Florida Couple Accused of Fleecing Detroit Police in $10 Million Ponzi Scheme in Story Fit For Hollywood

Florida Couple Accused of Fleecing Detroit Police in $10 Million Ponzi Scheme in Story Fit For Hollywood

It reads like the script out of a bad Hollywood movie.  After convincing a Detroit Police and Fire Retirement pension fund to loan $10 million for the purchase and resale of low-income housing, a Florida couple allegedly made off with $5 million, living a lavish lifestyle traversing the Caribbean.  Along with shopping for a $1.5 million house, the couple also purchased exquisite jewelry that included jeweled Russian eggs and sculptures by French sculptor Auguste Rodin.  When the pension fund raised questions about mismanagement of the funds, the couple fled to a Caribbean island to avoid arrest, and a business partner committed suicide.  The husband was eventually arrested upon his return to the United States, while the wife is rumored to be hiding in Costa Rica with the protection of armed guards.

Unfortunately, these actors were real, and their actions devastated many.  The couple, George and Teresa Kastanes, is the subject of a lawsuit by the Police and Fire Retirement System of the City of Detroit (the "Pension Fund"), contending that the couple mismanaged funds from a $10 million loan and owed more than $15 million after subsequently defaulting.  The couple's business partner, Abner McWhorter, committed suicide several months after the lawsuit was initiated.  As the suit moved forward, the Kastanes then filed bankruptcy one day before warrants were to be issued for the couple's arrest for failure to turn over documents.  Weeks later, both fled the country to avoid arrest.

The Kastanes' were featured in a Wall Street Journal article in March 2007 that detailed their involvement in George Kastanes' client's business of flipping low-income foreclosed homes.  George Kastanes, an attorney, then teamed up with McWhorter to enter into a partnership to continue the practice.  After they approached the Pension Fund to pitch the idea of purchaing distressed mortgage loans for resale in the secondary market, the Pension Fund declined to invest but did agree to loan $10 million at an 18% annual rate of interest.  The Pension Fund received regular updates affirming that the operation was functioning as promised, and later requested a second $8 million loan.  However, after making numerous alarming discoveries about the true state of the operation, the Pension Fund declined to make the second loan.  As a result of these discovered deficiencies, the Pension Fund later placed the $10 million loan in default.

Rather than purchase mortgage loans, it was discovered that the Kastanes and McWhorter had been purchasing large lots of foreclosed properties for eventual resale to individuals - contrary to the stated terms of the $10 million loan.  The properties, totaling over 2,500, had been purchased with $5 million of the loan given by the Pension Fund, and many now faced foreclosure or demolition.  Additionally, the proceeds that allegedly resulted from the operation's success were, in reality, being paid through the originally loaned funds.  

The remainder of the loan, $5 million, was allegedly spent by the Kastanes to support a lavish lifestyle that included traveling throughout the Caribbean.  The couple shopped for a $1.5 million house on the Caribbean island of Nevis, purchased exquisite items such as jeweled eggs and Polynesian artwork, and collected gold and diamond jewelry.  The couple also allegedly took active efforts to conceal the source of their wealth from Pension Fund lawyers, taking a series of actions to thwart creditors that included shipping sculptures to St. Kitts and entrusting bags of gold and diamond jewelry with relatives.  Additionally, two months after the lawsuit was filed, Kastanes allegedly told a friend that he had $1.8 million he was "going to be needing to get rid of."  In later testimony, George Kastanes denied each of these allegations.

After the Kastanes fled the country to avoid arrest in March 2012, George Kastanes was arrested upon his return from Costa Rica in May.  His wife is rumored to be holed up in Costa Rica and surrounded by teams of armed guards.  

The Pension Fund is not alone in alleging that the Kastanes operated a Ponzi scheme.  Several other creditors have also intervened in the bankruptcy, alleging that the Kastanes have nearly $40 million in debts.  Mr. Kastanes was the focus of a federal grand jury investigation earlier this year, but no criminal charges were filed.

A copy of the complaint is here.

For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.

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