Action by the Florida Department of Banking against Russ Whitney

One of my anonymous “Deep throat” sources told me that Whitney was the target of action by the Florida Department of Banking and gave me some case numbers. I still had considerable difficulty tracking the documents down. Finally got them. Here they are.

Proceeding No. 1450-F-7/89

State of Florida

Department of Banking and Finance

Division of Finance

Division of Securities and Investor Protection

The caption of the legal document has a list labelled “In re:” where the defendants usually go on a legal filing. The long list includes:

• Compuworld International, Inc.
• Mortgage Reduction Systems
• Russell A. Whitney, individually and as President of Compuworld international
• National Home Loan Mortgage Association, Inc.
• John Kane (a current Whitney executive)
• the woman Whitney got pregnant then lost a paternity-child support suit to

There are a whole bunch more individuals named, but I do not recognize any of them and they may be private persons so I will not list them here.

Notice of Order to Cease and Desist, Notice of Intent to Revoke Retail Installment Sellers License and Notice of Rights

Action under Chapters 517 and 520 of the Florida Statutes, the Retail installment Sellers Act and the Florida Securities and Investor Protection Act. The State of Florida has “reason to believe” that the people listed “In re:” “are violating, have violated or are about to violate some or all of the provisions of the said Acts…”

Below are paraphrases or “exact words” in quotes from the document, which was too lengthy and boring to be reprinted raw.

1. Compuworld is a licensed retail installment seller pursuant to Section 520.32 Florida Statutes License Number HR49481.

2. Russell Whitney has controlled, managed, supervised and participated in the acts and practices of Compuworld, and the activities of Compuworld are imputed to Whitney.

4.National Home Loan Mortgage Association, Inc. (“Nellie Mae”) is a Florida corporation located at Compuworld headquarters (4818 Coronado Parkway, Cape Coral, FL 33904. [Reed note: the use of the names National Home Loan Mortgage Association and Nellie Mae sound like an attempt to confuse the public into thinking this is a quasi governmental agency like the Federal National Mortgage Association (Fannie Mae)]

5. John Kane is president of Nellie Mae and is responsible for its day to day operations.

6. The other persons, including the pregnant Whitney girlfriend, were salespersons of the companies.

7. Florida had demanded documents by subpoena on 10/31/89 with a deadline of 11/15/89. “Substantial compliance was not received by the Department until 2/1/90.”

8. Compuworld operates a bi-weekly mortgage program where consumers have their account debited every two weeks and Compuworld pays their monthly mortgage payments plus one extra monthly payment at each anniversary of the start of the program. Consumers are charged $500 up front plus per-debit service charges.

9. Sold by direct mail, newspaper ads, TV infomercials, and telephone boiler room salespeople. The ads encourage prospects to attend a free seminar.

10. The funds are put into accounts owned by MRS until used to pay the mortgage payments. The MRS accounts are in “several out-of-state banks…which have been closed and relocated…” Consumers have not been told where their accounts are or when they are closed and moved.

11. Funds are “…pooled in a securities investment fund which generates interest to the benefit of MRS. Customers are told that their mortgage funds are held in FDIC insured institutions. In fact, funds have been maintained in various accounts, including a Shearson Lehman Hutton Financial Management account, which do not provide FDIC insurance for each participant’s funds.”

12. “Literature distributed by Compuworld to potential customers has indicated that Compuworld’s MRS program has been approved by a government agency to administer the MRS services through ‘Nellie Mae.’ ‘Nellie Mae’ was described as a ‘quasi-governmental agency’ [told you so] which would electronically debit and credit the bi-weekly mortgage payments. In fact, no such government agency exists. Additionally, no such agencies have endorsed or approved the MRS system.”

13. MRS is “an investment of money primarily induced by the prospect of economic benefit.”

“c. the program has been marketed by Compuworld as a ‘tremendous money making opportunity.’”

14. “In order to participate in this plan, the customer is required to invest up to $10,000 in Compuworld. The investor obtains the right to solicit potential MRS participants and obtain a cash payment from Compuworld. As part of this package, the participants receive training materials and, in some cases, a computer. Participants elect to finance these purchases on a retail installment basis…”

15. “Compuworld has described this right to participate as ‘the Business Opportunity of the Year.’…literature…represents that previous investors are realizing profitable returns…does not specify the number or percentage of such investors…identity of these investors, or the amount of profits being made…further demonstrates that an investor can earn up to $50,000 annually, but does not advise prospects whether such results have in fact been obtained and, if so, the percentage of investors realizing such results…no profits have been made from MRS by Compuworld…Compuworld’s profits are derived from selling participation rights to investors and from revenues from related ‘training’ seminars.”

