In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
Unofficial Web Site
On July 29, 1998, Alaska Attorney General appointed private attorney Leroy Barker of the law firm Roberson, Monagle & Eastaugh as special investigator to investigate and make recommendations regarding the actions of various State of Alaska employees. His September 30, 1998 report to the Attorney General, as redacted by Mr. Barker, follows. Some minor style changes and hypertext links have been imposed to make the document suitable for the Web.
State's Decision to Defer Prosecution
Common Law Fraud
Executive Branch Ethics
Legal Professional Rules
[When the October 16, 1998 report is received from Mr. Barker, it will be posted as well.]
Bruce M. Botelho, Esq.
Alaska Department of Law
Juneau, AK 99711-0300
Re: World Plus Investigation
Our File No. 1363.001
Dear Mr. Botelho:
This report is in response to your request of July 29, 1998 (Appendix A) that I conduct an investigation of Raejean Bonham and the individuals involved in her company, World Plus. The scope of my full investigation is to determine both if there were any criminal violations by any individuals, professional conduct violations by lawyers, judicial conduct violations by judges or formal ethics violations by State employees and the appropriateness of State departmental disciplinary actions. This is the first portion of my report. As I indicated to you on September 2, 1998, this report provides you with my conclusions and recommendations regarding whether or not any individuals may have violated criminal statutes, state personnel ethics laws, Rules of Professional Conduct for lawyers or Code of Judicial Conduct for judges or should be considered for State departmental disciplinary actions. This group will include all State employees we have been able to identify. I have also addressed, at your request, the States decision to defer investigation and prosecution to the Department of Justice.
The only exception to this is that it will take me some additional time to determine if criminal charges or ethics violations should be considered against the principal actors who have been alleged to be involved with Ms. Bonham in the Ponzi scheme. This group will, of course, also include Ms. Bonham. My report on this latter group of individuals will be submitted to you by October 16, 1998.
World Plus was an enormous Ponzi scheme involving hundreds of individuals. The blind greed of the investors is almost incomprehensible. They had to realize that the excessive returns on their "investment" was too good to be true. Also, the individuals who were utilizing the frequent flyer mileage tickets and signed the World Plus agreement were perfectly willing to agree to lie to an airline representative about their relationship to the person who had been originally awarded the mileage certificate.
As stated before, the magnitude of the World Plus investment scheme was enormous. It involved literally hundreds of individuals. In my report I have not included a description of the World Plus Ponzi scheme or a chronology of events. That information has been compiled in numerous other documents. In undertaking my work effort, I decided to focus initially on Kenneth Goldman. The reason for this is that whether or not there were violations in his situation would assist me in determining whether or not there had been violations by other less involved and less prominently placed State employees. Given the results of my investigation, as discussed below, I came to the conclusion there is not sufficient evidence to establish that any State employee committed any prosecutable criminal or significant ethics violations.
Given the size of the task, I have not completed my investigation. I am still determining possible criminal violations by some non-State employees. I am also looking at the possibility of violations of the Rules of Professional Conduct by non-State employees. This ongoing work effort is limited to the main actors in the Ponzi scheme. I will make my report on these individuals by October 16, 1998.
I recognize in reviewing the information with which I have been provided that there was a significant amount of conflict regarding this matter between the Division of Banking, Securities and Corporations ("BSC") and the Department of Law. There also have been questions raised about the conduct of Laurie Otto. These events were not relevant to my work efforts. Your office promptly turned the investigation of World Plus over to the Department of Justice. This decision will be discussed in the next section of my report. The major focus of my work effort has been on what facts can be established and what elements of a crime or ethical violation they can support. Basically, I have taken the facts and analyzed them to determine if they were sufficient to meet the elements required to prove a criminal act beyond a reasonable doubt or an ethical violation.
As I stated, the blind greed of the investors is almost incomprehensible. Frequent flyer ticket users were perfectly willing to agree to lie to the airlines. Having said this, it is my responsibility to determine if this conduct was criminal or unethical. For the reasons discussed in this report, I have concluded that none of the conduct is such that the State can prove the elements of any violation of a criminal statute beyond a reasonable doubt. I have also concluded that, although the conduct of State employees is totally inappropriate, it does not violate any provision of the States Ethics statutes.
One of the concerns raised in this matter is whether or not it was appropriate for the Department of Law to defer the investigation and prosecution of the World Plus matter to the federal government. My review of the facts leads me to the conclusion that this was a prudent decision. This was a massive fraud scheme involving hundreds of people. Many of the witnesses are outside the State of Alaska. The financial resources and expertise to handle this matter clearly favored deferral to the resources and expertise of the federal government. In conducting my investigation, I have had to rely heavily on the efforts of the SEC and the attorneys for Larry Compton, the bankruptcy trustee. Although it is difficult to quantify the amount of time and resources they have expended to investigate and organize the facts in this case, it is clear such an undertaking would have been virtually impossible for the State.
