Two men accused of running a Ponzi scheme, siphoning off some of the misappropriated investors’ money to prop up the failing Panoramic View resort in Montauk, have been indicted by a federal grand jury on charges alleging an almost decade-long string of thievery and deceit.
Brian F. Callahan, 43, of Old Westbury and Westhampton Beach, and his brother-in-law, Adam J. Manson, 41, a New York resident with offices in Great Neck and Montauk, duped banks, auditors, and investors, including the Montauk Fire Department, by creating fictitious funds, documents, companies, and even people, according to the indictment.
If the pair are convicted, the federal government will seize the Panoramic View, which was the starting point for most of the alleged crimes, and all other properties they own.
The two men purchased the Panoramic View, then a motel with five multiple-unit buildings and three oceanfront cottages on 10 acres, in October 2006, for $32 million. Their plan was to convert the old motel into cooperatives, selling buyers the leases on the units but not the land. After taking over, they transferred ownership of the cooperative to a company called Distinctive Ventures, which itself was owned by a holding company called Distinctive Investments.
They obtained a $35 million loan in January 2007 to help cover the purchase, as well as a $10 million loan for the planned renovations, from an unnamed New York bank, promising to make monthly payments to the bank at 10 percent interest.
Before he became involved in the Panoramic, according to the indictment, Mr. Callahan was already misusing investors’ funds. He was sole owner of several offshore investment companies, with such names as Diversified Global Investments, Horizon Millenium, the Masters Global Fund, and others. He told his investors, who were scattered across the country, that he was putting the money into New York-based hedge funds, or that he was investing in high-dividend stocks and bonds.
Mr. Manson does not appear to have been involved in those companies, at least not before the purchase of the Panoramic.
From the beginning of his involvement in the Panoramic, Mr. Callahan began using investors’ money from his varvarious companies to fund its financing. He pulled $14 million, for example, from one of his offshore investment companies, Pangea Funds, to help pay the initial outlay of cash for the Panoramic. At the same time, according to the indictment, he continued to solicit investments in Pangea.
One of the investors was said in the indictment to be an East End fire department, which published reports have identified as the Montauk Fire Department. From October 2006 to February 2008, Mr. Callahan reportedly received about $600,000 from the department, on the understanding that the money was being invested in “mutual funds and other securities.” It was actually being funneled into the Panoramic.
The indictment does not say whether that money was ever returned, though it does say that some of Mr. Callahan’s early investors did get their money back. Several calls made on Tuesday to Richard Schoen, chief of the department, and other department officials had not been returned as of press time.
By early 2008, Pangea was nearly cleaned out. While much of the money went to the Panoramic, $3 million went into Mr. Callahan’s pocket, the government charges.
The bank note on the Panoramic came due. The co-op units were not selling, and the hotel income was not nearly enough to cover the loan. Mr. Callahan began to drain another of his companies, Audited Callahan Funds, to cover the bills.
The brothers-in-law could not cover the note when it came due that April. The bank extended the loan for six months, but raised the interest to 14 percent and required an immediate payment of $350,000.
At that point the true Ponzi scheme began. Mr. Callahan and Mr. Manson commingled funds across company lines, says the indictment, using Audited Callahan Funds to lure in investors, promising them large returns and following up, like small-time Bernie Madoffs, by sending them false statements. The statements, together with fake promissory notes and fictitious signatures, fooled auditors and the lending bank, the indictment says, adding that the pair went so far as to create false identities, with e-mail addresses and telephone numbers.
Mr. Manson played a major role in deceiving the lending bank, the government charges, telling it that he had financed his share of Distinctive Investments, the holding company for Panoramic, through his own funds. He told the bank that his father had provided a major part of the money.
In the end, about $118 million was said to have been taken in by the pair, with $96 million of it unaccounted for.
Mr. Callahan and Mr. Manson were arraigned last Thursday in United States District Court, Central Islip, before U.S. Magistrate Judge A. Kathleen Tomlinson, on a 24-count indictment. “The lie stops here,” the federal prosecutor, Loretta E. Lynch, said in a statement.
Mr. Callahan was released following arraignment on a $2 million bond secured by $500,000 equity in three houses owned by his father and his sister in Southington, Conn. Mr. Manson was released on a $1 million bond secured by $500,000 equity in his father’s Old Westbury residence. The pair, who are due back in court on Sept. 30, were told to surrender their passports and warned to have no further contact with each other.
A reporter who walked along the pristine beach in front of the Panoramic last Thursday found about 25 people, all guests at the motel, sunning themselves in lounge chairs. Several, who did not want their names used, agreed the place was “a bit tired”; one remarked that “this was our first time, and our last.” There were no investors to be found.