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Sapient Investigation News > Corporate Con-Artist Targets Small Firms

Corporate Con-Artist Targets Small Firms

In the pantheon of American financial fraud, Lowell “Bob” Hancher will probably not join Charles Ponzi and Bernie Madoff as men whose names are synonymous with criminal avarice. Hancher’s alleged frauds only managed to siphon off a few million dollars from unsuspecting companies and investors over the past few years.

But the saga of Bob Hancher, a 57-year-old Indiana businessman and former co-owner of Indy and NASCAR racing teams, highlights just how vulnerable professional investors and corporations continue to be to fraud from purportedly respected members of the business community. And how important it is to conduct thorough due diligence prior to every deal.

A review of Hancher’s federal court file illuminates how seamlessly he was able to manipulate small companies and raise money from skilled investors in highly compartmentalized schemes that looked like good plays on the surface-even too good-but were rotten underneath. What should have been red flags; Hancher’s offer of guaranteed returns, conducting company transactions through his own bank accounts, and failing to provide adequate transaction documentation were often overlooked by his victims because of Hancher’s reputation and status as a successful businessman in the Midwest.

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This past January the Securities and Exchange Commission filed a six-count civil complaint against Hancher accusing him carrying out three separate scams against companies and investors from 2005 to 2010, all of which involved different models of deception. “It wasn’t the same scheme over and over again,” SEC Regional Director Anne McKinley told the Associated Press. “These were three separate, completely different frauds.”

The fraud began, according to the SEC, in early 2005 when Hancher, acting through his firm Commerce Street Venture Group, Inc., convinced the owner of the Colorado-based construction company, Scott Contracting, to hire Commerce Street to take the company public. Hancher claimed he had deep connections with large Wall Street investment firms, and explained how he would raise investments into a holding company called Scott Contracting Holdings, Inc. and then perform a reverse-merger once enough capital had been secured for an initial public offering.

Over the next two years, Hancher proceeded to raise nearly $2 million from at least 60 investors; using a series of different and often conflicting promises, according to the SEC. These stories included telling investors their money was going into a holding company that would be used for a reverse merger with Scott Contracting, telling investors their money was being safely held in an interest-bearing escrow account and would not be used until the threshold was reached to fund the IPO, and that their money was a bridge-loan until a major institutional investor stepped in.

Apparently the only thing Hancher was consistent about, according to SEC investigators, was chumming the waters by promising a 50 percent return on investment after the IPO.

Says Michael Gold, a partner with Jeffer Mangels Butler & Mitchell LLP in Los Angeles, “a deal sponsor’s inability or unwillingness to provide appropriate deal documentation should be a bright red flag to any investor of problems to come. I continue to be surprised at how many savvy investors get into poorly documented deals when in their own businesses they would never tolerate such a lack of documentation.”

As investors were lured by the chimerical promise of too-good-to-be-true profits, Hancher was spending their money on himself – paying for lavish homes and credit cards – and funneling it into both Commerce Street and LMWW Holdings Inc., the holding company for custom car maker Legend Motors Worldwide, Inc., of which Hancher was chairman of the board.

In June of 2007, more than two years into the scheme, Hancher doubled down and convinced the owner to take a $2 million short-term loan from a group of Detroit investors that he maintained would strengthen the contracting firm’s balance sheet and make it more attractive to an institutional investor. But according to the SEC’s complaint, the loan was fraudulent, with Hancher forging the owner’s signature on a separate debt and equity agreement that sold 75,000 shares of Scott Contracting to the investors in exchange for the $2 million, as well as guaranteed them an option to buy another $5 million of the company’s stock.

To top it off, Hancher presented the Detroit investors with a forged stock certificate naming them as majority shareholders in Scott Contracting. In that instance, at least, Hancher did not get any of the $2 million of the fraudulently brokered loan.

By the end of 2007, investigators say Hancher was moving on to his next scam, this time illegally manipulating the price of LMWW Inc.’s stock by having cohorts place ‘matched orders’ for more than 60,000 shares of the stock, which mirrored actual trading of the stock at the same time. The result made it appear that trading in LMWW’s stock was much more vigorous than it actually was and propped up the stock price.

Hancher personally directed this scheme, according to the SEC complaint, using Skype to orchestrate the bogus trading. During this period, which ended in February of 2008, trading volume in LMWW’s stock rocketed from 450 shares per week to 47,000 shares per week.

By September of 2008, Hancher was on to his third illegal scheme, according to the SEC’s investigation, this time betraying the trust of a company whose board of directors he had sat on for the better part of a decade.

Hancher used his position as a board member and audit committee member at Cycle Country Accessories Corporation, a publicly-traded Iowa manufacturer of accessories for all-terrain vehicles and golf carts, to convince the firm to allow him to return the company to private ownership.

Using a bogus buyback scheme that included forged documents, fake broker accounts and a lot of tap dancing in between, Hancher managed to rook Cycle Country out of $620,000 by the time he was finally caught a little over a year later, according to the SEC. Cycle Country has reported it lost more than $800,000 as a result of the fraud.

According to SEC investigators, Hancher did place a small order through an associate for Cycle Country stock, about $94,000 worth, but spent the rest of the company’s money on buying LMWW Inc. stock, and more than $500,000 on his personal expenses, homes and lifestyle.

In early January of 2009, Cycle Country’s external auditor began asking Hancher for documents connected with the stock buyback that would assist his quarterly review of the books. Over the next year, according to the SEC, Hancher played a cat and mouse game with the auditor, dragging his feet in complying with repeated requests for documentation, in part claiming his broker-dealer had gone out of business.

Then in the fall of 2009, he finally provided a series of completely forged spreadsheets, bank statements, wire transfers and brokerage account statements. By then the jig was up, his scam unraveled and Hancher resigned from Cycle Country in January of 2010.

But the damage was done.

In January of this year, Hancher, who filed for bankruptcy, agreed to repay more than $3 million to investors and was permanently banned by the SEC from serving on the board or as an officer of any publicly-traded firms. As part of the deal, Hancher did not admit to any wrongdoing and a separate settlement was reached with his now defunct Commerce Street company.

As they dig themselves out of their losses, Hancher’s investors might ask themselves how he was able to take their money and then string them out as long as he did.

While Hancher, like numerous charlatans before him, was adept at using props and an unflinching willingness to walk a high-wire of brazen claims, even a cursory review into his operations to authenticate those claims may well have prevented those losses. A review and consideration of his track record in business might have also helped, as Hancher has accrued numerous civil judgments and tax liens against him across three states over the past 20 years.

Corporate con artists seem to sense and thrive upon the inherent willingness of people-even highly-educated, business professionals-to succumb to the temptation of trusting those they have worked with or know through business circles. Only by remaining vigilant to the credo of “trust but verify” can businesses avoid being the victim of the next Bob Hancher.