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Originally published January 15, 2011 at 10:02 PM | Page modified January 15, 2011 at 11:14 PM

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Financial empire, luxurious lifestyle were built on a mirage

Financial scandals have trailed Frederick Darren Berg across the Northwest for more than 25 years — each linked to his unusual lifelong fixation on tour buses.

Seattle Times deputy business editor

Ponzi schemes

What it is: A Ponzi scheme is a fraud where new investors' money, instead of going to a real business purpose, is used to pay earlier investors.

The last big local Ponzi: Kevin L. Lawrence got a 20-year sentence after pleading guilty in 2003 to defrauding thousands of investors of up to $100 million in Bainbridge Island-based Znetix.

Bernie Madoff: The New York financier pleaded guilty in 2009 and was sentenced to 150 years in prison for the nation's largest Ponzi scheme, which authorities say cost investors $50 billion or more.

Source: Seattle Times archives

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Financial scandals have trailed Frederick Darren Berg across the Northwest for more than 25 years — each linked to his unusual lifelong fixation on tour buses.

When Berg was a University of Oregon undergraduate in the 1980s, fraternity officials accused him of embezzling the chapter's money for a charter-bus venture. A few years later he pleaded guilty in a check-kiting scheme, again involving a bus company.

Now Berg is charged in the biggest Ponzi scheme ever prosecuted in Washington. The 48-year-old founder and chief executive officer of Meridian Group is accused of defrauding hundreds of more than $100 million invested in his Seattle company's mortgage funds between 2003 and 2010.

Prosecutors allege Berg spent tens of millions on a ritzy lifestyle, including a posh Mercer Island mansion, two yachts and two jets.

But investigators say Berg diverted a bigger chunk, estimated at $45 million, to create a luxury bus line that served tour groups and sports teams, including the Seahawks and the Oregon Ducks.

Investors are left asking how Berg could have fooled so many for so long.

"This is Wizard of Oz — there was absolutely nothing behind the curtain," said bankruptcy trustee Mark Calvert, who is tracing the finances of nine Meridian funds.

Berg has pleaded not guilty, and he declined to comment for this story.

Berg and Meridian sales agents recruited more than 700 investors, some of whom put in up to $5 million, with the promise of interest rates as high as 12 percent. The Meridian funds were supposed to earn profits from buying mortgages and making real-estate loans.

Two local wealth-advisory firms, Cornerstone Advisors and Kibble & Prentice, counseled many investors. Others came into Meridian's orbit through friends or relatives wowed by the steady earnings it reported — and the payouts they got whenever they asked.

"My oldest friend was getting checks every month — 10 percent, I think, and for years," said Ron Neubauer, a former federal prosecutor who first put money into Meridian in 2006.

"The thing that impressed me the most about it was that he had audited financials from a national firm," he said.

High living

Berg's lifestyle was embodied in his house on the northern tip of Mercer Island, with 112 feet of Lake Washington shoreline and a view of downtown Bellevue.

Berg bought it for $5.5 million in March 2007. He and the man he was living with remodeled it into a modern palace of stone, glass and exposed wood — spending at least as much as the house cost, according to the bankruptcy trustee.

"Money wasn't an object. It was like, 'We saw this in a magazine; put it in,' " said one subcontractor. "We do a lot of waterfront stuff, but this was above and beyond."

The subcontractor said he worked at the house for more than two years. "We rebuilt rooms three to four times. He'd come in and say, 'Don't like it; redo it.' "

A long, curved slate driveway leading to glass doors on the home's three-car garage took six months and $500,000 to complete to Berg's satisfaction, said two former Berg employees. Custom metalwork cost another half-million, said the craftsman who did that work.

"It was high, high, high, high living," said Jurian Vreeburg, a pilot who worked for Berg for five years.

With Berg's empire in bankruptcy, a buyer has agreed to pay $5.9 million for the house. The bus operations were sold this past week for just over $8 million. Lenders are claiming Berg's planes, boats and condos.

Household goods remaining to be sold include 100 dress shirts, 50 pairs of dress pants and 40 pairs of shoes.

"Perry Mason game"

As a Pi Kappa Alpha fraternity member at the U of O in 1982, 20-year-old Darren Berg from Grants Pass, Ore., impressed everyone in Eugene with his entrepreneurial zeal. He created an off-campus business arranging charter bus trips.

"He was a hair-on-fire ball of energy," said Michael Stone, the chapter's adviser at the time. "Lots of charisma, lots of confidence."

The fraternity elected Berg treasurer and president. But in October 1983, rent for the frat house went unpaid, said Stone, and the chapter discovered "we don't have any money."

Stone, a CPA and attorney, examined the books and concluded as much as $21,000 had been diverted to Darren Berg Tour Corp.

