Battle lines are drawn in the Mesa-based Mathon Management investment-fraud case with investors seeking to remove the court-appointed conservator who is overseeing the recovery of their assets.
Investors, who are owed $77 million by two Mathon funds, want the proceedings moved from Maricopa County Superior Court to Federal Bankruptcy Court and the appointment of a liquidating trustee to return their money.
Superior Court Judge Barry Schneider is scheduled to hear the investors’ requests at 9 a.m. Monday.
Gerald Shelley, attorney for the committee representing investor interests, said bankruptcy court is a best venue for the case because federal law is better suited than state law to recover assets from financially strapped businesses.
He denied that investors are unhappy overall with the performance of the conservator, James Sell, although he said opinions vary among the 130 investors.
But he said most investors believe Sell and Arizona securities regulators have done all they can to help them, and a management firm with more experience in asset recovery would better handle the case now.
"There is nothing negative about Mr. Sell or the state of Arizona in our motion," he said. "In fact, the system has worked. The investors are now organized and are ready to go forward with a bankruptcy plan that is most favorable to the investors."
The change is opposed by the Arizona Corporation Commission, which triggered the shut down of the two Mathon funds on April 1. After a yearlong investigation of the funds, ACC investigators concluded the operators of the funds were running a Ponzi scheme and were in violation of many other provisions of the state securities law.
They said the funds lured investors with promises of lavish returns but used the money for dubious loans that had little chance of returning the promised profits. In fact, investors who did get their money back were repaid by money put in by later investors, investigators said.
Commission spokeswoman Heather Murphy said Sell should continue his work because he can ensure that perpetrators of the alleged scam don’t benefit and the recovered money will go to those who are deserving.
"The conservator’s job is to find out who the insiders are, to figure out where the money went, and to fairly distribute the proceeds that are recovered," she said. "This other plan advantages some investors to the disadvantage of others."
The investors’ attempts to remove the conservator put them in the seemingly incongruous position of opposing the state regulators who supposedly intervened to protect them. But Murphy said it’s not unprecedented for the interests of regulators to diverge from those of supposed victims.
"The state role is to protect the investing public from fraud and abuse and to defend the Arizona Securities Act," she said. "The investor committee is looking out for investors, and their method of doing that may advantage some investors and disadvantage others."
INSIDERS AN ISSUE
A key issue is whether the investor committee is being controlled by "insiders" — family members and friends of the two principals in the Mathon funds, Duane Slade and Guy Williams. The insiders put money into the funds and therefore are classified as investors, but they also may have received preferential treatment, Sell said.
He believes they have too much influence on the "innocent" investors because most are members of The Church of Jesus Christ of Latter-day Saints.
"This is typical of an affinity fraud," said Sell, an LDS member himself. "When you’re dealing with that, you often have reluctant victims. They get pressure put on them every Sunday. No one wants to admit a fellow church member has done anything wrong . . . No one wants to admit they made a stupid investment. Put all that together, and you have real reluctant victims."
Sell emphasized his comments are not intended to be a criticism of the Mormon church, and affinity frauds have been committed within many religious and other groups where some members take advantage of positions of trust they hold with other members.
Shelley denied the 13-member investors’ committee has been hijacked by insiders.
"We worked hard to make sure there are no insiders on the committee," he said. "They asked to be placed on the committee, but we declined because that would compromise the committee."
He added that if the case is moved to bankruptcy court, federal law would assure fair treatment of all investors.
Shelley said the committee wants to replace Sell with the firm of Alvarez and Marsal, a company with national experience in dealing with recovery of assets. A Phoenix partner in the company helped to guide the Baptist Foundation investment-fraud case through bankruptcy court, he said.
The Alvarez and Marsal proposal was one of five options considered by investors, he said. Others included continuing Sell’s conservatorship and an offer by a Seattle attorney to buy investors’ claims at 45 cents on the dollar. But the Alvarez and Marsal option is believed to offer the best chance of recovering the most money, Shelley said.
Shelley said he also is negotiating with attorneys for Slade and Williams about a potential deal to grant the pair immunity from civil suits if they return millions of dollars they control to investors.
He declined to say how much money Slade and Williams are offering, but he said such an agreement makes sense. "It would reduce litigation expenses and put money in the pockets of investors."
He said the investors would not agree to any deal that gives Slade and Williams the capability of living lavish lifestyles.
"We are aware of those concerns and those possibilities," he said. "Investors expect Slade and Williams will act appropriately."
Attorneys for Slade and Williams could not be reached.
Sell said he has not been involved in those negotiations, but he said he should be.
"The (investors’) committee is way off the reservation," he said. "If you look at the original enabling petition of the committee, they were supposed to aid and assist me."
Sell insisted he has worked effectively for investors and has already recovered more than $10 million.
But the strains between the investors and Sell are evident in his efforts to recover money from one of Mathon’s investments — a coal mine in Wyoming.
Sell wants to accept a proposal from Robson Communities, a Valley developer, to pay about $3 million for Mathon’s interest in the mine, which Sell said represents the full value investors’ cash put in the project. But the investors’ committee is objecting, saying the asset should be subject to competitive bidding to make sure the best bids are received.