WASHINGTON -- Robert Buchanan Jr., has been found guilty by a federal court jury in Greenville, S.C., of securities and mail fraud as well as conspiracy in connection with a $16 million bond issue he underwrote for a South Carolina retirement project.
Nursing home mogul Charles Donald Stone, the developer of the financially troubled Skylyn Hall retirement center in Spartanburg, S.C., and his development and equipment supply firms -- Unico Development Services Inc. and United Medical and Surgical Supply Corp. -- were also convicted of the same charges on June 22 in the U.S. District Court for the District of South Carolina.
Rev. Benjamin Smith, president of the management and marketing firm for the 240-unit Skylyn Hall, and Horace Smith, the management firm's attorney and a former South Carolina state senator who served 24 years in the legislature, were also defendants in the case. Both pleaded guilty or no contest to some of the same charges just before the beginning of the three-week trial, which was brought by the U.S. attorney's office in Columbia, S.C.
Mr. Buchanan, head of the now-defunct underwriting firm Buchanan & Co. of Jackson, Mass., underwrote roughly 65 retirement center bond issues totaling $400 million that are now in default. In connection with the Skylyn Hall case, he faces a maximum prison sentence of 65 years and a fine of $3.25 million. Mr. Stone faces a similar sentence and fine.
In addition, the U.S. attorney's office will ask the court to order the defendants to pay millions of dollars in restitution to bondholders out of their personal assets on top of the fines spelled out in the conviction. Mr. Buchanan filed for personal bankruptcy in December, and his firm has been ordered to liquidate. Despite the bankruptcy filing, an attorney for Mr. Buchanan said last year that his client has "considerable assets."
"We will use whatever powers we have in this office to attempt to make the bondholders whole," said Assistant U.S. Attorney Clarence Davis, noting that the 2,300 Skylyn Hall bandholders nationwide have so far recovered roughly 67 cents on the dollar in civil lawsuits. Mr. Davis was lead prosecutor in the criminal case.
Underwritten in 1985, Skylyn Hall was constructed one year later, but the bonds went into default after managers were unable to sell enough units. The property was foreclosed on in 1987.
The Justice Department charged that the official statement for Skylyn Hall was rampant with misinformation and omissions about the project, the track record of its promoters, and the shaky status of the retirement center bond market in general. The document, for instance, listed six retirement center projects built by Mr. Stone, but failed to disclose that four were in serious financial trouble.
The official statement also failed to disclose that Mr. Stone was under investigation by the Justice Department for possible Medicaid and Medicare fraud in a separate business deal. He was found guilty of those charges after the official statement was circulated.
The U.S. attorney charged that participants in the retirement home deal lied in the official statement, saying they had presold 25% of the units when, in fact, they had gotten down payments for a number of units from business associates who had no intention of buying them. He also charged the document failed to disclose a $150,000 kickback made by the developer to Rev. Smith for conceiving the project. The $150,000 was taken out of a $450,000 development fee in the deal.
"It certainly is a situation that warranted convictions," said Richard Lehmann, head of the Bond Investors Association in Miami Lakes, Fla., which has carefully tracked the defaults by Buchanan & Co. "Buchanan was particularly notorious for the quality of the bonds he put out. Over half of the underwritings he did defaulted, which goes beyond what you would say is careless."
Following a General Accounting Office report showing that retirement center bonds experienced a whopping 20% default rate during the 1980s, Rep. Brian J. Donnelly, D-Mass., in April said he planned to introduce legislation to clamp down on bonds issued for retirement centers. The GAO cited weak financial structures, inexperienced developers, and inflated market projections for the failures, which peaked at 93% in 1983, but have dropped below 10% since 1986.