A 40-year-old Lakeville, Minn., man pleaded guilty in federal court to operating a Ponzi scheme that defrauded at least 17 lenders in Minnesota and several other states. According to the government’s investigation, the lenders suffered losses in excess of $79 million.
Corey N. Johnston entered a plea of guilty to one count of bank fraud and one count of filing a false income tax return in connection to this crime. Johnston was charged on August 6, 2010.
In his plea agreement, Johnston admitted that from 2005 through March of 2009, he oversold participation in large commercial and personal loans arranged by him through his company, First United Funding.
Johnston’s scheme involved selling more than 100% participation in at least 10 loans arranged through the company. In other words, he purportedly sold loan participation to banks after already selling that same participation to other banks.
In each instance, Johnston failed to disclose that the total participation exceeded 100% of the original loan, making it impossible for the participating bank to receive the money expected.
For example, Johnston oversold loan participation for a project known as White Out Way Investments. The original White Out Way loan, arranged through First United Funding, was for $7 million.
Johnston sold 100% participation in that loan to Western National Bank. At the same time, however, he convinced several other banks to participate in the loan, including 100% participation by The National Bank in Bettendord, Iowa, as well as partial participation by four other lending institutions.
In all, Johnston solicited and received $23.65 million from six banks for the $7 million loan.
In addition, Johnston oversold loan participation for a project known as JM Land Development II. The original JM Land Development loan was for $8 million, and once again, Johnston sold 100% participation in the loan to Western National Bank.
However, he simultaneously obtained full loan participation from Choice Financial, The National Bank, and Hillcrest Bank, along with partial participation from four other banks. Johnston solicited $38.65 million for an $8 million loan.
Six additional lenders also were defrauded during the course of this scheme by overselling participation in other loans.
Johnston used some of the proceeds of the fraud to repay other loans and perpetuate the scheme. He also diverted fraud proceeds for his personal use as well as for use by family members.
Furthermore, Johnston failed to report the fraudulent income on his 2005 federal income tax return. That failure resulted in an underpayment of taxes of approximately $508,905.
Johnston faces a potential maximum penalty of 30 years in prison on the bank fraud charge and three years on the charge of filing a false income tax return.