Berg resigned but denied the accusation in a sharply worded letter. "Unfortunately ... I will be unable to participate in your 'Perry Mason' game," he wrote, directing Stone to a certain local attorney. "He is paid good money to answer stupid questions and I'm sure he'll be happy to answer yours."

Stone wrote back that he'd checked, and that attorney had no idea who Berg was.

"Darren put up a good face for about a week and a half, and then he cleaned out his room and left Eugene," Stone said.

Berg was not charged, and Eugene police have no records of the case.

Berg soon joined with a fraternity brother to open a Portland advertising firm, Berg/Shavere and Associates.

In 1987 a federal grand-jury indictment accused him of a check-kiting scheme using accounts for the ad agency and a charter-bus business he owned, TourDesign of Oregon.

The scam cost US Bank $19,234. Berg pleaded guilty to one of the eight charges and got a suspended sentence on condition he repay the money and get counseling.

Berg moved to Seattle in 1989 and spent the next decade building a business that bought and sold mortgages.

In 2001 he raised his sights higher, launching the Meridian Mortgage funds. Those would become the vehicle for his alleged Ponzi scheme.

"That was his passion"

Friends saw a lot of Berg's playful side. Those with access to his Facebook page could see him mugging for the camera in front of a Seattle's Best Coffee poster that said, "I'm hot and I'm rich."

A Christmas video, set to Merle Haggard's "If We Make It Through December," showed Berg wandering into a department store and peering into the underwear on a male mannequin.

To drivers of his MTR Western motor coaches, Berg was an innovative and generous employer.

He interviewed them personally, bought their uniforms at Nordstrom, and spent hundreds of thousands of dollars each year to bring them and their companions on an all-expenses-paid trip to a holiday party — one at Teatro ZinZanni in Seattle, another at Disneyland in California.

"They were legendary — nobody will be able to beat the Christmas parties Darren threw," said Larry Votruba, a San Francisco tour-bus driver since 1979 who worked at MTR for four years.

Berg frequently told drivers his grandfather had been a Greyhound driver. He also told people he'd worked his way through law school driving a bus. Votruba said the drivers knew "the bus company wasn't the moneymaker; that was his passion."

John Carrington, who drove for MTR in 2005, said Berg's example inspired him to return to college and major in entrepreneurship.

"I actually idolized him," said Carrington, who now lives in Indiana.

Meridian employees in Seattle saw another side of the mercurial Berg.

Michael Rognlien, Meridian's human-resources manager in 2004, said he quit one day when Berg "flew into a rage, screaming at me and everyone in the office ... He picked up a stapler and threw it at me from across the space."

Other employees recall Berg throwing laptops or coffee mugs.

Berg often said he was a University of Oregon graduate, and he told bus-industry publications he'd earned a U of O law degree or an MBA. The school has no record of Berg receiving any degrees.

How the Ponzi worked

Prosecutors allege Berg took money from later investors to pay off earlier investors, the classic Ponzi scheme.

In short interviews before his October arrest, Berg insisted "it's really hard to identify where it crossed that line. We certainly didn't intend for that to happen."

But investigators say Berg crossed the line in 2003. He wanted to grow his bus company, and Meridian's second mortgage fund had $13 million in available cash, said Calvert.

Berg initially took $4 million, said the trustee. And for the next couple of years, said Calvert, "Fund II was where he went to get money for the bus company and for his personal use."

To explain where the funds' money had gone, Berg faked loans using title reports, loan applications and other genuine paperwork from proposed deals never made.

Taking a mortgage Meridian hadn't bought, "he would then turn that into a live file and put it on the books," as though Meridian had done the deal, said Calvert.

That created a bogus asset to offset the diverted cash. But in the years ahead, Berg somehow would have to produce interest payments from that purported loan.

Another Berg tactic was to take a genuine loan a Meridian fund had made and sell it without recording the sale, said Calvert.

Prosecutors say Berg admitted to them "he spent countless hours fabricating documents to mislead investors and independent auditors."

But money was also necessary to keep the scheme going.

In all, Berg raised about $130 million, and he reported to investors they had earned $80 million. Investors withdrew about $40 million of those purported earnings, according to Calvert.

The bursting of the real-estate bubble gave cover to Meridian's real problem — it had few real assets behind the mortgage funds. When the funds filed for Chapter 11, Calvert said, they owned mortgages with a face value of only $11 million — and their current value is less.

When Berg notified investors in August 2009 that Meridian could not let them redeem any of their principal, many supposed it was just a temporary problem.

But behind the scenes, he was hustling to keep things from collapsing. In 2009 and 2010 he created five new funds but raised only $16 million, according to prosecutors.

