Magnolia Voice has learned that a Magnolia couple has been charged with running a ponzi scheme by the Washington Department of Financial Institutions (DFI).  They are facing a $25,000 fine in the administrative case for violating the Securities Act of Washington.

James H. Liddell and Leslie Collins, a married couple who live in Magnolia, are charged with raising in excess of $3,750,000 through the sale of promissory notes to eight investors through their business Payright Merchant Services.  The investors included business acquaintances of Liddell and Collins, parents of their children’s classmates and friends of investors.  We are told that some of the victims live in Magnolia.

According to papers filed by DFI, from December 2005 through December 2008, Liddell and Collins told investors that they had a business buying used point of sale (POS) terminals and then reselling the terminals to a company that would refurbish the units for resale.

DFI says that Liddell told investors that he was a middle man in the transaction and that he never took possession of the terminals but needed funds to purchase the units.  Liddell also told investors that he had pre-existing sales agreements and/or purchase orders to purchase the used units from a large Seattle area pharmacy.   

“As far as we know the POS terminals were never purchased or put in the stores,” said Tyler Letey, Financial Legal Examiner, DFI. 

According to the statement of charges filed by DFI:

Liddell showed investors sales agreements and purchase orders indicating the existence of the negotiated terms for a particular shipment of POS terminals to the refurbishing company or pharmacy.  Liddell then provided the investors with promissory notes normally varying in length from 20 to 45 days.  The rate of return on the promissory notes varied from 5.8% to 9.9%.  Additionally, some investors were promised a percentage of the gross profits for the particular transaction in which they had invested.  The percentages ranged from 14% to 50% of the gross profits of the transaction.  Investors initially received their return on investment and Liddell then offered them the opportunity to reinvest their money.

“It’s a ponzi scheme, said Letey.

According to the DFI, payments to investors from Liddell and Collins started to fall behind in 2008.  Some investors refused to invest more money until they had their existing investments returned with the interest earned.  On multiple occasions Liddell and Collins made deposits into investor bank accounts giving the investors the belief that this was the return on their prior investments.

DFI says some of the deposits made by Liddell and Collins were from new investors whose money was deposited directly into an existing investor’s bank account.  On other occasions the deposits made by Liddell and Collins into investor bank accounts were later returned due to insufficient funds.  These were not discovered by the investors until after they had already given more money to Liddell and Collins based upon the mistaken belief that their prior investment money had been returned.

The first complaint came in April ‘09 from one of the investors. After an investigation, DFI charged Liddell and Collins with violation of the Securities Act of Washington.  They face a fine of $25,000.  They have requested a hearing in the case.  

“In a perfect world we get the money back for the investors but our objective is to stop the activity,” said Letey.

Letey also said that in an administrative proceeding people can’t be made to liquidate their assets to pay back victims.  That would come as part of any action taken by the criminal justice system. Victims could also take civil action against Liddell and Collins.  Letey could not say whether the case has been turned over to the prosecutor’s office or the attorney general’s office for investigation.

The DFI investigation also revealed that in 1987 Liddell was named in a cease and desist order for securities fraud.  In that case, Liddell was convicted of first degree theft for raising over $125,000 from investors, claiming that he would purchase investments through Fidelity Investments. He was not licensed to make such sales and did not use any of the investor funds to purchase securities from Fidelity for the investors benefit.

“We encourage people who have the opportunity to invest to do their research. In this case investors would have found out about the prior order and conviction,” said Letey.