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$323.5 million bank fraud's unraveling cuts a wide swath Story unfolds: Despite the millions involved, the loan scheme was relatively simple and its victims went along easily.

THE BALTIMORE SUN

Everything was collapsing around him, and Robert Merrick knew it.

"We have a major problem," Mr. Merrick, senior credit manager of Signet Banking Corp., advised his hushed colleagues in the bank's Richmond, Va., headquarters. "The Nelco deal is a fraud."

The prospect of bank fraud on such a huge scale was so devastating that some chose not to believe him -- holding out faint hope that everything would still work out.

But those hopes evaporated 24 hours later, on Tuesday, March 19, as details of one of the largest frauds in U.S. banking history began to unfold.

The scheme went undetected for two years. By the time it was exposed, seven banks from the United States, Canada, Japan and Austria were left holding the bag for $323.5 million. A highly respected computer company was pushed into bankruptcy. An embarrassed Signet Bank, whose roots in Baltimore date back two centuries, faced a multimillion dollar lawsuit. And two people -- Edward J. Reiners of New York and Jody Bachiman of New Jersey -- were arrested on federal bank fraud charges.

The FBI's investigation continues and indictments are expected soon.

Unanswered, though, is how could so many be duped for so long?

A reconstruction of the case by The Sun shows that the scheme worked because despite the millions involved it was actually relatively simple and the victims went along easily.

Details of the case come from interviews with more than three dozen people, including federal authorities, bankers, neighbors and business associates of Mr. Reiners, and an examination of FBI affidavits and other documents filed in federal courts in Alexandria, Va., Richmond and White Plains, N.Y.

What emerges is a story of fraud of huge proportions aided by those entrusted with safeguarding the banks' money who:

Failed to make even rudimentary checks on Mr. Reiners before lending him millions of dollars.

Ignored obvious warning signs of trouble, including Mr. Reiners' extraordinary caution that his employer would disavow any knowledge of a secret program that the loans would finance.

Feared offending Philip Morris Cos. Inc., a Fortune 100 company with immense influence in Richmond.

Were lured by the prospect of huge payoffs, especially for Signet, which knew it could become one of the region's big players in loan syndications.

"These people come out of the woodwork and con the drawers off the banks," Bill Gearin, chief of Financial Security Consulting Services and the former director of security for Shawmut

National Bank, would later observe.

Project Star

The mastermind of the scheme, the FBI says, was Edward Reiners, who worked for Philip Morris for 20 years before leaving the company in 1992.

It began in late 1993 when Mr. Reiners was ushered into the tightly secured second-floor executive offices of Nelco Ltd., a computer leasing company on the outskirts of downtown Richmond.

Richard A. Nelson, Nelco's president and chief executive officer, was pleased to once again see Mr. Reiners, whom he believed still to be an executive with the tobacco giant, and greeted him with a firm handshake.

The two men had known each other for the past decade while Mr. Reiners helped arrange the purchasing and leasing of computer equipment for Philip Morris.

After exchanging the customary pleasantries, Mr. Reiners got to the point of his visit.

Philip Morris, he revealed, had a top-secret program -- code name Project Star -- that would involve millions of dollars in computer equipment.

He explained that the company wanted Mr. Nelson to go to the banks and help arrange financing. It made sense because Nelco had an excellent reputation with the largest banks in Richmond and had done business with Mr. Reiners and Philip Morris for years.

Mr. Reiners presented a document from Philip Morris, signed by the company's assistant corporate secretary, authorizing him to conduct business for the company until Dec. 31, 2003. The corporate seal was affixed to the instrument.

Mr. Nelson was eager to help. He had started Nelco in 1979 in his basement and seen it blossom into a company with sales of almost $100 million a year. But this new deal would not only

provide Nelco with a cash payment of up to 2 percent of the size of the loan for the computers, but more importantly would offer a large profit later by selling the computer equipment when Philip Morris was through with it.

F: Mr. Reiners smiled. Everything was working as planned.

Wheeler-dealer

Mr. Reiners' ability to talk people into following him didn't surprise his associates.

They describe the 51-year-old New Yorker as a smooth talker, with a trim 6-foot frame and light brown, slightly graying hair. His preferred dress is casual slacks and button-down shirts. He came off as a wheeler-dealer -- dashing from one meeting to another in a 1994 red Jaguar, flashing business cards listing himself as an executive of at least four different companies and boasting about the latest big deal he was about to complete.

"Whenever I would speak to him, he always seemed to have a lot of outside business deals going. Half the time I spoke to him he was on his car phone. He would say, 'I'm busy! I'm heading to the city for a big meeting,' " recalled Willing "Wing" Biddle, chief operating officer of HRE Properties of Greenwich, Conn., which owns the shopping center where Mr. Reiners leased space.

John Merritt, the property manager for the Heritage 202 Shopping Center in Somers, N.Y., where Mr. Reiners owns the Video Forum store, recalled that the first time they met, Mr. Reiners suddenly halted the meeting to check on a red-hot stock.

"He interrupted in the beginning of the meeting to take a phone call. It was almost as if he was trying to impress me, asking, 'How's Netscape doing?' " Mr. Merritt said.

"I sensed a little bit of hot air," he added. "We all felt that way."

Mr. Merritt recalled that in December Mr. Reiners bragged about a mineral deal he was working on in Russia and how dangerous it could be.

"He took pleasure in the wild nature of some of these things. He hinted that you can get killed over there in a second. He was delighting in the excitement," Mr. Merritt said.

He seemed to live the life as well. Mr. Reiners, his wife, Gail, and two young daughters reside on Londonderry Lane in Somers, less than five minutes from the Video Forum, in an upscale neighborhood where attorneys, doctors, stockbrokers, advertising and news executives reside in half-million dollar homes on 2-acre lots.

In February, Mr. Merritt met in the back room of the Video Forum with Mr. Reiners to discuss his business. In the middle of their meeting, Mr. Merritt recalled, Mr. Reiners observed coldly: "I don't really need this store because I'm making a ton of money in the computer business."

'Cigarette alternatives'

The money had indeed been flowing for two years. Hundreds of millions.

The spigot had been on ever since Mr. Reiners and Nelco's Mr. Nelson had convinced Signet Bank in late 1993 to help bankroll Project Star.

Mr. Nelson, as he'd promised, made the initial contact by calling Connie Mooney, a senior vice president at Signet. He explained the program in general terms, then requested a face-to-face meeting to arrange financing.

Mr. Reiners, Mr. Nelson and the Signet bankers gathered in the bank's six-story headquarters in downtown Richmond.

Mr. Reiners introduced himself as the chief operating officer of a Philip Morris subsidiary called Worldwide Regional Exports. He then explained that the loan would finance a top-secret research and development project designed to create "cigarette alternatives," according to an FBI affidavit.

A bank source recalled, however, that Mr. Reiners explained Project Star this way:

"The computer equipment was to be used to test nicotine levels in cigarettes. The research would be used to battle litigation relative to addiction. If anyone found out the results, it could greately increase Philip Morris' liability."

Project Star was so vital to Philip Morris that the company was taking extraordinary steps to prevent leaks, he told the group.

Mr. Reiners said that the work would all be conducted offshore and that Philip Morris planned to build not one huge facility, but five smaller research and testing centers scattered around the world to avoid detection.

In addition, he explained, IBM would produce and ship computers without serial numbers, Philip Morris' research centers wouldn't have an operating name and Project Star workers wouldn't even know the identity of their employer.

He insisted that the bankers not breathe a word about the deal, then required them to sign a confidentiality agreement.

Then he laid down the law: He, and he alone, was the only person who they could contact about the project. When questions arose, they were not to call other bankers or Philip Morris executives for answers. Otherwise, Project Star would be compromised.

A bank source recalled that Mr. Reiners issued this warning: "You are going to hear that I'm no longer with Philip Morris. But that's not true. I'm heading this secret project."

He added that if Philip Morris was ever questioned about the project, it would "disavow any knowledge about the program," according to an FBI affidavit and banking source.

It was a loan Signet couldn't pass up.

Philip Morris is a premier company -- the nation's 10th largest -- with stellar credit. Equally important, it employs 8,000 people in Richmond and has immense political influence.

The company "means right many jobs. It may be more important to the city [today] than years ago since it is the last big tobacco manufacturer" in Richmond, noted Earle Dunford, retired city editor of the Richmond Times-Dispatch and an author of a book on the newspaper and the city.

He recalled that Philip Morris in the early 1970s made a point of building its new plant on Interstate 95 within the city limits as a show of support for Richmond.

Turning down the loan would "be banking suicide" for Signet, noted a banking source.

But the loan made sense on other levels as well. Although Signet couldn't bankroll all of Project Star, it could "syndicate" the loan -- bring other banks in on the deal.

Signet knew the deal would put it on the map as a loan syndicator and undoubtedly lead to other such big deals.

In addition, the project seemed logical. Everyone knew the tobacco industry was being hammered from every direction, and several states had filed suits against the companies.

"Cigarette alternatives -- it sounds reasonable, doesn't it?" said Charles Meiburg, a professor of management of commercial lending at the University of Virginia's Darden Graduate School of Business.

The scheme also was aided by the past associations of the people in the meeting. Signet and other banks had dealt with Mr. Reiners before as well as with Mr. Nelson.

In addition, Mr. Reiners gained the confidence of the bank and Nelco by telling them that CCS Inc. was involved in the project.

The New York-based computer purchasing firm had done work for Philip Morris and Nelco in the past, specializing in buying computers for leasing transactions.

It was an integral part of the scheme because Nelco and the bankers were familiar with CCS, and they thought it was buying the computers for Project Star.

"You have got to gain the confidence of the financial institution if you want to defraud them," noted George Freibert, a former bank examiner and president of Professional Bank Services Inc., a bank consulting and investigative firm.

"They had done that from previous transactions that appeared to be credible. They had to have a reasonable banking request, which they did. They gained the confidence of the bank," he said.

Although Signet had a self-imposed limit of $50 million for a single customer, it ultimately agreed to initial loans of $61 million for Project Star. It demanded no collateral, meaning the loan was unsecured, and it would simply rely on Philip Morris' good name in case of a default.

Over the next two years, Signet's piece grew to $81 million and it helped generate another $173 million or so by bringing in other banks. In addition, NationsBank Corp. approved a loan of about $70 million to the project, of which it syndicated all but $20 million.

Mr. Reiners kept the money flowing from the banks by making payments on the interest, which helped convince the banks that the project was up and running.

"You take part of the money you are acquiring from a bank and you use that to pay off some of the earlier lenders, so you have these great references," Mr. Freibert said. "If you did a credit check and asked how are these people doing on their lease payments, 'Hey, they are doing great.' You build up the money and you disappear."

The other banks involved were CoreStates Financial Corp. of Philadelphia; Bank of Montreal; Hitachi Credit Corp. of Japan; Creditanstalt-Bankverein of Vienna, Austria; and Tokyo's Long-Term Credit Bank of Japan.

The money was supposed to flow this way: The loans were made in Nelco's name, giving it a revolving line of credit with Signet. It would draw money as needed and wire it to CCS, which would purchase the IBM computers, then ship them to the Philip Morris subsidiary, Worldwide Regional Exports.

Warning signals

Loans of such magnitude could not be approved on the spot. Neither Signet nor the other banks that were contacted would comment. But others in the banking industry say it would be customary for the loan to have gone through Signet's senior loan committee, which is composed of the bank's top executives.

Did the bankers have enough information, though, to make a sound decision?

Because the banks believed that they were making loans backed by Philip Morris' credit, approval "would be a no brainer," said Jeffrey Springer, president of Citizens Bancorp in Laurel. "It would not be unusual for a commercial bank to make a five-year term loan to a company of this high quality. It would be unusual for anyone to call up and investigate someone that they had been dealing with for years."

But others in the industry say there were too many warning signals to proceed with the loan:

They should have been wary when Mr. Reiners began talking about a top-secret project and demanded that no one but he could ever be contacted about Project Star.

"You can't be the only one aware of this top-secret mission," said Boris F. Melnikoff, director of security with Winston-Salem-based Wachovia Corp. "Corporately, someone has to give it its blessing. To have an individual come forth and say, 'I have been designated' you are really skating on thin ice; you really left the door open."

And they should have been suspicious when told that IBM had agreed to produce computers with no serial numbers. No reputable firm would do so, and a phone call to the company would have determined that.

In addition, computers without serial numbers would prevent the banks from checking the inventory to make sure the money was being used as intended.

"As far as I know, there were no computers shipped in this case," said John J. Shay Jr., general counsel for IBM Credit Corp. "As far as I know, IBM would not make computers without serial numbers."

Given the amount of money involved, the bankers should have verified that Mr. Reiners was employed by Philip Morris. Indeed, Signet should have insisted on a face-to-face meeting with the company.

"If I'm going to loan them $81 million I want to check their DNA before I lend that kind of money out the door," said Financial Security Consulting's Mr. Gearin. "It is not Star Wars technology, it is common sense. Obviously, none of these banks did any due diligence on this individual. One telephone call to Philip Morris would have revealed that this person was no longer an employee."

Charles A. Intriago, publisher of Money Laundering Alert, a Miami-based newsletter, said the bankers failed to follow the industry's mantra: "Know your customer."

"A mom and pop walking into a bank for a house loan come up with a financial statement and almost take a blood sample to get a mortgage loan," he said. "So it's just amazing to me how the 'know your customer' high-risk safeguards of a bank can just disappear when a smooth-talking scam artist walks into the bank and these guys fall for it."

In banking, millions of dollars can flow from one account to another in an instant. And that's exactly what happened with Project Star.

Where did the money go?

Authorities, of course, now know that Project Star never existed, nor did Philip Morris have any other top-secret program involving Mr. Reiners.

And to date there's no evidence that any computer equipment was ever purchased.

So where did the $323.5 million go?

About $200 million has been traced and frozen by the FBI. Of that, about $180 million was invested in stocks controlled by Mr. Reiners and John Ruffo, president of CCS Inc., according to court documents, sources and Judd Burstein, Mr. Ruffo's attorney.

Included in those investments were: $66.5 million in Texas Instruments Inc.; $27.1 million Philip Morris; $17.4 million in IBM; and $14.4 in Netscape, according to documents obtained by The Sun.

Authorities also have taken control of Penthouse "D" in Trump Palace Condominium in New York City that was purchased for $9.4 million in Mr. Reiners' name.

OC To date, authorities have found no trace of about $123 million.

'This is a phony certificate'

As carefully constructed as the scheme was, it unraveled quickly.

The beginning of the end came Friday, March 15, when Masanori Shoji, deputy general manager at the Long-Term Credit Bank of Japan's New York office, began to get nervous.

He called NationsBank Executive Vice President Robert R. Wetteroff in Richmond, asking questions about loan documentation Mr. Reiners had used.

Specifically, Mr. Shoji had questions about an "incumbency certificate," which purported to give Mr. Reiners the authority to enter into contracts and conduct business on Philip Morris' behalf until Dec. 31, 2003. The certificate was signed Oct. 26, 1995, by Mr. Reiners, giving his title as "chief operations officer," and by Diane M. McAdams, an assistant corporate secretary.

Mr. Wetteroff provided a copy of the certificate to Mr. Shoji, who in turn faxed it to Ms. McAdams at her Philip Morris office in Manhattan.

Ms. McAdams' response was quick and blunt: "This is a phony certificate."

"Mr. Edward J. Reiners is not an elected officer of Philip Morris Companies Inc.," she continued. "I do not know a Mr. Edward J. Reiners, and the signature that appears on the certificate is not mine."

Mr. Shoji immediately notified NationsBank, which in turn called officials at Signet.

The FBI was called.

On the weekend of March 16-17, FBI agents interviewed bankers at NationsBank and Signet.

Mr. Nelson, of Nelco, first learned about a possible problem when a banker called him at home about 5 p.m. Saturday, March 16.

Later that evening while he was being interviewed by an FBI agent, Mr. Reiners called from New York, an FBI affidavit states.

Mr. Nelson put the call on the speakerphone, allowing the agent to listen in.

Mr. Reiners explained that a fax would be sent to NationsBank from Diane McAdams, explaining why she had previously denied the authenticity of the incumbency certificate.

The two-page fax arrived at the bank at 11: 35 p.m. Saturday.

"On March 15, I was contacted by Long-Term Credit Bank of Japan regarding the validity of the incumbency certificate referencing Mr. Edward J. Reiners," stated the letter, written on Philip Morris stationery. "I was not in possession of a confidentiality agreement executed with Long-Term Credit Bank and therefore I responded in order to protect the confidentiality and high level of security surrounding Project Star. For your records the incumbency certificate authorizing Mr. Edward J. Reiners as Chief Operations Officer for Project Star is valid and was signed by me "

The letter was signed, "Sincerely, Diane McAdams."

The only problem was the letter wasn't really from Ms. McAdams.

On Monday, FBI agent James M. Glynn interviewed Diane

McAdams at her Park Avenue office. Ms. McAdams, who holds the title of assistant secretary for Philip Morris, told the FBI the same thing she had told the bankers: the incumbency certificate was a fake.

By this time, Mr. Reiners put in a call to Mr. Nelson, saying he wanted to arrange a meeting with officials from Signet and NationsBank at Philip Morris offices in Rye Brook, N.Y.

He said that Diane McAdams would attend and that they would have two new incumbency certificates, one for each of the banks.

On Tuesday, Mr. Reiners and a woman traveled to the Philip Morris offices, where they were let in the door by a company employee.

The woman was Jody Bachiman, a CCS employee who had been approached by Mr. Ruffo and by Mr. Reiners to pose as Diane McAdams and validate the certificate of incumbency, according to the FBI.

The two men had tutored Ms. Bachiman on how to obtain business cards and false identification in the name of Ms. McAdams, Ms. Bachiman later told the FBI. She also practiced forging the name Diane -McAdams.

Once inside the Philip Morris headquarters with Mr. Reiners, Ms. Bachiman identified herself to the bankers as Diane McAdams. Unknown to Mr. Reiners and Ms. Bachiman, the meeting was being monitored by the FBI through a transmitter.

Within minutes after Ms. Bachiman identified herself as "Diane McAdams," an FBI agent called Ms. McAdams at her office in Manhattan.

Moments later, the FBI arrested Ms. Reiners and Ms. Bachiman on federal bank fraud charges. So far, they are the only people who have been charged in the case.

When the FBI took them into custody, Mr. Reiners had a photo identification card purporting to show that he was employed by Philip Morris and an ID card from Philip Morris with a photo of Ms. Bachiman and the name of Diane McAdams.

Ms. Bachiman, 38, lives in small house in a working-class neighborhood of Cliffside Park, N.J., with her 6-year-old son.

In court records, Ms. Bachiman said she makes $30,000 a year.

Ms. Bachiman's attorney, Suzanne Brody, said that her client was lured into posing as Diane McAdams and that she didn't believe she was committing a crime.

"She was under the impression from her boss they were involved in Operation Star -- a government project," Ms. Brody said. "She was told they needed to get out a document to protect the integrity and secrecy of the project and that they needed her to sign a document. And she got arrested."

Likewise, Mr. Ruffo's attorney insists that his client was duped along with everyone else.

"John Ruffo is an individual led to believe he was working on a joint Philip Morris-government project to be funded with the government's authorization and knowledge through phantom sale lease-back transactions guaranteed through Philip Morris," Mr. Burstein said. "None of that was true, but my client believed it to be true because he was victimized by Mr. Reiners."

Mr. Freibert, the banking consultant, noted that "this kind of scenario is played out a jillion times in many different varieties."

The scheme's destruction cut a wide swath.

Nelco was forced into bankruptcy six days after the arrests and is trying to reorganize. The company listed $189 million in assets and $166.2 million in liabilities with about 1,700 creditors.

Mr. Nelson says he was tricked by Mr. Reiners.

"It really boils down to believing in people you have done %J business with," he said. "Business is belief and trust."

Signet has not recovered its $81 million, and this month it was sued by a shareholder claiming that the bank's directors should reimburse the company the amount of the loans because they were negligent.

The bank has said it hopes to recover most of the money, but it was forced to restate 1995 earnings to reflect a $35 million pre-tax charge related to the scheme.

NationsBank is seeking to recover $64 million and it has set aside $40 million to cover anticipated losses.

As for Mr. Reiners and Ms. Bachiman, they could face as much as 30 years in prison, fines of up to $1 million and other charges.

One of the mysteries, though, is why Edward Reiners would not have fled after collecting the millions.

"Your greed traps you," said Dr. Leon Eisenberg, a Harvard Medical School professor of psychiatry. "You get so sure you can keep this going, if you have $300 million, why not $500 million, and I'll beat to Switzerland in the next couple of weeks. The scheme was working so well, he deceived himself."

HOW THE MONEY FLOWED

1. Signet Bank, NationsBank and five other banks agree to finance $323.5 million in computer equipment for Project Star, which they believe to be a top secret Philip Morris endeavour.

2. The banks lend the money to Nelco Ltd., a Richmond, Va.-based computer leasing firm. Nelco believes that it is buying IBM computers for the project and will lease them back to Philip Morris. The money is deposited in accounts of CCS Inc., a New York-based computer sales and servicing company, which Nelco believes will buy the computers.

3. CCS believes it is working on a secret project for the U.S. government and a Philip Morris subsidiary called Worldwide

Regional Exports, headed by Edward J. Reiners.

4. CCS moves the money into trading accounts that Mr. Reiners has control over.

5. Although no IBM computers are purchased, bogus invoices are sent to Nelco and the banks. Interest payments on the loans are kept up to date.

Pub Date: 4/22/96

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