I had access to the interviews taken by the SEC investigators in the spring of 1996, taken under oath and transcribed by a court reporter. I have, in the course of my career, participated in or reviewed literally hundreds of witness statements and depositions. The SEC sworn interviews were some of the most thorough I have ever reviewed.
There is also the consideration of parallel investigations which can cause serious conflicts and hamper the agencies making such investigations. Also, but in my judgment less significant, is the fact that there were Department of Law employees who were involved in this Ponzi scheme. You could have initiated a special prosecution investigation two years ago. However, whether the Department of Law or an independent prosecutor had conducted the investigation the problems would have been the same. I am now free to pursue my investigation without concern that I am disrupting the efforts of the federal government. Also, I have had the advantage of the substantial work efforts which have been undertaken in the last two years by the SEC and the Bankruptcy Trustee.
The Division of Banking Securities and Corporations ("BSC") in a memo as early as December 27, 1995, to Governor Tony Knowles recognized that investigation should be initially deferred to the federal government. BSC advised the Governor that "it is a massive fraud case and is interstate, rightfully a federal matter and likely beyond our limited resources to prosecute." This position is confirmed in several other memorandums and e-mails by BSC until mid-January, 1996. For example, a January 8, 1996, BSC memorandum states: "This World Plus is a classic securities fraud but is beyond our resources to investigate and prosecute." Later, on January 16, 1996, a BCS memorandum reflects: "The crime of Ponzi, fraud and deceit is huge and could be better accomplished by the federal government because it spans several states." Subsequently, the BSC concluded that the State should become active in the investigation and prosecution of the World Plus matter.
You met with representatives of BSC regarding World Plus on January 12, 1996. Five days later, BSC wrote you a memo regarding the meeting and stated, in part:
Given the size and tenure of the scheme and the far flung reaches of the venture (investors in some thirty states) I share your concern as to the resources we have available to devote to this matter but reiterate my hope to be able to pursue a very narrow prosecution through your office of Special Prosecutions and Appeals notwithstanding your clear indication and belief that the Federal authorities have the matter in hand. We will of course abide by your decision in this matter as in all matters legal but wanted the opportunity to discuss the magnitude of our concerns with you personally.
It is not altogether clear to me why the BSC changed its position.
I interviewed U.S. Attorney Robert Bundy regarding this matter. He stated that he strongly urged the Department of Law to permit the federal authorities to undertake and complete their investigation and prosecution before the State took any further action. He felt that the State of Alaska had neither the resources nor the expertise that the federal government possessed. He was also very concerned about the potential pitfalls of parallel investigations. He confirmed to me his agreement with the contents of the letter your department sent to Willis Kirkpatrick on February 26, 1996. (Appendix D)
From my own professional experiences as a prosecutor both here in Alaska and in California, it is customary for small jurisdictions to look for assistance from larger jurisdictions or agencies to conduct major investigations and prosecutions.
There was a suggestion that the decision to defer the investigation and prosecution to the Department of Justice was, in part at least, to protect Kenneth Goldman (the then Anchorage District Attorney) and other Department of Law employees. This is a very serious allegation. I focused specifically on this issue and found no evidence to support it. For the reasons already discussed, the deferral decision was the same one any prosecutor would have made given the magnitude of the World Plus Ponzi scheme.
Another concern that has been expressed is that critical evidence is now unavailable because of the delay in the States investigation. According to Mr. Bayless, the SEC, at the request of BSC, began its investigation in late December, 1995. That agency obtained detailed sworn statements from the major witnesses. Most of the important evidence in this type of case is the documents (the paper trail). The relevant documents involving World Plus and the people involved in it were preserved and are in the possession of the State or the bankruptcy trustee. Therefore, I have concluded there is no merit to the concern of "lost evidence."
The first issue that needs to be addressed is whether or not any of the individuals who are the subject of this report violated any criminal statutes. This group includes all State employees and non-State employees. It does not include the principal actors in the Ponzi scheme. I will address two categories of conduct: the first is the individuals who wrote letters expressing confidence in World Plus; the second category is the individuals who utilized the frequent flyer awards. I will begin my analysis of each category with a review of the applicable criminal statutes followed by my analysis of the facts with respect to those statutes.
(1) LETTERS OF CONFIDENCE
In approaching this group, I focused on the conduct of Kenneth Goldman and Gayle Garrigues. I selected these two individuals since they are State prosecutors and should be held to the highest standard of behavior in terms of avoiding criminal conduct. Both of them wrote letters in the fall of 1992 addressed "To Whom It May Concern" praising World Plus and endorsing it as a good investment. Mr. Goldman stated in his letter: "I am currently employed as the District Attorney for Palmer, Alaska." (Appendix E) Ms. Garrigues represented: "I am an attorney and currently work for the State of Alaska." (Appendix F) It appears that those letters were solicited personally by Raejean Bonham. The authors understood they would be submitted to some State agency on behalf of World Plus. All of the interviews my investigator has conducted of the letter writers confirm that Ms. Bonham requested the letters be sent to her attorney (Richard Hompesch) because her company was having a problem with the State. They did not anticipate they would be used to solicit new investors. We have found no investor who has ever seen any of the commendation letters. Mr. Goldman, in his recent interview with my investigator, explained he received a telephone message from a prospective investor he thought might have seen his letter or been advised by Ms. Bonham to contact him. He did not return the telephone call. He told the SEC investigator he promptly advised Ms. Bonham not to use his name as a reference to prospective investors. Mr. Goldman acknowledged that he understood that the purpose of his letter was to obtain exemption from the Securities Act. He first became aware that World Plus was having problems in September, 1995.
