Lavish lifestyle built with play money
RAMI GRUNBAUM; The Seattle Times
Financial scandals have trailed Frederick Darren Berg across the Northwest for more than 25 years – each linked to his unusual lifelong fixation on tour buses.
When Berg was a University of Oregon undergraduate in the 1980s, fraternity officials accused him of embezzling the chapter’s money for a charter-bus venture. A few years later he pleaded guilty in a check-kiting scheme, again involving a bus company.
Now Berg is charged in the biggest Ponzi scheme ever prosecuted in Washington. The 48-year-old founder and chief executive officer of Meridian Group is accused of defrauding hundreds of more than $100 million invested in his Seattle company’s mortgage funds between 2003 and 2010.
Prosecutors allege Berg spent tens of millions on a ritzy lifestyle, including a posh Mercer Island mansion, two yachts and two jets.
But investigators say Berg diverted a bigger chunk, estimated at $45 million, to create a luxury bus line that served tour groups and sports teams, including the Seattle Seahawks and the Oregon Ducks.
Investors are left asking how Berg could have fooled so many for so long.
“This is Wizard of Oz — there was absolutely nothing behind the curtain,” said bankruptcy trustee Mark Calvert, who is tracing the finances of nine Meridian funds.
Berg has pleaded not guilty, and he declined to comment for this story.
Berg and Meridian sales agents recruited more than 700 investors, some of whom put in up to $5 million, with the promise of interest rates as high as 12 percent. The Meridian funds were supposed to earn profits from buying mortgages and making real estate loans.
Two local wealth-advisory firms, Cornerstone Advisors and Kibble & Prentice, counseled many investors. Others came into Meridian’s orbit through friends or relatives wowed by the steady earnings it reported — and the payouts they got whenever they asked.
Berg’s lifestyle was embodied in his house on the northern tip of Mercer Island, with 112 feet of Lake Washington shoreline. Berg bought it for $5.5 million in March 2007 and spent another $5 million remodeling it.
As a Pi Kappa Alpha fraternity member at the University of Oregon in 1982, 20-year-old Darren Berg from Grants Pass, Ore., impressed everyone in Eugene with his entrepreneurial zeal. He created an off-campus business arranging charter bus trips.
“He was a hair-on-fire ball of energy,” said Michael Stone, the chapter’s adviser at the time. “Lots of charisma, lots of confidence.”
The fraternity elected Berg treasurer and president. But in October 1983, rent for the frat house went unpaid, said Stone, and the chapter discovered “we don’t have any money.”
Stone, a CPA and attorney, examined the books and concluded as much as $21,000 had been diverted to Darren Berg Tour Corp.
Berg resigned but denied the accusation in a sharply worded letter.
“Darren put up a good face for about a week and a half, and then he cleaned out his room and left Eugene,” Stone said.
Berg was not charged, and Eugene police have no records of the case.
Berg soon joined with a fraternity brother to open a Portland advertising firm, Berg/Shavere and Associates.
In 1987, a federal grand-jury indictment accused him of a check-kiting scheme using accounts for the ad agency and a charter-bus business he owned, TourDesign of Oregon.
The scam cost US Bank $19,234. Berg pleaded guilty to one of the eight charges and got a suspended sentence.
Berg moved to Seattle in 1989 and spent the next decade building a business that bought and sold mortgages.
In 2001, he raised his sights higher, launching the Meridian Mortgage funds. Those would become the vehicle for his alleged Ponzi scheme.
Berg often said he was a University of Oregon graduate, and he told bus-industry publications he’d earned a U of O law degree or an MBA. The school has no record of Berg receiving any degrees.
Prosecutors allege Berg took money from later investors to pay off earlier investors, the classic Ponzi scheme.
In short interviews before his October arrest, Berg insisted “it’s really hard to identify where it crossed that line. We certainly didn’t intend for that to happen.”
But investigators say Berg crossed the line in 2003. He wanted to grow his bus company, and Meridian’s second mortgage fund had $13 million in available cash, said Calvert.
Berg initially took $4 million, said the trustee. And for the next couple of years, said Calvert, “Fund II was where he went to get money for the bus company and for his personal use.”
To explain where the funds’ money had gone, Berg faked loans using title reports, loan applications and other genuine paperwork from proposed deals never made.
Taking a mortgage Meridian hadn’t bought, “he would then turn that into a live file and put it on the books,” as though Meridian had done the deal, said Calvert.
That created a bogus asset to offset the diverted cash. But in the years ahead, Berg somehow would have to produce interest payments from that purported loan.
Another Berg tactic was to take a genuine loan a Meridian fund had made and sell it without recording the sale, said Calvert.
Prosecutors say Berg admitted to them “he spent countless hours fabricating documents to mislead investors and independent auditors.”
But money was also necessary to keep the scheme going.
In all, Berg raised about $130 million, and he reported to investors they had earned $80 million. Investors withdrew about $40 million of those purported earnings, according to Calvert.
The bursting of the real-estate bubble gave cover to Meridian’s real problem — it had few real assets behind the mortgage funds. When the funds filed for Chapter 11, Calvert said, they owned mortgages with a face value of only $11 million — and their current value is less.
When Berg notified investors in August 2009 that Meridian could not let them redeem any of their principal, many supposed it was just a temporary problem.
But behind the scenes, he was hustling to keep things from collapsing. In 2009 and 2010 he created five new funds but raised only $16 million, according to prosecutors.
Two prominent accounting firms lent credibility to the Meridian funds, and bankruptcy trustee Calvert said he is preparing to sue them.
“The fraud should have been discovered,” he said.
Berg used some simple stratagems to mislead auditors at Moss Adams, a large Seattle-based firm, which produced audits for a trio of Meridian funds for three years.
The standard procedure is to send out confirmation letters to a random sample of mortgage borrowers and compare what they say they’ve paid with what the lender’s records say.
But Moss Adams didn’t notice most of the confirmations it sent out were going to post office boxes and coming back with the same handwriting, said Calvert.
Berg had rented more than 20 post office boxes and had the mail forwarded to another address in Seattle. He was replying to the auditors’ queries himself, according to the indictment.
Berg also hired Deloitte Financial Advisory Services to do a “valuation report” on funds V through VII, meant just for Meridian management. Meridian, however, used it to reassure investors, touting Deloitte’s conclusion “the sample mortgage pool appears to be of higher quality and better performance” than comparable loan portfolios.
Moss Adams and Deloitte would not comment on their work for Meridian. Likewise, wealth advisers Cornerstone and Kibble & Prentice would not discuss their roles.