In nearly two decades of payday lending, Charlie Hallinan stayed one step ahead of state laws while amassing a fortune — one high-interest loan at a time.

Now U.S. prosecutors are preparing a racketeering case against him, gathering evidence in an attempt to show he conspired to evade usury laws, according to four people with knowledge of the matter, who asked not to be identified because the proceedings are secret. One of the payday lenders Hallinan partnered with faces a potentially lengthy prison term after pleading guilty Wednesday to racketeering charges.

Hallinan, who's 75 and a resident of Philadelphia's Main Line, was among the first to start offering payday loans over the phone in the 1990s, allowing him to operate in states that have tried to ban the costly cash advances. He pioneered two tactics — now nicknamed "rent-a-bank" and "rent-a-tribe" — that payday lenders have been using for years to stymie state regulators. The industry he helped create has since shifted to the Internet and now makes about $16 billion of loans a year, charging rates that often top 700% annualized.

With state regulators unable to stop the elusive online lenders, federal prosecutors are turning to a racketeering law created to crack down on the Mafia. A grand jury in Pennsylvania has been investigating Hallinan for more than a year, the people said. Adrian Rubin, Hallinan's former business partner, was charged there in June with racketeering conspiracy.

Wharton Graduate

"Rubin conspired with other people to evade state usury laws and other restrictions on payday loans by engaging in a series of deceptive business practices," Zane Memeger, the U.S. Attorney in Philadelphia, said last month in a statement. "Rubin and his co-conspirators reaped tens of millions of dollars."

The case against Rubin, 58, of Jenkintown, Pa., describes a "Co-Conspirator No. 1," who isn't identified. That's Hallinan, according to two of the people.

Hallinan declined to comment, as did Michael Rosensaft, his attorney at Katten Muchin Rosenman. Rubin didn't address the court while entering the guilty plea at Wednesday's hearing and is scheduled to be sentenced Oct. 28.

Hallinan got into payday lending in the 1990s after selling a landfill company for about $120 million. A former investment banker, he graduated from the University of Pennsylvania's Wharton School. He owns a house in Villanova, Pa., and a condo in Boca Raton, Fla.

Delaware Bank

Payday-loan stores are common in states where they're legal. They outnumber McDonald's restaurants 4-to-1 in Alabama, President Barack Obama said in a March speech calling for new regulations.

They offer cash-strapped workers advances of a few hundred dollars, to be repaid on the next payday, generally charging about $20 for every $100 borrowed. Most states restrict the size or cost of the loans and about a dozen ban them altogether.

That created an opportunity for Hallinan. In 1997, he approached County Bank of Rehoboth Beach, Del., to see if the firm would help him make payday loans over the phone in states with restrictions, according to documents filed in a civil lawsuit brought six years later against the bank and companies owned by Hallinan and Rubin. The case was filed by Eliot Spitzer, then New York's attorney general.

Emergency Cash

"I did a little bit of research and found that County Bank was involved with a company doing refund-anticipation loans," Hallinan said in a 2005 deposition in Albany. "I picked up the phone and called the president of County Bank and asked him if he would have an interest in meeting with me to discuss a potential payday loan operation."

Banks that are licensed in states that allow high interest rates on short-term loans, such as Delaware, may lend to customers across the country using those limits. Hallinan and County Bank struck a deal where the bank would be the lender on paper in exchange for a fee, while Hallinan's companies would run the business and earn the bulk of the profits, according to documents filed in the case.

Hallinan's companies, which operated under the name Tele-Ca$h, advertised the loans in newspapers, on the radio and in New York subway cars, Spitzer said in the case. "Need emergency cash?" one newspaper ad from the time said. "You can get up to $500 directly deposited into your account."

Customers would fax over their paystubs, and Tele-Ca$h would deposit money in their account, then withdraw it two weeks later, along with fees that exceeded 500 percent on an annualized basis, according to Spitzer. Tele-Ca$h started offering loans online as the Internet became more popular.

‘Loansharking Operation'

Hallinan introduced Rubin and other payday lenders to County Bank, and the business took off, earning the nickname "rent-a-bank." That caught the attention of regulators. Spitzer filed his lawsuit in 2003, calling County Bank "a front for an illegal loansharking operation."

In 2005, the Federal Deposit Insurance Corp. issued guidelines that effectively closed the loophole, according to the Center for Responsible Lending, a consumer advocacy group. County Bank and the firms owned by Hallinan and Rubin settled the New York lawsuit in 2008 for $5.5 million, without admitting or denying wrongdoing. David Gillan, County Bank's current chief executive officer, didn't respond to a message seeking comment.

Hallinan didn't set out to evade the law, according to Hilary Miller, the lawyer who represented him in the case.

"The law was pretty clear that the bank was the lender," Miller said in a phone interview. "He was as surprised as we were that the New York attorney general sued him."

Racing Ferarris

By the time the lawsuit was settled, Hallinan had found a new way around state usury laws: partnering with American Indian tribes. Hallinan — or Co-Conspirator 1 — struck a deal with a tribe that agreed to pretend to be the lender so that it could assert sovereign immunity when state regulators sued, according to Rubin's indictment.

Hallinan also had another partner. In 1997, he met Scott Tucker, who was then running a single payday loan storefront. Hallinan backed Tucker and his brother Blaine as they set up an online business, according to a lawsuit Hallinan would later file against them. Their effort took off, generating tens of millions in profits that Scott Tucker used to finance his entry into sports car racing, including the Ferrari Challenge and American Le Mans Series.

Hallinan said in his case against Tucker, filed in 2008 in Nevada state court, that he discovered after a decade that his protege had secretly set up his own companies to divert the profits to himself. Tucker paid Hallinan about $30 million to settle the case, according to a person with direct knowledge of the matter, who asked for anonymity because the settlement was confidential.

Lending Doubled

Manhattan U.S. Attorney Preet Bharara has been working with the Federal Bureau of Investigation in New York to build a case against Tucker, people familiar with the matter said in December. Paula Junghans, a lawyer for Tucker at Zuckerman Spaeder, declined to comment, as did a spokesman for Bharara's office. Blaine Tucker killed himself last year.

The industry Hallinan helped create is giant. Internet payday lending in the U.S. has doubled since 2008 to $16 billion a year as of 2013, with half made by lenders who say state laws don't apply to them because they're based offshore or affiliated with tribes, according to Jefferies Group research.

Hallinan says he's gotten out of the payday-loan business, according to five people who've spoken with him in the past year. Like some other payday moguls, he's shifted his investments to what's called "merchant cash advance" — lending to small businesses such as restaurants or truckers at rates that can rival payday loans.

Business cash advances are completely unregulated. Everest Business Funding, the firm Hallinan invests in, is lending millions of dollars a month, according to three of his competitors. He's not involved in managing it, a person close to the firm said. Scott Crockett, who runs Everest, didn't respond to a message seeking comment.

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