On November 17, 1992, Richard Hompesch forwarded these and other letters to Mr. Edward C. Watkins, Securities Examiner, at BSC representing: "Also enclosed is a number of letters from individual investors expressing their satisfaction with the program." A copy of Mr. Hompeschs letter is attached as Appendix G. The question I addressed is whether these letters are sufficient to justify criminal prosecution. I looked at both the state Securities Act (AS 45.55.010 - .995) and the state aiding and abetting statute (AS 11.16.110). For the reasons explained below, I do not think the State could be successful in a criminal prosecution of either Mr. Goldman or Ms. Garrigues (or any other letter writer), either as principals or aiders and abettors for violations of the state securities law.
(a) Securities Act
The Alaska Securities Act provides in pertinent part:
Sec. 45.55.160. Misleading filings. A person may not, in a document filed with the administrator . . ., make or cause to be made an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.
Violation of this section can be a felony. The Act provides:
Sec. 45.55.925. Criminal penalties. (a) a person who. . . wilfully violates AS 45.55.160 knowing the statement made to be false or misleading in a material respect or the omission to be misleading by any material respect, upon conviction, is punishable by a fine of not more than $5,000, or by imprisonment for not less than one year nor more than five years, or both.
To convict a person under these sections the State must prove beyond a reasonable doubt that:
1. There was an "untrue statement,"
2. of a "material fact," and
3. it was made "knowing" the statement made to be false or misleading.
All three elements must be established. To be material, there must be a "substantial likelihood that a reasonable . . . [person] would consider it important" in making a decision. Brown v. Ward, 593 P.2d 247, 250-251 (Alaska 1979).
Our Supreme Court requires that the State, in order to prove that conduct was willful, must establish a "consciousness of wrongdoing." Hetzner v. State, 613 P.2d 821, 826 (Alaska 1980). Put another way, the State is required to prove that the person was "aware that what he is doing is illegal." Wheeler v. State, 659 P.2d 1241, 1250 (Alaska App. 1983).
(b) Aiding And Abetting (Accomplice)
Under Alaska law, a person who aids and abets another in the commission of a crime can also be convicted of the same crime. AS 11.16.110 provides, in pertinent part, that: "A person is legally accountable for the conduct of another constituting an offense if , . . with intent to promote or facilitate the commission of the offense, the person . . . aids or abets the other in planning or committing the offense."
To obtain the conviction of a person for aiding or abetting another in the commission of a crime, it is necessary to establish all of the elements of the principal crime as discussed above and also show that the accomplice acted "with the intent to promote or facilitate the commission of the offense." Erickson v. State, 824 P.2d 725, 730 (Alaska App. 1991).
(c) My Analysis
The question is whether the authors of these two commendation letters made untrue statements of material fact knowing the statement they made to be false or misleading on whether they acted with the intent to further Ms. Bonhams fraudulent conduct. Can the State, based on this evidence, show a consciousness of wrongdoing? Also, the State must show BSC relied on the statement in issuing its exemption. I conclude that such proof is lacking.
The representation Mr. Hompesch made in his letter of November 17, 1992, was that the letters were "from individual investors expressing their satisfaction with the program." (Appendix G) At the time the letters were written (Fall 1992), both of the authors of the letters were satisfied with Ms. Bonham and their investment in World Plus. It was several years later (Fall 1995) before it was realized there was a serious problem and that Ms. Bonham was engaging in a Ponzi scheme. It is not clear from the language in Mr. Hompeschs letter of November 17th that it was in fact an application for exemption. However, even if it were an application, there is nothing in the letters of confidence attached to it that provide false or misleading information.
The letters were from Alaska residents who made their purchases in this State. In short, they made no representations at all going to the specific requirements of the exemption statute, AS 45.55.140, e.g., the total number of investors, the total amount invested, whether there were out-of-state investors, etc. There is no evidence to date that the letter writers were aware of these circumstances. There is no representation in any of them as to the total dollar amount invested during the last 12 months or that there are no more than 25 individuals involved as investors. These are the type of representations that would have been necessary in order to assist World Plus in obtaining an exemption from BSC under AS 45.55.140(b)(5)(B) (this section has now been renumbered to be AS 45.55.900(b)(5)(B)).
