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The receiver in the Warren Equipment Finance fraud case on April 21 sought permission to distribute $1 million among roughly 70 investors who lost nearly $11.2 million on bogus promissory notes they purchased from the late Warren Clayton Stephens. A court is scheduled to consider the distribution on June 22.

Victims of the alleged Ponzi scheme, who stand to recover in this distribution about a dime on each dollar of losses, compete for dwindling company and estate assets with attorney and accounting firms that billed more than $1.1 million in the case through March. The fraud was discovered when Stephens, founder of Novato-based Warren Equipment Finance and its parent Warren Capital, died on Nov. 10, 2014. Stephens had apparently been selling fraudulent promissory notes for almost 14 years.

Receiver Michael Kasolas was appointed by a San Francisco court in Dec. 2014. Kasolas proposed to the court a simple formula for determining what pro rata share of the $1 million distribution goes to each investor: total investments minus any payments, whether characterized as returned principal or interest. In most cases, this calculation yields the amount of each investor’s net loss in the fraud.

Note holders who disagree with their proposed pro-rated distribution as calculated by Kasolas can contest the amount and let the court decide.

New documents reviewed by the Business Journal show that more than a third of the fraud victims live in Sonoma County, with other victims located throughout California including Santa Monica, Palm Springs, Silicon Valley, San Francisco, Marin and Mendocino counties. Other investors are in Arizona, Idaho, Illinois, Indiana, New York, Oregon and the state of Washington. See the sidebar list of parties, including investors in the case, on next page.

A Sonoma County probate case involving the estate of Stephens has drawn dozens of creditor claims since March. Kasolas filed one claim against the estate of $22.9 million that included the total due on all notes for all investors. About 55 individual investors filed their own claims against the Stephens estate by May 4. Some investors filed claims for the original amounts they gave Stephens; others filed claims for their net losses. As of May 12 the total claimed by individual investors was about $16 million.

Some investors seek to hold Stephens individually liable through his family estate for fraud perpetrated in Warren Equipment Finance. Dale and JoAnn Overfield of Edgewood, Washington filed a claim on May 4 for two notes, one in 2010 for $10,000 and another in 2013 for “$25,000 plus accrued interest at 9.5 percent from Dec. 5, 2013 according to the terms of a Promissory Note Purchase and Subscription Agreement executed by decedent, Warren C. Stephens, on behalf of Warren Equipment Finance, Inc. for which the individual decedent is liable because of fraudulent and unlawful activities carried on by decedent in violation of applicable securities law,” the Overfields said.

In a declaration to the court about the preliminary distribution to investors, Kasolas reported that Warren Capital had total deposits of $16.6 million from 2010 until his death in Nov. 2014.

“WCC has relied on borrowing to fund its operations since at least 1987,” Kasolas said. Significant loans were made to the company by Stephens and his brother Paul Stephens, and loans or advances totaling some $12.1 million from Warren Equipment Finance.

Total investment in Warren Equipment Finance was $50 million, Kasolas said, with payments to note holders totaling $38.8 million, leaving net losses of about $11.2 million.

“Insiders and family members of insiders assert that they have claims based on note purchases and loans” to Warren Capital, Kasolas said. He proposes to reserve from the interim distribution any amounts that would be payable to insiders and family members of insiders “in the event their claims were valid and verified.” But Kasolas plans to object to these claims and to “all purported loans” from insiders and family members. Any disputes about these claims may need to be decided by the court.

A large portion of assets available for victims and for payment of legal and accounting fees in the case is from payouts on four life insurance policies totaling $1.75 million, already received. When the receiver was appointed Dec. 9, company cash balances were about $850,000. As of Mar. 31, $296,000 was available from actual equipment leases on which payments were due.

The receiver “still has additional avenues to pursue to obtain further recoveries” from insurers, company insiders or Stephens family members, Kasolas said, such as homeowners and umbrella polices in the estate.

The total for legal and accounting fees and expenses in the case rose to about $1.15 million through March.

Since his appointment, Kasolas billed almost $275,000 through March. His attorney, Arent Fox, billed about $541,000 through March. Hemming Morse, hired by Kasolas to do forensic accounting on the case, billed nearly $184,000 by the end of March. Another accounting firm, Kokjer, Pierotti, billed almost $32,000.

Most accounting and legal work on the case is finished, Kasolas said. He proposed withholding $450,000 from cash on hand for future legal and accounting fees.

A committee of Harry Polley, Leo Joseph and Tim Smith elected by the investors hired its own law firm, Orrick, Herrington & Sutcliffe; the firm billed nearly $114,000 through March.

Polley filed a creditor’s claim in the probate case for $981,000 as trustee for the Harry E. Polley and Jean E. Polley revocable trust. Polley along with former real estate company partner David Madsen, both in Sebastopol, filed a claim of $760,000 on behalf of HADA Real Estate Co. profit-sharing retirement plan. Madsen filed another claim as trustee of the David R. Madsen and Carleen M. Madsen revocable trust for about $1.8 million.

On May 1, committee member Leo Joseph filed a claim for $1 million — two notes of $500,000 in 2012 and 2013 — as trustee for LN family trust. The third committee member, Timothy Smith of San Francisco, had not filed a claim as of May 12.

A case management conference is scheduled for Nov. 2015.