Seattle crook behind $120M Ponzi scheme escapes from prison
Frederick Darren Berg, the biggest fraud in Washington state history, is once again a wanted man.
Berg, 55, disappeared Wednesday from a California federal prison, where he was serving an 18-year prison term imposed in 2012. Berg stole about $120 million from investors through a Ponzi scheme that enabled him to live a life of luxury.
Prior to his disappearance, Berg was incarcerated at U.S. Penitentiary Atwater’s Satellite Prison Camp. Located outside of Merced, Atwater houses 1,265 inmates sits in California's central valley.
Bureau of Prisons and U.S. Marshals Service investigators were searching for him Thursday, the Merced Sun-Star reported. Authorities are asking anyone with information on his whereabouts to contact the Marshals Service at 559-487-5600.
Though not violent, Berg’s history shows him to be a predator. On paper, Berg’s victims lost at least $120 million during the decade-long fraud. In practice, it meant retirements delayed, homes lost and faith shaken.
“Many of Mr. Berg’s victims will be forced to make significant changes to their lifestyle … such as foregoing retirement, taking additional jobs to support their children’s education and selling their homes,” Assistant U.S. Attorney Norman Barbosa said in 2012. “Others are likely to be forced into bankruptcy and may also lose their homes because of the financial devastation Mr. Berg’s fraud has caused.”
Schemes like Berg’s have been snaring American investors for at least a century. Berg’s victims joined the thousands of others caught up in similar schemes operated by Bernie Madoff, Charles Ponzi – the 1920s crook for whom the scam is named – and the countless confidence men in between.
Keep reading for more on Berg.
A life of crime
Berg started in white collar crime in 1987, when he launched – and was caught in – a check-kiting scheme. Berg was also alleged to have embezzled thousands of dollars from a University of Oregon fraternity.
He dropped out of college around the same time. Berg, despite his criminal history and educational failure, was able to cobble together a career in business that ultimately saw him launch a legitimate mortgage investment firm. Trading on that reputation, Berg started swindling investors in 2001.
Berg launched the investment firm – later known as Meridian Group – with three friends after moving to Seattle in 1987. Berg’s looting of the investment fund forced it into bankruptcy in June 2010.
Ostensibly, Berg’s business dealt in was seller-financed real estate mortgages – home or commercial property loans made by the owner to a buyer, who would otherwise have to secure a mortgage through an outside lender. Berg’s investment funds would buy the seller’s stake in a property – paying a lump sum less than what the buyer would pay over time – and begin receiving mortgage payments from the property’s buyer.
Meridian Group continued to operate in the seller-financed real estate market through the 1990s. The firm itself bounced between lenders while making its money brokering loans until 2001, when Berg came up with a plan to raise capital through a series of investment funds.
In January 2001, Berg began soliciting investments, telling would-be investors their money would be used to buy seller-financed real estate contracts and fund short-term loans backed by money or property. Borrower payments were to form the return to investors.
The loosening of lending rules that led to the 2008 mortgage crisis – and the Great Recession – dried up the sell-financed real estate market Berg intended to dive into. Home builders and buyers who would have had to turn to firms like his found willing lenders in the banks.
Unable to find investment opportunities, Berg had better luck in his search for investors. Of course, he was promising investors their money would be going to nearly default-proof loans.
Speaking with investigators after his arrest, Berg described himself as “snowed under in money,” and attempted to explain why he didn’t just sent back his investors’ money – or stop soliciting investments – when he couldn’t find enough loans to make.
“There’s only one thing you can do to make people madder than being in a deal that blows up,” Berg told federal investigators. “That’s being in a deal where you just send them all their money back. …
“I look back on that now and I think that’s probably bull(expletive).”
Berg started stealing almost immediately after launching the investment funds, buying gifts for family and friends.
He bought a 53-foot yacht with investors’ money. Then he raided another fund to launch a luxury bus line, dumping about $45 million of investor money into the venture between 2003 and 2010.
Using investors’ money, Berg bought a $2 million condo in downtown Seattle, a $1.25 million house in La Quinta, Calif., a $1.4 million condo in San Francisco and a $5.5 million waterfront mansion on Mercer Island. He spent another $5 million remodeling the Mercer Island estate, also stolen from investors.
Then there were the planes – a pair of Lear jets, bought and operated for $5.5 million – and several other yachts maintained at investor expense.
To keep the scheme rolling, Berg began paying existing investors with new investors’ money. Barbosa described it as a “classic Ponzi scheme.”
As the fraud went on, it also grew more complex. Berg created fake loans, then funded them.
The scam began to come apart in 2009, when one of Berg’s largest investors asked to cash out a $30 million dollar investment. When Berg was unable to pay, that firm sued Berg claiming he used the investment to pay off other investors.
Berg launched a second set of investment funds in an effort to pay off his older investors. He managed to take in another $16 million between March 2009 and August 2010, when the house of cards he’d build collapsed.
Meridian went bankrupt and Berg was arrested in October 2010. Still, Berg was slow to admit his crimes.
Even after he knew the federal investigators were interested in his dealings, Berg attempted to hide $400,000. He used the money to make lease payment on two Porsche automobiles, buy an Audi and pay advance rent on a Los Angeles apartment.
All told, investigators found 844 investors were caught in Berg’s scheme. Their total loss was pegged by prosecutors at $123 million.
When he was sentenced, Berg’s attorneys argued that the actual loss might be slightly lower – in the neighborhood of $100 million. They also suggested the fraud may not have technically become a Ponzi scheme until 2008.
Berg’s victims varied in their backgrounds. Some were sophisticated investors with millions of dollars invested in Berg. Others were ordinary people looking to find safe harbor for their retirement.
Berg knew his victims well. He sat down with several when the real estate market was collapsing to reassure them. He stole from trust accounts created by elderly clients, whose money he was managing personally.
“Mr. Berg’s fraud is by far the largest Ponzi scheme ever prosecuted in the State of Washington,” Barbosa told the court, adding that the victims “stand little chance of recovering the vast majority of the money they entrusted to Mr. Berg.”
Pleading guilty in 2011, Berg admitted to wire fraud, money laundering and bankruptcy fraud. The plea agreement remained binding so long as Berg is sentenced to 18 years in prison.
Sentencing Berg, Judge Jones told Berg he had “reckless disregard for his victims … and had no moral compass.”
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