There is no evidence that BSC considered these letters important in making its decision to grant an exemption. (See Brown v. Ward, supra) During the course of my investigation, I interviewed Mr. Edward Watkins, the securities examiner who was the recipient of Mr. Hompeschs letter. He advised me that the letters of confidence, including the one from Mr. Goldman, did not influence their decision to grant World Plus an exemption. This is confirmed by Mr. Willis Kirkpatricks memorandum of February 27, 1996, in which he discussed these letters and stated:
Investors letters had no relation to the available exemption other than the investors, at the request of the issuer, was advising that they had no problems in an unregistered offering. A rescission was in process which brought the offering into compliance of the Alaska Securities Act. Ed Watkins, knowing that investor lists were not an exemption consideration, purged the file of their names. This is a common practice in exemption consideration, especially in private placement exemptions with a lot of proprietary information.
I have been unable, in my review, to identify anything in BSC files to show that these letters influenced any decision that agency made.
It is also noteworthy that by November 2, 1993, BSC was aware that there were problems with World Plus that were being investigated by the Idaho State Securities officials. A BSC memorandum of that date states:
Jim Burns, Idaho Securities, called 11/2/93 re an Idaho investor being offered a $5,000 (cash) investment contract in World Plus Bank with a high interest rate. The telephone number in Alaska is 451-1900. Polks directory shows this as the Fairbanks number for World Plus Travel at 455 3rd Ave, Fairbanks AK.
World Plus Travel is associated with World Plus, Inc. an AK corp which has an exemption filed-b5B- in March 1993. The investment is in frequent flyer miles which are resold and investors are offered a 20% return (previously a 50% return).
Jim Burns will recontact the ID [Idaho] offeree and get addl info.
Notwithstanding this information, BSC issued two additional exemption renewals to WPI on June 6, 1994 (Appendix H) and on July 19, 1995. (Appendix I) The letters of commendation that BSC received in the fall of 1992 would not have relieved any concerns the agency would develop regarding investigation of Raejean Bonham by the Idaho authorities.
The investigation by the SEC appears to confirm my conclusion. On April 11, 1996, the BSC reported in a memo that they had a conference with the SEC investigators. These investigators reported:
As to Goldman and Roosa both were interviewed under subpoena and records taken. The general thrust of their findings though not final at this juncture are that the evidence does not tend to support the criteria for aiding and abetting with respect to the fraud. Neither of them look very good but probably are not culpable in a criminal sense.
Mr. Bayless, in my interview, confirmed this information.
(2) UTILIZING FREQUENT FLYER AWARDS
There are three potential criminal violations that I considered could be used to prosecute the individuals who utilized the frequent flyer awards. This addresses those individuals who were willing to sign the agreement to lie to the airlines about the source of their frequent flyer awards. For the reasons discussed below, I do not believe such prosecutions would be viable.
(a) Theft by Deception
AS 11.46.180 states:
A person commits theft by deception if, with intent to deprive another of property or to appropriate property of another to oneself or a third person, the person obtains the property of another by deception.
This statute focuses on deceptive conduct as a means of wrongfully acquiring property.
AS 11.81.800(a)(15) defines "deception" in a way that includes passive misrepresentation:
Deception means to knowingly ,
(A) create or confirm anothers false impression that the defendant does not believe to be true; . . .
(B) fail to correct anothers false impression that the defendant previously has created or confirmed; . . .
There was a question in my mind whether or not the deceptive use of the mileage award would constitute the taking of the airlines "property." However, the federal courts have specifically held that these awards are "property" for the purposes of criminal fraud. In United States v. Schreier, 908 F.2d 645, 647 (10th Cir. 1990) the court held:
We need not pursue a metaphysical argument regarding whether the "property" existed as such in the possession of American [airlines] to conclude that the creation of a liability on the part of a corporation is no less the misappropriation of its property than would be the theft of an asset worth an equal amount.
See United States v. Mullins, 992 F.2d 1472, 1477 (9th Cir. 1993); United States v. Loney, 959 F.2d 1332, 1336 (5th Cir. 1992).
Our State Supreme Court has not addressed this issue but I believe they would give a broad interpretation of the term "property." AS 11.46.990(12); See LaParle v. State, 957 P.2d 330, 333 (Alaska App. 1998).
It is not clear how the court would determine the value of these awards to determine whether this is theft in the second, third or fourth degree under AS 11.46.130 - 150. See Transworld Airlines v. 47th Street Photo, Inc., 1990 W.L. 481956 (S.D.N.Y.)
(b) Theft of Services
AS 11.46.200 states, in part:
A person commits theft of services if
(1) the person obtains services, known by that person to be available only for compensation, by deception, . . ., or other means to avoid payment for the services.
Under AS 11.81.900(a)(53), "services" includes transportation services.
(c) Scheme to Defraud
The pertinent portion of Alaskas "scheme to defraud" statute, AS 11.46.600(a) provides:
A person commits the crime of scheme to defraud if the person engages in conduct constituting a scheme
(2) to defraud one or more persons of $10,000 or to obtain $10,000 or more from one or more persons by false or fraudulent pretense, representation, or promise and obtains property or services in accordance with the scheme. . ..
