$50.4 million in suburbs' money could be lost to scam

About $50.4 million in taxpayer money could be lost after suburban mayors and other local leaders learned this week that a potentially far-reaching scam hit an Oak Brook-based government investment firm.

Illinois Metropolitan Investment Fund, or IMET, said it has retained counsel and has been investigating how fake loans with forged signatures of federal officials had put suburban investments, and others in Illinois, at risk.

But that action wasn't enough for Hanover Park Mayor Rodney Craig, who saw about $242,000 of the village's money identified as being invested in the scam and placed into a restricted fund until the case is resolved. Craig said Friday he signed papers to pull out $8.5 million of their taxpayers' money from IMET and reinvest it at Illinois Funds.

"I did that because I have a lack of confidence in IMET," Craig said. "I think this could be the tip of the iceberg and I need to protect the interests of the people of Hanover Park.

"This was done because of IMET's lack of due diligence. I have to be very careful where we park our money and make sure it's really going to be there when we need it."

Hanover Park's $242,000 was in IMET's so-called Convenience Fund, which had unknowingly invested in the scam. IMET took 2.8 percent out of each of the affected accounts and reserved a total of $50.4 million in the restricted fund until the case is resolved, according to IMET letters to investors.

The Palatine Park District said its $270,000, part of its overall investment of $10 million, also was reserved in the restricted fund related to the scam. It is up to the park board to decide if the district will pull out of IMET and invest elsewhere, said Elliott F. Becker, Palatine Park District superintendent of finance and personnel.

"We believe that IMET is a solid organization, but this was a bizarre circumstance," Becker said.

Des Plaines-based Northwest Municipal Conference saw about $35,000 placed into that restricted fund, Executive Director Mark Fowler said.

"It's a disappointment that this has occurred with public tax dollars," Fowler said. "We don't know what will happen next, but we could hear next week. We're awaiting correspondence on how they'll recover our investments."

It all started with Nikesh A. Patel, CEO of Florida-based First Farmers Financial LLC, who was arrested more than a month ago. He was accused of selling about $176 million in fake loans that were marketed as being approved by the U.S. Department of Agriculture, which backs such investments for local municipalities.

Patel was later released on $100,000 bail. And First Farmers Financial and its website has since closed down, according to IMET letters and a Milwaukee Journal report.

His lawyer was not available to comment.

IMET is a government investment fund created under Illinois law that manages two investment funds for municipalities and other public bodies. IMET officials told investors in October that First Farmers had sold its loans to Milwaukee, Wisconsin-based Pennant Management and then to IMET. The loans appeared to comply with the USDA, but officials later learned the documents had forged signatures of USDA officials.

"First Farmers Financial was, at all relevant times, a USDA-approved nontraditional (non-bank) lender operating in the states of Florida and Georgia," an IMET letter said. "We understand that First Farmers Financial was held out by the USDA as one of the top five lenders of these types of loans in the United States last year."

Concerns arose among investors after the USDA told Pennant Management that it would not honor the guarantees since the USDA did not officially approve the loans or sign the guarantees. Pennant Management then took legal action to insist that the USDA guarantee the money. Calls to USDA spokesmen were not immediately returned.

IMET Executive Director Laura F. Allen declined to provide more details because of the ongoing investigation but provided letters that were sent to investors about the matter.

"If the USDA does not honor the guarantees, IMET would seriously consider proceedings against the USDA to enforce the guarantees in light of the fraud perpetrated by their approved lender," said an IMET letter to investors. "Furthermore, IMET would vigorously pursue civil claims against First Farmers Financial and other parties involved in the transactions ... ."

The IMET letter said it believes First Farmers Financial used the proceeds to purchase commercial properties, such as hotels and other luxury items and investments, which could be targets for recovering the money.

But the letter warned investors that if IMET vigorously pursues the case, it will take a lot of time and more money and "likely would result in IMET recovering less than the full principal and interests amounts owned on the loans."