16. “…taped interviews of Whitney distributed to potential and existing investors deceptively appear to present Whitney on an impartial ‘Investor Hotline’ talk show. However, the moderator [Whitney’s Schenectady friend who moved to Florida with him] has had previous affiliations with Compuworld, has an interest in a company controlled by Whitney, and…Compuworld owns or controls the company which produces the subject program. None of these facts are disclosed to viewers.”

17. “…in certain instances, investors are not aware of the location of the related trust accounts…”

19. “…the purchase of a Compuworld Business Kit and subsequent participation agreement constitutes a security within the definitional context of Chapter 517, Florida Statutes.”

20. “None of the securities offered by Compuworld is registered with the State of Florida Division of Securities.”

21. “None of the Respondents is registered with the State of Florida Division of Securities as an issuer, dealer or associated person.”

22. “…the Respondents [like defendants] have misrepresented and omitted material facts, including but not limited to:

i) “Misrepresented that funds were held in FDIC-insured accounts…”

ii) “…failure to state tho location of the trust accounts or the fact that Compuworld is in fact the beneficiary of such accounts and obtains the interest from these accounts;

iii) “…failure to disclose the fact that Compuworld controls the company which produces the [video talk show] program and that the moderator has previous and present affiliations with the Respondents;

iv) Failure to state that [name withheld by John T. Reed in case he is currently a private person] has a Final order of Permanent Injunction against him, based on action by the United States Securities and Exchange Commission.”

v) “Failure to state that the MRS service has not been profitable for Compuworld, and failure to provide financial data on the company sufficient for the investor to determine his risk and that the company may not survive the term of the investor’s mortgage loan;”

vi) “Failure to disclose the risk of loss of all or part of the investment or the risk that all or part of the promised financial benefit will not be obtained, as the result of the failure of the Compuworld business, change or restriction of the business plan, or other risk factors…”

vii) “Misrepresentation that ‘Nellie Mae’ is a quasi-governmental entity.”

viii) “Failure to disclose the business background and qualifications of the management of Compuworld or the use of proceeds of the investment, including compensation of key management;”

ix) “Failure to disclose the exact location of mortgage funds once they are debited from customer accounts;”

x) “Failure to disclose that interest accrued from the MRS trust account benefits Compuworld rather than remaining in trust for investors;”

xi) “Misrepresentation that conventional bank refinancing is necessary to convert a mortgage to the bi-weekly payment system, unless the MRS service is used, and misrepresentation that consumers must enroll in MRS to obtain the benefits of mortgage reduction;”

xii) “Failure to disclose that consumers are able to administer this service on their own without investing in MRS.”

23. “In conjunction with Compuworld’s sales of participation interests in the Compuworld Business plan, the Repsondents have misrepresented and omitted material facts, including but not limited to:

i) “Failure to [tell] that…unregistered security;”

ii) “Failure to state that representatives…unregistered associated persons, broker/dealers, and issuers of securities;”

iii) “Failure to state that [name withheld because may be private person] has a Final order of Permanent Injunction against him concerning securities violations;”

iv) “Failure to state that Compuworld’s profits are derived from seminars and sales of participation agreements, not from the MRS service, and failure to disclose that MRS program has not been profitable to Compuworld;”

v) “Misrepresentations that large profits are likely to be derived from the investment in Compuworld business plan, and failure to provide specific information with regard to the earnings of previous investors;”

vi) “Failure to disclose the use of proceeds of invested funds and risk of loss of all or part of that investment;”