This statute requires proof that the person acted with specific intent to defraud the victim. LaParle v. State, 957 P.2d 330, 332 (Alaska 1998); Knix v. State, 922 P.2d 913, 920-921 (Alaska App. 1996).
The state court would probably follow the federal courts in deciding that the frequent flyer awards are "property" for the purposes of a scheme to defraud. Our state statute AS 11.46.600(a) is derived from the federal fraud statute. Moore v. State, 740 P.2d 472, 474 (Alaska App. 1987).
(d) My Analysis
I have outlined above the three statutory provisions which could be utilized to prosecute the individuals who illegally used the frequent flyer awards for the purpose of obtaining the aircraft passage. There are some serious obstacles to charging the individuals who used these award miles with criminal conduct. I do not believe this is the type of conduct for which juries would find criminal responsibility.
The frequent flyer industry has existed for many years and has been the target of several civil suits by the airlines against the brokers who sold these tickets. However, we have been unable to find any case where the users of the mileage awards were prosecuted. As I will discuss in a moment, it is problematic whether a jury would find the elements necessary for a criminal conviction. Also, the cost of prosecuting these individuals would be disproportionate to the likelihood of conviction. If convicted, it is doubtful a judge would impose a severe penalty. In doing my analysis I was concerned with juries finding criminal behavior when the loss is as intangible as it is in this situation.
Assuming that Delta Airlines came to our firm and asked that we initiate legal action against the individuals who illegally utilized their frequent flyer awards, I would, based upon everything I know at this time, advise Delta against filing such a lawsuit for two reasons. The first is, it would be very difficult to show the amount of damages. Transworld Airlines v. 47th Street Photo, Inc., cited previously in this report, demonstrates the problems, even in a civil case, that a litigant would face in establishing the amount of damages. In that case, TWA contended that the appropriate measure of damages was one of quantum meruit or awarding it the full cost of the fare which the individual who flew would have had to pay. The defendants, on the other hand, argued that TWA could only demonstrate damages if it could show either that the passengers who used the invalidly issued coupons to obtain reduced fare tickets would have otherwise flown on a full fare or that their seats would otherwise have been sold at the full fare to other passengers. The defendants argued that TWA could not be paid if an aircraft had departed with any empty seats. The court did not determine what the appropriate measure of damages was but allowed the defendants to obtain discovery from TWA regarding their damage theory of the case, including the question of whether or not the flights involved in the case were full. Even assuming, in civil litigation, Delta Airlines could recover a full fare, the cost of responding to the discovery requests would almost certainly exceed the value of the recovery.
In a criminal prosecution the State would have to prove the amount of the "property" that Delta Airlines lost as a result of each individual defendants criminal behavior. For example, John Doe is charged with illegal use of a Delta Airline Mileage Award to obtain passage on Flight 2170 on June 3, 1994, from Anchorage to Salt Lake City. The State might be required to prove that the flight was full on the date that Doe would have taken the flight and paid full fare. The State would, in any event, have to show the dollar difference between what Doe paid for his discounted fare and the full fare for that specific flight on the date he flew. The problem of this type of proof is obvious. The cost to prosecute would clearly be more than $1,000, which is the maximum penalty that can be imposed for a Class B Misdemeanor. AS 11.46.150; AS 12.55.035(b)(4).
I think from a purely theoretical legalistic standpoint a prosecution could be sustained for the crimes of theft by deception (AS 11.46.180) or theft of services (AS 11.46.200). The problem of proving the amount, as discussed above, could be very difficult. In addition, it is very doubtful whether the State could prove the element of specific intent. The problems with proving specific intent have already been discussed in this report.
It would appear from the information I have that the savings to the individuals who used the frequent flyer awards was generally $500 or less per ticket. That would mean, in a civil action, it would take an awful lot of solvent individuals and a lot of time and money to make a recovery which, in my judgment, would be marginal. Turning this analysis to a criminal prosecution of each and every one of these individuals would, it seems to me, be a prosecutors nightmare.
In my analysis none of the individuals encompassed in this report could be successfully prosecuted under the scheme to defraud statute. The court requires that the State establish a specific intent to actually defraud the airline. This would mean a requirement to prove that the mental state of the individual was such that they recognized that they were defrauding the airline out of its property. If an individual defendant in this situation testified that he or she believed that all they were doing was violating the airlines rules, it would seem to me to be virtually impossible to convince a jury that that individual had a specific intent to defraud the airlines. The owner of the award miles is the person who earned them and then sold them to World Plus. In my experience, it is a common perception that frequent flyers who sell their awards have "earned" those mileage awards. All the airlines advertise if you fly on our airline you will "earn" mileage awards. In my view, anyone sitting on a jury is going to find it difficult to convict a person who has paid a purchase price to a broker selling these "earned" mileage awards.
