The former owner, president, and CEO of Cobalt Financial, Inc. is going to prison for running a scam that raised more than $23 million from over 250 investors in private placement real estate offerings.
William B. Foster was sentenced to three years in prison in Manhattan federal court by U.S. District Judge Kimba B. Wood, who presided over the three-week jury trial. In addition to Foster, co-defendants Mark Alan Shapiro and Irving Stitsky were found guilty.
Beginning in late 2003, Foster, Stitsky and Shapiro founded a group of companies that operated under the name "Cobalt," which purportedly engaged in the acquisition and development of multi-family real estate properties throughout the United States.
Through the Cobalt entities, the trio fraudulently induced victims to invest by -- among other things -- (a) misrepresenting Cobalt's operating history; (b) failing to inform prospective investors that Cobalt was owned and controlled by Stitsky and Shapiro, both convicted felons; and (c) misrepresenting and causing others to misrepresent Cobalt's purported ownership interests in certain properties to prospective investors.
In fact, Cobalt was a new company with little or no record of real estate investment success, was managed and controlled by Stitsky and Shapiro, and did not own several of the properties that it claimed to own.
In order to carry out their scheme, Foster, Stitsky and Shapiro established Cobalt's corporate headquarters in Springfield, Massachusetts, and a telemarketing center in Great Neck, New York. Foster, who worked out of Cobalt's Massachusetts office, was identified in the company's marketing materials as the individual responsible for overseeing all aspects of the operations of all of the Cobalt entities.
The defendants and their employees solicited funds from investors by making false and misleading oral and written representations about the investment for which the investors' funds were solicited, including false representations about:
the identities and relevant background information about the individuals controlling the Cobalt entities;
the identities of Cobalt's business partners;
the properties that Cobalt owned; (iv) the properties in which investor funds were to be invested;
the history of the Cobalt entities; (the amount of management fees to be taken by Cobalt entities from the investor funds;
the uses of the management fees taken by Cobalt entities from the investor funds; and
Shapiro's educational background.
Foster, Stitsky and Shapiro then caused millions of dollars of investors' funds to be transferred to accounts for the defendants' personal benefit.
In addition to the prison term, Judge Wood sentenced Foster, 70, of East Hampton, Massachusetts, to three years of supervised release and ordered him to pay $22 million in restitution and to forfeit $23 million in proceeds from his offenses.
Stitsky, 55, of Milan, New York, was sentenced to 85 years in prison on July 6, 2010. Shapiro, 50, of Avon, Connecticut, is scheduled to be sentenced on October 14, 2010.
"It is a very serious, egregious scheme that defrauded hundreds of people of their hard-earned money," Judge Wood said during the sentencing proceeding. "Some people in fact face financial ruin." Of Foster's role, Wood said, "Mr. Foster was in a position of trust with respect to the investors and it is a position of trust that he abused."