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Originally published Saturday, September 4, 2010 at 10:01 PM

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Sunday Buzz

Sunday Buzz: Meridian founder Darren Berg to get paid to unravel finances

Meridian Group founder Darren Berg will be paid $70,000 to help unravel what happened to more than $200 million he raised for nine Meridian Mortgage funds in bankruptcy.

In a pragmatic decision that may rub salt in the wounds of some investors, Meridian Group founder Darren Berg will be paid $14,000 a month for five months to help unravel what happened to more than $200 million he raised for nine Meridian Mortgage funds now in bankruptcy.

Court-appointed bankruptcy trustee Mark Calvert told investors last week that Meridian "may not have started as a Ponzi scheme but ended up a Ponzi scheme."

He said in an interview that tracing the "fraud and irregularities" at Meridian will be "much more efficient and cost-effective" with Berg's aid.

The investigation so far has found that Berg channeled at least $32 million to finance the luxury bus company he owns, and diverted additional sums for his own use, Calvert said.

"We did find personal uses of Meridian funds," he said. "We're still confirming the nature and extent, but the answer to that question would be yes."

"The amounts involved are material," he added.

A criminal probe by the FBI intensified Aug. 27 when about 30 federal agents arrived at Meridian Group's downtown Seattle headquarters and carted away more than 650 boxes of documents. A grand jury has been convened to hear evidence, and Berg has surrendered his passport to authorities, Calvert said.

The trustee briefed about 400 Meridian investors about his conclusions at the University of Washington's Kane Hall last Monday, and summarized the findings in a subsequent interview. Calvert said he told the group it's most likely they'll recover 15 to 20 cents on the dollar.

He said delivering the bad news that they'd invested in a Ponzi scheme was "a gut-wrenching experience... one of the tougher things I've done in my career."

The 600 to 700 individuals and entities who invested in the high-yield Meridian Mortgage funds had little advance warning of trouble, he said, because "from 2001 through (early) 2010, they never missed a payment" of interest, supposedly earned from the mortgages purchased by the funds.

But Calvert said the Meridian funds functioned like a classic Ponzi scheme: "an investment fraud that pays existing investors purported returns by bringing in new investors."

Berg said last week that if Meridian was a Ponzi scheme, "It's really hard to identify where it crossed that line... We certainly didn't intend for it to go there."

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Calvert said that of the $211 million put into Meridian by investors, $75 million was turned around to make interest payments to other investors.

An additional $32 million — and potentially more — was loaned to the bus company; "Do we expect it to be more? Yeah," he said.

Another, still undetermined, chunk of money likely went to redemptions of principal by investors.

As for actually purchasing real-estate loans, the declared purpose of the Meridian funds, Calvert said he found they currently own "178 loans totaling $11.5 million." Failed loans with a face value of $9 million left the Meridian funds owning real estate worth an estimated $5 million, he said.

Investors at the Kane Hall meeting were asked for a show of hands about the plan to hire Berg. "I would say over 75 percent said, 'Yes, pay him and get it figured out,' " Calvert said. Berg has been "very cooperative," he said.

But not everyone favors paying Berg $70,000 for his help. One investor wrote in an e-mail that the idea "pisses me and a lot of other people off."

Still, said Lynn LoPucki, who teaches law at UCLA and Harvard and has written extensively about bankruptcy, "It is not terribly unusual for the trustee to pay somebody, even a wrongdoer, who has information and can assist."

Although the person who ran a company before it went bankrupt has the legal obligation to cooperate with a trustee, that doesn't always happen. "Bernie Madoff just told them all to go fly a kite. He just went to jail — no cooperation at all," LoPucki said.

To salvage what he can for investors, Calvert will turn to Berg's assets that are now locked up in a separately administered personal bankruptcy, including bank accounts, a Mercer Island home, a Seattle condo, an $800,000 yacht and sole ownership of the Meridian Group's constellation of companies.

Chief among those businesses is the bus company MTR Western, whose subsidiaries serve a half dozen West Coast markets and "can be operated to generate a profit," Calvert said. It is "probably a $30 million-plus asset," offset by $20 million in debt, he said.

Another potential source of cash may be a nasty surprise to some Meridian investors: Those who cashed out their investments with a profit could be required to return anything beyond their original capital, he said.

Calvert is also examining whether there are potential claims against two leading accounting firms that worked for Meridian.

Seattle-based Moss Adams, now the nation's 12th largest CPA firm, audited certain Meridian Mortgage funds up through 2008, said the trustee. Separately, Deloitte Financial Advisory Services "issued a report, not an audit, based upon a sample of the (mortgage) portfolio, and outlined the quality of the portfolio," he said.

A February letter from Berg to investors in four Meridian Mortgage funds quoted the Deloitte report as concluding that loans in a random sample were "of higher quality and better performance than typical Alt-A mortgages."

The two firms could not be reached for comment Friday.

Calvert, himself a CPA, stressed that "auditors are not required to discover fraud. The question is whether the nature and extent of their procedures should have identified the issues." But sometimes that question can wind up before a judge, he said.

Foreclosure guru

is in Chapter 11

Kerry Hemmingsen bills himself on websites and radio spots as "America's Foremost Foreclosure Profit Expert!"

But now the local promoter of real-estate vulture investing is in danger of losing his own home.

Hemmingsen filed for Chapter 11 bankruptcy protection Aug. 27 to stop a trustee sale of his Kirkland lakefront home. According to a notice filed in April by the lender's representative, Quality Loan Service Corp., he was $353,000 overdue on a $2.8 million mortgage for the 5,500-square-foot house.

That's not an outcome you'd expect for a man who boasts online that "I have a business model that's made me millions of dollars in income, from over a half billion in transactions."

His website, Kerryhemmingsen.com, touts a free starter kit that's said to contain "ALL my secrets for success" — although he apparently saves some insights for the $199 book "Fast Track to Foreclosure Fortunes." Hemmingsen also is listed as president of the firm Foreclosure Solutions NW.

The house had been scheduled for a trustee sale three times this year, the latest being July 30. Hemmingsen's bankruptcy filing postpones that sale, said a spokesman for the trustee, who said he could not discuss details of the case.

Hemmingsen had no comment.

His preliminary filing had no financial details, reporting only that both assets and debts ranged between $1 million and $10 million.

Hemmingsen's been quoted several times in local media, including this newspaper, about the potential profit in buying and flipping foreclosed properties.

"It's a no-brainer," he told Puget Sound Business Journal in 2006. "A lot of people can't afford to stay in their houses."

Seattle Times researcher David Turim

contributed to this report.

Comments? Send them to Rami Grunbaum:

rgrunbaum@seattletimes.com or 206-464-8541.

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