The airlines, over the years, have by and large shown a lackluster attitude toward enforcing the frequent flyer restrictions. This would further erode the jury appeal of prosecuting this type of a crime.
There has been a reference to bringing the charge of common law fraud against some of the participants in this Ponzi scheme, including the principal actors, the confidence letter writers and the users of the frequent flyer awards. There are no common law crimes in Alaska, including fraud. AS 11.81.220; Olp v. State, 738 P.2d 1117, 1118 (A).
There has been some information in the documents that I have reviewed during the course of my investigation suggesting that there may be a question that the World Plus promissory note agreements were in violation of our Usury statute. Alaska Usury laws are found in AS 45.010 to .070. These laws are designed to protect a borrower from unreasonably high interest rates in a loan or similar transaction. The statute sets the legal rate of interest. The penalty for charging usurious interest is that the lender is not permitted to recover any interest on the obligation, only the principal, and also the lender must pay the costs and fees of the borrower in any litigation that the lender initiates. There are no criminal penalties attached to the Usury statute. If these transactions are within the Usury statute then the aggrieved party would be Ms. Bonham and not the individuals who invested their funds in World Plus. Therefore, the Usury statute has no application to my inquiry.
In approaching my analysis of the potential ethics violations by the various State employees in this World Plus investigation, I will utilize a somewhat different format. Rather than setting out the statutory provisions and concluding with my analysis, I will address each section and include my analysis as I discuss each potential ethical violation.
All of the State employees involved in the World Plus matter were subject to the Alaska Executive Branch Ethics Act. AS 39.52.010 - .960. That Act is supplemented by a set of regulations set forth in 9 A.A.C. 52.010 - 990.
(a) Representation By A Public Officer
AS 39.52.160 provides that, "a public officer may not represent . . . a person in any matter pending before the administrative unit that the officer serves.. . ." The Act goes on to provide a detailed set of explanations and their requirements. No State employee involved in the World Plus matter violated this section. The letters of confidence were addressed to BSC, which is a part of the Department of Commerce and Economic Development. Neither Mr. Goldman or Ms. Garrigues "serves" that agency. Therefore, the constraints of this provision do not apply to them.
(b) Gaining Benefit Through Coercion Of A Subordinate.
AS 39.52.120(b) provides that, "a public officer may not . . . attempt to benefit a personal or financial interest through coercion of a subordinate."
The only individual that might be subject to violating this provision is Mr. Goldman. He recommended and encouraged others to invest in World Plus. This was clearly the case with the Valley Investors investment club. However, I do not believe that conduct falls within this prohibition. It is not clear to me how this could be construed as "an attempt to benefit a . . . financial interest." Mr. Goldman would not have, so far as I am able to ascertain, personally benefitted by the fact that his subordinates invested in World Plus. I have seen no evidence to prove that he was actively aware that this was a Ponzi scheme. His continued investment in it might suggest the contrary. In addition, we have found no subordinate of his who suggests he or she was "coerced" by Mr. Goldman to invest in World Plus. My investigator has interviewed a number of witnesses. All of them substantiate they voluntarily invested in WPI. There was no "coercion" by anyone else.
(c) Misuse Of Official Position
AS 39.52.120 provides, in part, that "a public officer may not use . . . an official position for personal gain . . .." Both Mr. Goldman and Ms. Garrigues identified their employment situation in their respective letters of commendation. I do not believe that was sufficient to violate this statute. They wrote letters which reflected their perceptions, at that time, of World Plus. They did know that they would be submitted to a State agency. The letters were not written on State of Alaska stationery but simply referred to the individuals employment. The terms "use" and "official position" are not defined in the Act. However, my understanding of this act is that those terms would mean that the person was acting in an official capacity, which, at a minimum, would have required these letters to have been written on State letterhead.
(d) Improper Use Of State Time, Property Or Equipment.
AS 39.52.120(b)(5) provides, "a public officer may not . . . use State time, property, equipment or other facilities to benefit the officers personal or financial interests." The only individual who comes within the prohibitions of this section is Mr. Goldman. He made three personal phone calls, which were billed to the State of Alaska. He also utilized the offices of the District Attorney in Palmer for after-normal-working-hours meetings of Valley Investors on several occasions. These are violations of the Ethics Act. The question becomes the seriousness of these transgressions. Obviously, not having any current experience in supervising State employees, I cannot utilize my own personal experience in evaluating this issue. However, there are two sources of information which were of some assistance to me. The first is the applicable provision in the Alaska Administrative Code. That provides:
A public officer who uses state time, property, equipment, or other facilities to benefit the officers personal or financial interest is not in violation of AS 39.52.120(b)(3) if the officers designated supervisor determines that the use is insignificant, the attorney general has not issued a general opinion against the use, and the attorney general does not advise the officer against the use.
The other guidance I received was from an Attorney Generals Ethics Opinion in File No. 663-92-0028, dated August 16, 1991. (Appendix K)
Reading the Ethics Act, in light of the regulation and the Ethics Opinion, it appears that, in this case, the appropriate action is for you or Mr. Goldmans immediate supervisor to undertake appropriate disciplinary action. That subject is discussed later in my report.
