Friday, March 5, 2010

Second Canopy Financial Co-Founder Added to New Federal Charges Alleging $75 Million Investment Fraud and $19 Million Misappropriation from Clients’ Custodial Heath Care Accounts

CHICAGO—Two co-founders of Canopy Financial, Inc., a bankrupt health care transaction software company based here, were charged today with allegedly defrauding investors of approximately $75 million, while at the same time misappropriating approximately $19 million from client custodial accounts intended for health care savings and expenses. One defendant, Jeremy Blackburn, Canopy’s former president and chief operating officer, was initially charged last December in connection with the investment fraud aspect of the case, while charges were filed for the first time today against the second defendant, Anthony Banas, Canopy’s chief technology officer. Today’s charges contain the first allegations that either man was involved in an alleged scheme to misappropriate millions of dollars from Health Savings Accounts and Flexible Spending Accounts that Canopy held and administered for the benefit of individual clients. Blackburn and Banas were each charged with two counts of wire fraud in a criminal information filed today in U.S. District Court, announced Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois; Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the Federal Bureau of Investigation; and James Vanderberg, Special Agent-in-Charge of the U.S. Department of Labor Office of Inspector General in Chicago.

Both defendants allegedly used false information about Canopy’s financial condition, including a bogus auditor’s report and falsified bank statements, to fraudulently obtain approximately $75 million from several private equity investors in 2009. Approximately $39 million of that money was used to redeem shares of other Canopy investors, including approximately $1.6 million that went to Blackburn and $975,000 that went to Banas, while another $29 million obtained from investors was deposited into Canopy operating accounts, according to the charges. Blackburn and Banas allegedly misappropriated Canopy operating funds for their own benefit, including: $2 million for Blackburn’s shared interest in a private jet; $1 million to a luxury automobile dealer for Blackburn; $1 million to a ticket broker for Blackburn; and $300,000 for Banas’s investment in a nightclub.

The charges allege that Blackburn and Banas created phony bank statements during 2009 to conceal the transfer of approximately $19 million from special health care accounts in which Canopy held funds as custodian to make payments to medical providers to Canopy’s own operating accounts. It was from those operating accounts that Blackburn and Banas allegedly misappropriated millions of dollars for their own benefit. In 2008, Blackburn and Banas allegedly lied to a Canopy employee who was attempting to reconcile account balances, and in order to avoid detection, Banas refused to allow Canopy employees to have access to bank statements for certain custodial accounts.

The charges seek forfeiture of $94 million, as well as watches and automobiles, from both defendants, representing the alleged $75 million investment fraud combined with the $19 million misappropriation of client funds.
The U.S. Attorney’s Office will be sending victim notification letters to some 1,600 known or potential identified victims of the alleged custodial account fraud. Individuals who believe they are victims and have not received a letter by March 15 should call a toll-free hotline, 866-364-2621, or e-mail usailn.victim.aia@usdoj.gov and provide their name and address.
Blackburn, 36, formerly of Malibu, Calif., was released last December on a $1 million unsecured bond. Blackburn and Banas, 32, of Chicago, will be arraigned at a later date in U.S. District Court.
In 2004, Blackburn, Banas and a third individual co-founded Canopy, which reportedly was one of the country’s fastest-growing privately-held companies before it entered bankruptcy proceedings late last November. At that time, a special committee of outside directors reported information to federal law enforcement officials and continues to cooperate with the ongoing investigation, officials said. A civil enforcement action filed by the U.S. Securities and Exchange Commission against Canopy remains pending and law enforcement officials noted the ongoing cooperation of the SEC’s Chicago Regional Office.
Canopy, which had offices in Chicago, Plainsboro, N.J., and San Francisco, developed and marketed software programs for banks and health care payers to administer and process payments involving health-related savings and spending accounts. Canopy’s products related to expense tracking, online bill payment and claims processing for healthcare transactions.
According to the charges, Canopy agreed to sell shares of preferred stock to certain investors on two separate occasions in July and August 2009, and agreed to provide the investors with audited financial statements for 2008. In July 2009, Canopy sold approximately $63 million of a class of preferred stock to several parties, including shares totaling approximately $60.5 million to two entities affiliated with Spectrum Equity Investors. In August 2009, Canopy sold approximately $11.9 million more of the same class of preferred stock to various investors, including about $1.9 million of that amount to the same two Spectrum entities. At the same time, Blackburn redeemed a portion of his stock for approximately $1.6 million, and Banas redeemed shares totaling approximately $975,000.

The charges allege that Blackburn and Banas fraudulently obtained the investors’ funds by making false representations about Canopy’s financial condition, including its revenues, profitability and total number of client accounts, and by falsely representing that its financial statements had been audited by the accounting firm KPMG. After creating false financial information, Blackburn, assisted by Banas, allegedly caused a phony audit report for 2008, purportedly prepared by KPMG, to be sent to Spectrum on June 30, 2009, to complete the stock purchase agreement. In fact, KPMG never performed an audit of Canopy’s financial condition and never drafted an independent auditor’s report for the company.
In addition to the phony audit report, Blackburn and Banas allegedly provided Spectrum with falsified bank statements for the months of January through June 2009, purporting to show a Canopy account at Northern Trust Bank with monthly balances ranging between $5.7 million and $8.9 million. In fact, the charges allege, no such Canopy account existed.
The government is being represented by Assistant U.S. Attorneys Stephanie Zimdahl and Manish Shah.
Each count of wire fraud carries a maximum penalty of 20 years in prison and a $250,000 fine and restitution is mandatory. The Court may also impose a fine totaling twice the loss to any victim or twice the gain to the defendant, whichever is greater. If convicted, the Court would determine a reasonable sentence to impose under the advisory United States Sentencing Guidelines.

An information contains only charges and is not evidence of guilt. The defendants are presumed innocent and are entitled to a fair trial at which the government has the burden of proving guilt beyond a reasonable doubt.

No comments:

Post a Comment