Can it really be so easy and so simple? Is there truly so little guile involved in a multi-million dollar fraud that the con requires little effort - mere child's play?
On December 1, 2010, Robert E. McDonald, President of RAI Hotel Acquisition, Inc., ("RAI,Inc."), was arrested in Brooklyn, NY and charged in Manhattan federal court with securities fraud, wire fraud, and mail fraud in connection with a $1.5 million scheme in which he falsely told an investor that the investor's funds would be used towards the purchase of more than $100 million worth of hotels. Instead, McDonald spent the investor's funds on, among other things, a variety of personal expenses.
NOTE: The allegations contained in the Complaint (and upon which this article is based) are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
8 Gets You 108 (million dollars, that is)
According to the criminal Complaint, in May 2009, McDonald, on behalf of RAI, Inc., entered into an agreement to buy a portfolio of approximately 14 hotels located in college towns in the Midwest (the "Midwest Hotel Portfolio"). The negotiated purchase price for those 14 hotels was approximately $108 million.
One-hundred and eight million dollars - my, that has a nice sound to it, no? I'm guessing that McDonald didn't have that much spare cash around.
According to the criminal allegations, McDonald then contacted an individual who already owned and managed several hotels (the "Hotel Investor") and solicited $8 million to complete the purchase. McDonald told the Hotel Investor that RAI, Inc. would combine the Hotel Investor's funds with $22 million in existing assets and would then borrow the remaining funds to complete the purchase.
You got that? McDonald shakes hands to purchase $108 million worth of hotels. He goes to a third party and says (as I imagine it):
Hey, I've got the amazing opportunity to buy 14 hotels for $108 million. Okay, so, I've got $22 million in my own assets. I need you to invest $8 million of your assets. Then, armed with our $30 million, I'm going to borrow the remaining $78 million to get this done.
To show that RAI, Inc. had adequate funds to complete the transaction, McDonald e-mailed the Hotel Investor a fake statement from JP Morgan Chase which showed that he had assets of $88 million. McDonald also e-mailed the Hotel Investor a phony letter from JP Morgan Chase stating that RAI, Inc., "has under management in the treasury services management division of our global trades department approximately $15,456,792.28."
As the feds alleged in the Complaint, there was no RAI, Inc. account at all at JP Morgan Chase. On the one hand, that sort of surprises me; and on the other hand, that sort of disappoints me. I mean, c'mon, at least take some pride in your work. If you're going to try to pull off a scam of this nature, at least open an account for RAI, Inc. at JP Morgan Chase. Right? Talk about cutting corners!
Based in part on the false assurances, the Hotel Investor wired approximately $1.5 million to a bank account that McDonald had provided in return for a 20% ownership interest in RAI, Inc.
What happened to the $8 million that was asked for? I don't know, the Feds don't say, and, well, let's not pretend that the wired funds were chump change. To McDonald's credit, he got the Hotel Investor to part with a still tidy sum based upon smoke and mirrors.
Hotel Purchase Interruptus
Allegedly, McDonald did not complete the purchase of the Midwest Hotel Portfolio. Instead, McDonald is charged with having diverted substantial portions of the Hotel Investor's $1.5 million investment to personal expenses, including, among other things, dental work, Florida real estate ($189,663 of the Hotel Investor's money to purchase a residential property in Tampa), and the payment of restitution that McDonald owed victims from a prior fraud conviction.
I hope that I didn't slip all that by you too quickly. Let's go through that once more, a bit slower.
First, McDonald is accused with having used just shy of $200,000 of the Hotel Investor's funds to purchase a residential property in sunny Tampa.
Second - and this one I just love - McDonald used some of the funds to pay off victims of a prior fraud that he had committed. In 2006, McDonald was convicted in Manhattan federal court of wire fraud and credit card fraud. He was also convicted in 2006 in a separate wire fraud case in Manhattan federal court. Oddly - geez, I can't imagine why - McDonald somehow failed to disclose any of these prior convictions to potential investors in the scheme…you know, the "current" scheme about which this article is being written.
Three Criminal Counts
McDonald was charged with one count of securities fraud, one count of wire fraud, and one count of mail fraud. He faced a statutory maximum sentence of 20 years on each count, resulting in a total statutory maximum sentence of 60 years in prison. He also faced a fine on the securities fraud count of the greater of $5 million, or twice the gross gain or gross loss from the offense, and a fine on the wire fraud and mail fraud counts of the greater of $250,000, or twice the gross gain or gross loss from the offense.
Following a two-week jury trial, McDonald was found guilty in Manhattan federal court on July 6, 2011, of securities fraud, wire fraud, and mail fraud crimes in connection with a multi-million dollar investment scheme.
On April 13, 2012, McDonald was sentenced to 70 months in prison, three years of supervised release, ordered to forfeit $1,582,323, as well as his interest in a house and a vehicle that he purchased with proceeds from his fraud, and ordered to pay $1,596,000 in restitution to his victims.
According to the Department of Justice's April 13, 2012, Press Release about the sentencing:
Manhattan U.S. Attorney Preet Bharara said: "Robert McDonald was a serial offender who created an elaborate charade to rip-off his would be investors, underwrite his spending habits, and even pay off his debt to the victims from one of his previous scams. With today's sentence, we trust that he will finally get the message that crime does not pay."
Oh my - lemme see here. McDonald engaged in this fraud in order to pay off his victims in a federal criminal case in which he was convicted in 2006. And that conviction was separate and distinct from another 2006 federal wire fraud conviction. Despite all that prosecutin' and convictin', it seems that McDonald didn't get the first or second message. Of course, hope springs eternal and US Attorney Bharara now believes that the third time is the charm and this fraudster will "finally get the message that crimes does not pay." Uh, uh, yeah, sure, right.
Maybe I'm just too cynical but why do I have the impression that McDonald will spend his next six or so years in prison planning his next caper with all the intensity of an Andy Dufresne? If I were Marriott, Hilton, Hyatt, Holiday Inns, Wynn Resorts, or any other major hotel chain, I'd sure as hell block all collect calls for the next 70 months from a Mr. McDonald of Club Fed. He may be trying to find a way to pay off his victims in his 2011 federal fraud conviction.