Several prominent victims of Sacramento’s costliest Ponzi scheme are being sued by a bankruptcy trustee, who says they helped prop up the pyramid and then pulled millions of dollars out before it collapsed.
In a series of lawsuits in U.S. Bankruptcy Court, trustee Beverly McFarland has sued several victims of disgraced tennis-team owner Deepal Wannakuwatte, who was sentenced to 20 years in prison last November. Prosecutors said Wannakuwatte defrauded more than 100 victims nationwide out of $108 million.
Among those McFarland accused are Sacramento homebuilding executive Jack T. Sweigart, his company JTS Communities and his business partner Larry Carter; Sacramento business executive Byron Younger Jr.; and two of Wannakuwatte’s lenders, Bridge Bank of Santa Clara and General Electric Capital Corp.
Sweigart and Carter’s lawyer said the lawsuit against his clients is “frivolous.” The other investors or their lawyers couldn’t be reached for comment.
Prosecutors say Wannakuwatte duped his victims into investing millions into his West Sacramento medical-supply company, International Manufacturing Group Inc., claiming the company had lined up huge contracts to supply latex gloves to veterans’ hospitals. In fact, the contracts were minuscule.
Wannakuwatte, the former owner of the now-defunct Sacramento Capitals professional tennis team, was arrested in February 2014. Prosecutors said he ran his Ponzi scheme for a decade or so before he was caught.
McFarland, trustee for International Manufacturing’s Chapter 11 bankruptcy reorganization, accused Younger, Sweigart and Carter of helping Wannakuwatte obtain loans and investors to keep his business going.
For instance, the trustee said Sweigart and Carter formed an insurance company that provided International Manufacturing with letters of credit, enabling Wannakuwatte to borrow from various banks. In addition, Carter and Sweigart “facilitated the Ponzi scheme by actively soliciting new investors,” the lawsuit said.
Meanwhile, Younger allegedly provided Wannakuwatte with blank business invoices that helped Wannakuwatte get a $4.4 million loan for a factory he was supposedly going to build in Olivehurst. The trustee said Wannakuwatte filled out the invoices in order to convince a bank that he was buying equipment from Younger’s business, Western Building Specialties, to outfit the new factory. The factory was never built.
The trustee said the individuals should have known Wannakuwatte’s business was a sham. “Even a cursory degree of diligence would have revealed that there was not a legitimate ‘wholesale’ business,” said the lawsuit against Carter and Sweigart.
In addition, the lawsuits say these investors were able to get money out ahead of other investors. Sweigart, Carter and their affiliated companies allegedly were paid $50.8 million; Younger and his companies received $10 million. The investors accepted the funds “in the face of numerous glaring ‘red flags’ of potential fraud,” the lawsuits say.
Prosecutors have said most investors won’t get more than pennies back on the dollar after Wannakuwatte’s assets are liquidated.
“It would be inequitable for the Carter/Sweigart Group to receive any distributions before (International Manufacturing’s) purely innocent investors are repaid in full,” the trustee’s lawsuit said.
Ian Craig, a lawyer for Carter and Sweigart, called the lawsuit “frivolous on its face” and said the trustee is going after two of the people who helped put Wannakuwatte in jail.
“It targets the individuals who first reported Mr. Wannakuwatte’s activities to the FBI,” Craig said. “These are the same victims who lost tens of millions in the scam.” Documents filed by federal prosecutors in Wannakuwatte’s criminal case said Sweigart lost $19.9 million in the scheme and Carter lost $6.8 million.
In her lawsuit against GE Capital, the trustee accused the giant national lender of stumbling onto Wannakuwatte’s fraudulent scheme as far back as September 2013. Nonetheless, the company accepted $2 million worth of payments after that. GE Capital “had reason to know” the money it received was the result of fraud. Similarly, Bridge Bank accepted more than $4 million in payments from Wannakuwatte in late 2013 and early 2014, after discovering his scheme was fraudulent, the trustee said.