In the documents that I have reviewed and from other sources, there have been suggestions of alleged misconduct by several State judicial officers. I reviewed AS 22.30.011, Canons 1 and 2 of the Code of Judicial Conduct, In Re: Inquiry Concerning A Judge, 788 P.2d 716 (Alaska 1990) and Inquiry Concerning A Judge, 822 P.2d 1333 (Alaska 1991). Based upon my review of the factual information and the applicable legal standard, I believe there is one State judicial officer whose conduct should be considered by you for possible referral to the Alaska Commission on Judicial Conduct. That judge, in February, 1994, signed an agreement (Appendix L attached hereto is a sample copy of that agreement) basically agreeing to be less than candid to the airlines in utilizing a ticket obtained through frequent flyer miles. It is my understanding that you, if you believe it is appropriate, can refer this to the Alaska Commission on Judicial Conduct for them to undertake whatever action they believe is appropriate. I recommend that you make such a referral. I have not disclosed the name of the judicial officer because I believe under AS 22.30.060 that information must be kept confidential.
Rule 8.4 of the Rules of Professional Conduct for Lawyers provides, among other things, as follows:
It is professional misconduct for a lawyer to:
* * *
(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation.
(d) state or imply an ability to improperly influence a government agency or official; or, . . .
Several attorneys signed the frequent flyer agreement. That document, by its terms, implies that the signor is prepared to lie to the airline about his or her relationship with the person who originally obtained the frequent flyer award. However, absent proof that a specific attorney did, in fact, lie to an airline ticket agent, it is not possible to prove the attorney engaged in conduct involving "dishonesty, fraud, deceit or misrepresentation."
Several lawyers involved with World Plus, including Mr. Goldman and Ms. Garrigues, also signed letters of commendation. My review of their conduct leads me to the conclusion that those letters were not sufficient basis to "improperly influence a government agency or official." We have been unable to find any evidence that the lawyers understood the statements they made were untrue. Therefore, I conclude there is no factual basis to establish the requisite element of impropriety.
I have conferred with counsel for the Alaska Bar Association who concurs in my analysis.
I wish to point out, however, that although an attorney, by signing the frequent flyer agreement, may not have engaged in conduct that is sufficiently dishonest so as to be a violation of the Code of Professional Conduct, it certainly is an act which brings discredit on our profession.
(a) Kenneth Goldman
Kenneth Goldman has a substantial amount of experience in the criminal justice system. He commenced working as an assistant public defender in Bethel in October, 1979. He joined the Department of Law on April 15, 1985, as an assistant district attorney in Fairbanks. He remained in that position until July 1, 1991, when he was transferred to Palmer to become the District Attorney for that Office. On January 25, 1995, he assumed responsibility as a District Attorney in Anchorage. He remained in that position until March 10, 1997, when he was transferred back to be District Attorney of Palmer. Mr. Goldman appears to have an exemplary record as a Department of Law employee. He has almost 20 years experience in the criminal justice system, of which 13 years has been as a professional prosecutor.
In the course of my investigation, I interviewed Harry Davis, the Fairbanks District Attorney. He advised me that some time between 1989 and 1991 he had a luncheon meeting with Ken Roosa and Ken Goldman. At that meeting Harry Davis told both of them he thought it was inappropriate to be involved in the World Plus investment. He did not believe it was necessarily illegal, but he was concerned that people using the Frequent Flyer Program had to make misstatements regarding their relationship to the individual who had earned the mileage. He told both of them he was generally against the investment although he did not specifically prohibit them from being involved in it. Once he heard World Plus obtained its exemption, he no longer gave the matter any consideration.
Mr. Goldman has been an investor in World Plus since 1989. He also utilized the award miles to obtain discount aircraft tickets. He admitted to the investigator that he understood the false identity terms of the mileage award agreements World Plus was utilizing.
Mr. Goldman wrote a letter on September 4, 1992 (Appendix E) showing his support for World Plus. The letter makes reference to the fact that he is "employed as the District Attorney for Palmer." The letters of recommendation signed by Goldman and others were sent by Mr. Hompesch to the State Securities Examiner on November 17, 1992. In that letter he describes them as ". . . a number of letters from individual investors expressing their satisfaction with the program." The letter goes on to explain that its purpose is so Mr. Hompesch can "discuss whether World Plus, Inc. could obtain an exemption under AS 45.55.140(b)(5)(B)" (the Alaska Securities statute). The representation that these are satisfied investors does not appear to be misleading or false. At the time the letters were written, all of these investors were satisfied with the program. Also, there was no evidence to show that the letter writers were aware of the exemption parameters or that they knew how many people had invested or how much was invested. In addition, I have been unable, in my investigation, to identify any evidence to show that these letters influenced any decision made by BSC.
