A 40-year-old Lakeville, MN, man is charged with operating a Ponzi scheme that resulted in a total estimated loss of $79.5 million for 17 lenders. Corey N. Johnston was charged via an Information with one count of bank fraud and one count of filing a false income tax return in connection to this crime.
Johnston is accused of conducting the scheme from 2005 through March of 2009. It purportedly involved overselling participation in large commercial and personal loans arranged by him through his company, First United Funding ("FUF").
Loan participation is a common practice in which a bank pays an original lender all or a portion of a particular loan and then assumes that loan, along with its associated risk. From that point on, the bank receives the loan payments from the borrower, as if the bank had made the loan in the first place.
Johnston's alleged scam involved selling more than 100 percent participation in at least ten different loans arranged through FUF. In other words, he purportedly sold loan participation to banks after already selling that same participation to other banks. In each instance, Johnston failed to disclose that the total participation exceeded 100 percent of the original loan, making it impossible for the participating bank to receive the full amount of money expected.
For example, Johnston allegedly oversold loan participation for a project known as White Out Way Investments. The original White Out Way loan, arranged through FUF, was for $7 million. Johnston reportedly sold 100 percent participation in that loan to Western National Bank. At the same time, however, he allegedly conned several other banks into participating in the loan, including 100 percent participation by The National Bank in Bettendord, Iowa, as well as partial participation by four other lending institutions.
In all, Johnston purportedly solicited and received $23.65 million from six banks for the $7 million loan.
In addition, Johnston allegedly oversold loan participation for a project known as JM Land Development II. The original JM Land Development loan was for $8 million, and once again, Johnston sold 100 percent participation in the loan to Western National Bank. Simultaneously, however, he reportedly obtained full loan participation from Choice Financial, The National Bank, and Hillcrest Bank, along with partial participation from four other banks.
Johnston allegedly solicited a total of $38.65 million for an $8 million loan. According to the charging document, six additional lenders were defrauded during the course of this scheme, through overselling participation in other loans.