Four state and federal authorities had the power to investigate Mortgages Ltd. before the company declared bankruptcy. At least two of the four were warned in writing about the company's practices. None of those authorities opened public investigations into Mortgages Ltd., which was one of the largest pools of investor money in Arizona.
Mortgages Ltd.'s collapse was preceded by two other massive bankruptcies involving investor money in Arizona: Charles Keating's Lincoln Savings in 1989 and the Baptist Foundation of Arizona in 1999. Much like those past investor disasters, state regulators waited until after Mortgages Ltd. declared bankruptcy to begin their investigations.
"Sometimes, [regulators] are very effective in detecting and preventing investment frauds from spreading and harming the public. Other times, they are too late, especially when the schemes involve purported prominent and successful appearing members of the local business community," says Robert Mitchell, a real estate and securities attorney based in Phoenix.
Here are the agencies that could have intervened, along with their authority:
Securities Division of the Arizona Corporation Commission: The securities division is the state agency responsible for regulating local investments and brokers, like Mortgages Ltd.
The securities division is headed by Matthew J. Neubert and its goal is "to ensure the integrity of the securities marketplace through investigative actions as well as the registration and oversight of securities, securities dealers and salesmen . . . consistent with vigorous investor protection," according to the division's mission statement.
Mortgages Ltd. fell under the securities division's jurisdiction in two ways. First, because it sold "securities," or investments. Second, because CEO Scott Coles was a licensed securities broker-dealer.
As such, the securities division was the state agency given the power to investigate Mortgages Ltd.'s business, but it was not required to investigate. The law actually reads that the securities division "may" investigate.
The division launched an investigation into Mortgages Ltd. shortly after Coles' death. New Times has not been able to confirm whether the division had been previously warned about Mortgages Ltd.
Spokeswoman Rebecca Wilder would not confirm whether complaints were filed against Mortgages Ltd. before the bankruptcy, but she did confirm that the division had not investigated Mortgages Ltd. before its bankruptcy.
"We have not in the past filed any public action against Mortgages Ltd.," Wilder said.
U.S. Securities and Exchange Commission (SEC): This federal agency enforces federal laws relating to investments. Because Mortgages Ltd. Securities is licensed with the SEC, the company falls under SEC jurisdiction.
The SEC often works closely with state securities regulators, like the Securities Division of the Arizona Corporation Commission, to monitor brokers in a given state. However, shortly after Coles' death the federal SEC opened its own investigation into Mortgages Ltd.
Arizona Attorney General: The state attorney general can file charges against business operators if it has evidence of fraud. On November 21, 2006, attorney Donald Gaffney sent a letter to attorney general chief counsel Susan Segal.
Gaffney's letter suggested that Mortgages Ltd. was engaged in illegal lending practices. Arizona Attorney General Spokesman Steve Wilson told New Times that Susan Segal did receive "one or more letters" about Mortgages Ltd. before the company's collapse.
"Her response was that we handle consumer fraud. We didn't see any indication of that. She referred them to the Arizona Department of Financial Institutions," he said.
Now that Coles is dead, there may not be one palpable suspect for the attorney general to prosecute, even if criminal behavior at Mortgages Ltd. is demonstrated.
Arizona Department of Financial Institutions (ADFI): The ADFI is responsible to enforce Arizona's laws about mortgage lending. Commercial lenders, like Mortgages Ltd., must be licensed through the ADFI.
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Spokesman Jack Hudock confirmed that ADFI did receive the November 2006 letter alleging that Mortgages Ltd. was lending money illegally.
He would not confirm whether an investigation was launched at that time, but he added that an "examination" of Mortgages Ltd.'s books has been under way since shortly after Coles killed himself.
The ADFI is not in any way responsible for the company's relationship with investors. It only oversees practices related to loans and ensures that those practices align with Arizona law.