Federal law enforcement officials are investigating whether nearly
$90 million in bank loans to a Bohemia finance company were the object
of a "massive fraud," according to court records and sources familiar
with the case.
The investigation involves Oak Rock
Financial Llc, at 3900 Veterans Memorial Hwy., a commercial lending
company that often provides capital that other lenders would then loan
for transactions such as automobile and business-related purchases.
Last week,
Israel Discount Bank of
New York,
the lead institution of the five banks that have loaned as much as $90
million to Oak Rock, asked a federal bankruptcy court judge in
Central Islip
to appoint a trustee to oversee the operation of the company on an
emergency basis to preserve any of its remaining assets. The banks
stated in court papers that Oak Rock falsified its financial position in
order to borrow money.
Attorneys for
Israel Discount Bank
said in court papers that they had learned that the founder and head of
Oak Rock, John P. Murphy, had resigned and can't be located -- and the
manager who took over at Oak Rock estimated that the fraud went as high
as $70 million.
"Oak Rock had perpetrated a massive fraud upon its senior secured lenders," the attorneys allege in the court papers.
As an example of the fraud allegation,
the banks said in court filings that Oak Rock claimed recently to have
$2.5 million in credit available when it actually was over-advanced by
$47 million. The other banks that loaned the money to Oak Rock were
identified as
Bank Leumi USA,
Capital One,
Bank Hapoalim, and First National Bank of
New York.
Lawyers for Oak Rock did not return telephone calls or emails seeking comment. Attorneys for the banks also declined to comment.
Murphy, who legal sources said had more than 20 years' experience in commercial lending, didn't return phone calls to his
Nesconset home.
New chief discovers fraud
A longtime associate of Murphy's,
Tom Stephens,
took charge of Oak Rock, court papers said. Stephens later told the
attorneys for the banks that on April 17 he discovered "that Murphy had
been perpetrating a long-running, extensive fraud with Oak Rock by
creating fictitious records," court papers said.
Murphy then resigned, the court papers said. According to state records, Oak Rock was incorporated in July 2001 as a
Delaware corporation. The incorporation papers listed Murphy as president and said the company had four employees.
Further, Stephens said he informed the
FBI
and the U.S. attorney's office in the Eastern District of the situation
at Oak Rock and they are investigating, the court papers said.
Sources confirmed the
FBI's and U.S. attorney's inquiries into Oak Rock. Spokesmen for both the FBI and federal prosecutors declined to comment.
Stephens also said in light of the
company's situation, "Oak Rock cannot possibly continue as a going
concern and must be orderly liquidated," the papers said.
Two Oak Rock workers told Newsday that Stephens resigned Friday. Attempts to reach him were unsuccessful.
According to the court papers,
Stephens began this past January to visit Oak Rock's offices to get a
firsthand look at the company's operations and its books and records.
During the week of April 15 Stephens
noticed unusual collection activity with respect to one of Oak Rock's
customers and confronted Murphy, the court papers said. It was at that
point, according to Stephens, that Murphy admitted to Stephens "that he
had been creating fictitious records in order to increase Oak Rock's
borrowing base," court papers alleged.
Though Stephens had told the banks
about the problems at Oak Rock, the banks' attorneys now say they do not
believe Stephens has the financial skills to operate Oak Rock and they
want an experienced trustee appointed to oversee the firm, the court
papers say.
A hearing on the banks' request for the trustee is scheduled for Monday in federal bankruptcy court in Central
Islip.
The banks said in court papers that
Stephens "has essentially hijacked" Oak Rock and accused him of denying
the banks access to critical information about the company's financial
health as well as failing to take steps to safeguard its assets.
Oak Rock specializes in a variety of
businesses that involve credit -- in effect, borrowing money from banks
and then loaning the money to other lenders or businesses or financing
its own credit transactions.
The lending of money to other lenders
or businesses is known as asset-based lending. Such loans can allow
businesses to engage in installment financing for the purchase of
consumer products or other business transactions, the court papers
stated.
Oak Rock also had other companies participate in its loans to spread the risk, according to court papers and legal sources.
Marketplace impact
Jerome Reisman, a
Garden City
attorney who is representing AmeriMerchant LLC, a firm that borrowed
from Oak Rock to advance to merchants, said the matter has the potential
to dry up credit for some consumers and merchants.
"Right now it is catastrophic to the
borrowers who can't draw down [from Oak Rock] on funding needs to fund
their operations," Reisman said.
He explained that firms such as auto
finance companies and merchants who let consumers make credit card
purchases aren't able to fund their consumer accounts and commercial
accounts.
"The end result is that [some] commercial and consumer funding has been cut off, pending a court hearing," Reisman said.
He declined to give specifics about
AmeriMerchant's borrowing from Oak Rock, but stressed that the company
had obtained alternate financing so it could pay off what it owed Oak
Rock.
By noon Friday, an "administrative hold" on Oak Rock's operating bank account was lifted, court records stated.
With Chau Lam
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