Standby letters were warning in fraud case - Daryl Brown, chairman of the Vertical Group, LLC, was arrested Monday following a fraud investigation by the FBI.

September 28, 2005
By CHARLES BERMAN
Missourian News

The arrest of a Columbia businessman Monday for his alleged participation in an investment fraud scheme stemmed from a wide-ranging federal and state investigation that targeted several Columbia financial companies with overlapping managers.

In May, the state of Missouri sought an injunction against Vertical Group, LLC, a Columbia financial services firm, after an FBI investigation found evidence of a “prime bank fraud” the company had allegedly used to scam multiple investors. On Monday, the investigation produced its first criminal charge against Daryl Brown, who is described in court documents as the chairman of Vertical.

While conducting a mortgage fraud investigation involving Columbia-based Liberty Financial, FBI agents searched Vertical’s offices in Columbia on March 31, according to an affidavit from FBI Special Agent Andrew Ryder. Vertical was founded by former Liberty President Nathan Reuter in August 2003, according to documents from the Missouri Secretary of State. About 75 percent of Liberty’s staff moved to Vertical when Liberty closed in January 2004, according to Ryder’s affidavit.

The Vertical Group is involved in home mortgages, insurance, securities, real estate investment and corporate finance, according to documents from the Secretary of State. On April 15, former Vertical accountant Amy House told the FBI that “separate business” deals were being made through Vertical related to “diamonds and oil.” She said a “secretive” group of Vertical employees referred to as the “Ivory Tower” — Brown, Reuter, Rickey Williams and Charles Bowman — were involved in the deals. Reuter, Brown’s attorney and officials at Vertical all would not comment.

Multiple investors told the FBI they were solicited to invest in “standby letters of credit” by one or more members of Vertical’s management. The investors said they were told they would receive a high return on their investments with little risk. According to court documents, the investment and trading wing of Vertical went by the name of Cerberus.

Standby letters of credit are described on the U.S. