U.S. Court of Appeals Affirms 25-Year Sentence for Leader of $179 Million Fraud Scheme

On April 16, a panel of the United States Court of Appeals for the Seventh Circuit affirmed the sentence of Nikesh Patel, an Orlando businessman who had pleaded guilty to five counts of wire fraud for his role for his role in selling $179 million in fraudulent loans to an investment advisor, Pennant Management.  Patel and Timothy Fisher, the co-founders of First Farmers Financial LLC (“First Farmers”) in 2011, had obtained certification for First Farmers as a nontraditional lender engaged in United States Department of Agriculture (USDA) government‐guaranteed lending programs.  Patel and Fisher, however, obtained that certification by creating and submitting documents to the USDA that falsely represented First Farmers’ financial condition.

Thereafter,

Patel induced Pennant to acquire First Farmers loans by falsely representing that the company had millions of dollars in assets, cash on hand, and profits. None of this was true, but Patel and Fisher created false financial statements and balance sheets and provided these documents to Pennant. Based on these false documents, Pennant began investing with First Farmers.

Because the kinds of USDA-related loans that First Farmers purported to be originating and funding were eligible to have the USDA‐guaranteed portion of its loans resold to investors, and the underlying obligations of those loans were guaranteed by the United States, they were seen to be fairly risk‐free investments.

Over a 17-month period in 2013-2014, Patel sold 26 loan packages to Pennant for $179 million, for loans that First Farmers had purportedly issued.  In fact,

all twenty‐six loans were completely falsified—there was no borrower, no USDA guarantee, and no loan. Patel had forged USDA employee signatures on the loan packages, made up fake businesses as the borrowers, and created fake USDA loan identification numbers for these loan packages.

After receiving the funds, Patel and Fisher “used some of the proceeds to make ‘principal and interest’ payments back to the Pennant investors who had invested in the fund. These purportedly represented payments from real borrowers, but those real borrowers did not actually exist.”  Other uses of the $179 million included Patel’s buyback of approximately $26 million of three other fictitious USDA loans that Patel had sold to another investment advisor; and Patel’s spending of another $130 million “to purchase, renovate, and operate hotels,” and of further proceeds on other business ventures, personal travel and expenses, homes, cars, a boat, and gifts for friends and family.”

In September 2014, after “Pennant employees became aware of inconsistencies relating to the First Farmers loans and were unable to verify the existence or location of certain purported borrowers,” Patel was indicted and arrested on wire fraud charges in 2014, and pleaded guilty to a wire-fraud indictment in December 2016.  For most of the next year, Patel requested and was granted continuances of his sentencing date.  During that time, Patel represented, among other things, that he  was assisting the court-appointed receiver in obtaining additional funds to be repaid to victims.

In fact, instead of earning money to pay back his victims, “Patel and another associate used fictitious identities and entities to defraud an Iowa lender out of millions of dollars. Approximately $2.2 million of the money Patel had ostensibly earned to pay back the Pennant fraud victims was newly‐stolen money.”  In addition, Patel had made plans to abscond to Ecuador prior to his sentencing.  On January 6, 2018 – only three days before his rescheduled sentencing —

government agents arrested Patel at an airport in Kissimmee, Florida, as he attempted to board a chartered plane to Ecuador. In his possession, Patel had an Indian passport in his name, United States currency, documents relating to his attempt to obtain asylum in Ecuador, financial documents indicating access to accounts holding millions of dollars, and detailed checklists for tasks relating to obtaining asylum in Ecuador and setting up a new life there for himself and his family. . . . The documents in Patel’s possession indicated that Patel had planned his flight for months: he rented a house in Ecuador, opened bank accounts and transferred funds there, obtained a lawyer to help him through the extradition process, and purchased tickets for his wife and family to travel and meet him in the coming days.

Even after his arrest, “while in custody awaiting transfer to Chicago, Patel continued to direct his  associate on how to complete this pending fraud.”  The United States District Court then sentenced Patel on March 6, 2018, to 215 years’ imprisonment and  $174,791,812.50 restitution.

On appeal, the Court of Appeals considered and rejected arguments by Patel that the sentence was procedurally and substantively unreasonable.  On the first argument, the Court rejected Patel’s contention (among others) that his sentence was procedurally unreasonable because his codefendant Fisher had previously pleaded guilty to money-laundering charges and received only a 10-year prison sentence.  It took particular note of the fact that the sentencing judge “observed several times that it viewed Patel as more culpable, calling him the ‘most significant player’ of the two and noting Patel was ‘in the cat bird’s seat of impropriety’ with respect to Pennant.”

On the second argument, the Court acknowledged that “there is certainly a stark disparity between the sentence of 25 years Patel received and the statutory maximum of 10 years that Fisher faced (a sentence he ultimately received),” but added that Fisher’s much lower sentence did not negate the reasonableness of Patel’s sentence.  It pointedly commented that the record on appeal

reveals several major differences between Patel’s and Fisher’s conduct that warrants a disparity between their respective sentences.  Most notably, as far as the record reflects, Fisher did not engage in an entirely new fraudulent scheme while on bond, attempt to pass off the money received from that fraud as legitimate recovery for Pennant victims, and try to flee the country and seek asylum elsewhere.

The Court concluded that Patel’s sentence was not substantively unreasonable because of the disparity between his and Fisher’s sentences, and that Patel had offered no other reason to question its substantive reasonableness.

Note:  This decision does not break any new ground in reviewing the reasonableness of a white-collar defendant’s sentence under the federal sentencing guidelines.  It does, however, provide a reminder of the need for investment advisors to conduct appropriate due diligence with their counterparties – not only at the beginning of a relationship but throughout that relationship as well.  Even if the general type of financial products that an investment advisor is considering is considered fairly low-risk, as was the case with the USDA loans that Patel purported to originate and fund, investment advisors need to scrutinize with care any newly established firm that lacks an established track record of success in such products.  Failure to do so  could lead in some cases, as did Patel’s scheme, to severe, even ruinous, losses for individual, corporate, and governmental investors.

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