It is also noteworthy that by February, 1994, BSC was aware that there were problems with Atlantic Pacific Funding Corporation in Idaho and it was being investigated by the state securities officials in that state. Notwithstanding that, the BSC issued two renewals of WPIs exemption on June 6, 1994 (Appendix H) and on July 19, 1995 (Appendix I). The letters of satisfaction that BSC received in the fall of 1992 would presumably not overcome any concerns they would develop regarding investigation of Raejean Bonham by the Idaho authorities. I interviewed both Larry Carroll and Edward Watkins, the two investigators for the Division of Banking and Securities. Ed Watkins advised me that the letters they received, including the one from Mr. Goldman, did not influence their decision to grant World Plus an exemption.
There is no question that Ken Goldman was active in an investment club in Palmer (Valley Investors), which included members of his staff. He recommended that they too invest in World Plus. I have been unable to find any evidence that any investor "relied" on Mr. Goldman or his position with the State as the basis for investing in World Plus. There is no evidence that he received any compensation from World Plus for encouraging new investors. There is no evidence he "coerced" any subordinate to join the investment club or to invest in World Plus. The club met on several occasions after normal working hours at the Palmer District Attorneys office to discuss their investments. On three occasions Mr. Goldman made personal telephone calls, at State expense, to conduct his business with World Plus.
There were two questions raised by the BSC records which gave me some serious concern. The first was the reference to Anchorage attorney Mark Copeland having a client who was shown the Goldman letter to encourage him to invest in World Plus. I interviewed Mark Copeland and he advises me that information is not correct. He obtained the Goldman and Garrigues letters from BSC and he then inquired of a Fairbanks client as to whether or not that individual had ever seen those letters before. The clients response was negative.
The other question was the assertion that the local Small Business Association attorney, Jon DeVore, had received a call from Mr. Goldman for the purpose of obtaining a bankruptcy and criminal lawyer to represent Raejean Bonham because she was being investigated by the federal government. I interviewed Mr. DeVore. He stated he had no recollection of ever receiving such a phone call. He does not know Mr. Goldman. He said it is possible that "some attorney" called him and asked him for a recommendation for a bankruptcy attorney. He says he receives these calls on a rather frequent basis and would not have any reason to recall who the attorney was that made the inquiry. Subsequently, my investigator interviewed Kenneth Roosa. He confirmed that he, not Mr. Goldman, called Mr. DeVore to obtain some names of attorneys to represent Ms. Bonham.
There has been a concern expressed that Mr. Goldman had recommended an attorney to Raejean Bonham when she received a subpoena from the Internal Revenue Service. I do not believe this conduct is inappropriate. Such recommendations are common.
For the reasons discussed above, I do not believe there is any basis that I know of to sustain a criminal prosecution, a referral to the Alaska Bar Association or formal personnel action.
I recommend that he be required to promptly settle his pending case with the bankruptcy trustee on behalf of himself, his wife and his children.
In addition, a strong message must be sent to him. Termination or demotion, in my opinion, are not justified. Some serious lesser penalty should be imposed.
(b) Gayle L. Garrigues
Gayle Garrigues, like Mr. Goldman, has a substantial amount of experience in the criminal justice system. After a brief period with Alaska Legal Services and a little over four years of private practice, she joined the Department of Law in August, 1984, in Fairbanks. Shortly thereafter, she was transferred to Kotzebue as a District Attorney. She spent three years in the Kotzebue office and then returned to the Fairbanks District Attorneys office in November, 1987. None of her background or work efforts indicate that she has any experience with securities law.
Ms. Garrigues was an investor and wrote a letter of confidence. Appendix F) She flew on World Plus awards on at least three occasions. (Appendix P) On at least one occasion (April, 1992), she signed the frequent flyer agreements. (Appendix Q)
My direction from you in this matter was to make an independent evaluation of the conduct of the various individuals who participated in the World Plus Ponzi scheme, as well as the individuals who utilized the frequent flyer mileage awards. Therefore, I did not, as a part of my work task, analyze either the State Securities Act or the Executive Branch Ethics Act. I do not feel I am in a position to comment on whether or not the State Securities Act should be amended in any way because of the World Plus situation. I think that would require a very sophisticated analysis which, if its to be made, should be done by your Department and the Department of Commerce and Economic Development.
I do feel, however, it is appropriate for me to comment on the Executive Branch Ethics Act. In my opinion, its requirements should be substantially more stringent. It is my perception that some of the conduct of the individual State employees involved in this case was not appropriate. On the other hand, and for the reasons I discussed previously in this report, their conduct did not constitute a violation of the Ethics Act. It strikes me that someone should take a hard look at this Ethics Act. I did review some of the legislative history, specifically, one of the committee hearings, the State Senate Affairs Committee hearing of April 3, 1986, on the Ethics Bill. My sense from reviewing that hearing is that there was some lack of enthusiasm for more stringent government ethical requirements for State employees. This may be an issue which the Legislature, with your Departments guidance, should revisit.
/s/ Leroy J. Barker
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