24. “The management of Compuworld has falsely stated to and concealed material facts from staff of the Department, including but not limited to:

i) “Respondents Whitney and [name withheld because may be private person] represented that no regulatory actions had been taken against Compuworld. In fact, on December 5, 1989, Compuworld entered into an agreement with the Attorney General of the State of Michigan to stop selling business opportunities in that state.” [Emphasis added]

ii) “Respondents Whitney and [name withheld because may be private person] stated that the response to the Department’s subpoena was delayed because they had no experience with a subpoena. In fact, the State of Kansas has subpoenaed extensive materials from Compuworld’s affiliate ‘Nellie Mae,’ in October of 1989 and [name withheld because may be private person] is an experienced attorney. [Emphasis added] [Not to mention the hit-and-run lawsuit against Whitney that lasted from 1980 to 1988]

iii) “[name withheld because may be private person] represented to the Department that no regulatory actions had been filed against him individually. In fact, on September 20, 1977, the Securities and Exchange Commission filed a complaint for permanent injunction against [name withheld because may be private person] to prevent him from filing false and misleading annual reports, as well as fraudulent proxy statements. A final order was entered granting the permanent injunction.”

iv) “[name withheld because may be private person] represented that he was a ‘principal’ in Paragon Securities. In fact, he was not a registered principal with that firm.”

v) “[name withheld because may be private person] provided a false social security number to the staff of the Department.”

Conclusions of Law

…the Depart men concludes each of the following as a matter of law:

1. The Respondents have offered investments as defined by Section 517.301(2), Florida Statutes…

2. The participation right in the Compuworld business plan constitutes a security as defined by Sections 517.021(21)(q), (r), and (s), Florida Statutes.

3. Each of the Respondents has acted in the capacity of an issuer, dealer, or associate person as defined by Sections 517.021(4)(9), and (14), Florida Statutes.

4. The Respondents have violated Section 517.07, Florida Statutes by offering or selling participations in the Compuworld business plan, when such securities were not registered with the Department as provided by law.

5. The Respondents have violated Section 517.12(1), Florida Statutes by selling or offering for sale securities in the State of Florida when such persons were not registered as securities issuer, dealers, or associated persons.”

6. The Respondents have violated Section 517.301(1)(a) 2 and 3, and 517.301(c), Florida Statutes by obtaining money through misrepresentation or omission of material facts in conjunction with the offer or sale of securities or investments, and by falsifying material facts or making false statements or documents in connection with such offers or sale.

7. Respondents have violated Section 517.301(1)(b by failing to disclose endorsements for consideration on programs designed to appear as interviews but which are sponsored by Respondents Compuworld and Whitney.

8. The Respondents have violated Section 517.301(1)(c), Florida Statutes by misrepresenting and concealing material facts and using false writings in matters within the jurisdiction of the Department…in paragraphs 22, 23, and 24 above.

9. The Respondents have violated Section 517.311, Florida Statutes by misrepresenting that the MRS plan was approved by ‘Nellie-Mae,’ a quasi-governmental agency.

10. Respondents Compuworld, Whitney, and [name withheld because may be private person] have violated Section 517.312, Florida Statutes for [selling unregistered securities].

11. The Respondents have violated Section 517.201 (3) by failing to timely comply with a subpoena issued by the Department.

12. The Respondents have violated Section 520.331(b), (c), (e), and (g), Florida Statutes, by using fraudulent misrepresentations and concealment of material facts as well as false , deceptive, and misleading advertising in conjunction with retail installment transactions. Such misrepresentations, concealments and deceptive advertising include without limitation those set for thin the preceding paragraphs 22 and 23.

13. Respondents Compuworld, Whitney, and [name withheld because may be private person] may be sanctioned as provided by Section 520.331(3)(d) for a demonstrated lack of honesty, based on the facts described in paragraphs 22, 23, and 24 above.

14. The licensee Respondent may be sanctioned for the acts of its control persons, employees, and agents, as provided by Sections 520.331(4) and (5), Florida Statutes.

Whitney apparently filed a countersuit against the State of Florida Case # 90-5512 in the Circuit Court of Leon County, FL. I have not seen that suit and do not know what it is about. It was dropped as part of the Final Order (Administrative Proceeding No. 1450-F-8/89) dated 1/15/91. Whitney had to pay $12,500 toward the cost of investigation. They also had to give each Florida resident who bought the program a right to rescind the deal unless their gross sales of bi-weekly programs exceeded the amount they paid. [I would be surprised if anyone was in that situation.] Those who elected to rescind got a full refund less the wholesale value of any computer hardware they received from Compuworld as part of the purchase. A letter signed by Russ Whitney to his customers informing them of their right to rescind was attached to the Final Order.

The Final Order was signed by Russ Whitney, [name withheld because may be private person], John Kane, and the secretary Whitney began having a sexual affair with during this action by the Florida Department of Banking. He got her pregnant in August, 1993.

To be continued