That made it harder to keep up the charade, said Calvert.

"The velocity of the cash continued to speed up — faster and faster," he said. "Cash would come in, and it would be transferred to where it was needed with no consideration to who actually owned that money or where it belonged."

One elderly couple in Redmond put more than $300,000 into Meridian — money they'd saved to remodel their home because of growing health problems.

In a letter to the bankruptcy court, the man recalled how in late 2009 he told Berg and his associates "the last thing I could afford was to have it stolen as in the Bernie Madoff case. Everyone laughed and reassured me how well Meridian was doing."

But last April he was ignored when trying to withdraw his money.

"Since learning our investment with Meridian Mortgage is nearly worthless, and what's recoverable could take years, (our) future has forever changed," he wrote.

CPAs deceived

Two prominent accounting firms lent credibility to the Meridian funds, and bankruptcy trustee Calvert said he is preparing to sue them.

"The fraud should have been discovered," he said.

Berg used some simple stratagems to mislead auditors at Moss Adams, a large Seattle-based firm, which produced audits for a trio of Meridian funds for three years.

The standard procedure is to send out confirmation letters to a random sample of mortgage borrowers and compare what they say they've paid with what the lender's records say.

But Moss Adams didn't notice most of the confirmations it sent out were going to post-office boxes and coming back with the same handwriting, said Calvert.

Berg had rented more than 20 P.O. boxes and had the mail forwarded to another address in Seattle. He was replying to the auditors' queries himself, according to the indictment.

Berg also hired Deloitte Financial Advisory Services to do a "valuation report" on funds V through VII, meant just for Meridian management. Meridian, however, used it to reassure investors, touting Deloitte's conclusion "the sample mortgage pool appears to be of higher quality and better performance" than comparable loan portfolios.

But Calvert said Deloitte's supposedly random sampling "was not completed as outlined" in its agreement with Meridian. He declined to be more specific.

Moss Adams and Deloitte would not comment on their work for Meridian. Likewise, wealth advisers Cornerstone and Kibble & Prentice would not discuss their roles.

"Likely facing prison"

The entire Meridian complex began disintegrating in early July when investors from Cornerstone moved to force three Meridian funds into bankruptcy.

Soon nine funds were in Chapter 11. Berg also agreed to put Meridian Group, the bus company and his other personal assets into bankruptcy, and the court appointed a separate trustee for that case. That was just the beginning of his legal problems.

Berg met with federal prosecutors and the FBI later that month and "advised the authorities of the crimes he had committed and expressed a willingness to accept responsibility," according to papers filed by his attorneys. "He understood that he was likely facing prison."

Prosecutors charged him in early October with several counts of wire fraud and later that month arrested him, adding charges of bankruptcy fraud. He's being held at the federal detention center in SeaTac.

On Jan. 7, Berg switched attorneys for a second time, replacing public defenders with veteran criminal lawyer Russell Aoki.

Aoki said it's too early for him to comment on the case. This week he and prosecutors agreed to move the trial date from Jan. 24 to October, citing the complexity of the case.

A key issue will be the amount of the fraud. Federal sentencing guidelines make $100 million a dividing line that could mean the difference between 22 years and 27 years, according to one prosecution proposal cited in defense documents.

Berg's defense may argue he reduced the fraud to less than $100 million by voluntarily surrendering the house, bus company and other assets before he was charged.

Glimpse of childhood

One person still sympathetic to Berg is his sister, Wendy Sigel.

"If all of these allegations are true, he shouldn't have done it," said Sigel, who offered her house in Grants Pass as a bond if Berg was released from pretrial detention.

But any wrongdoing, she said, was rooted in a traumatic childhood she blames on their now-deceased father. "Darren's personality was formed by some pretty weird stuff," she said.

"We grew up with child abuse, spousal abuse," Sigel said. "When he was a tiny boy, and my dad would be beating on my mother, he would crawl under the bed. It's almost like he developed some sort of off-switch where he could remove himself from the situation.

"I think, looking at what's happened, he created an imaginary world for himself."

Sigel said their mother divorced their father and married Leo Berg when Darren was 11. He later took Berg as his surname.

Among the highlights of young Berg's childhood, said Sigel, were visits by his grandfather, who drove for Greyhound.

"He came infrequently to our house, which made him a hero. He would tell stories about how you drive a bus, and Darren had a fascination with buses," said Sigel.

"That part of everything is true."

Berg is prepared for the possibility of prison time, said Sigel, who is in frequent contact with him.

She added: "If he comes out of it at any age where he still can work, he's still hopeful of paying something back."

Rami Grunbaum: 206-464-8541 or rgrunbaum@seattletimes.com

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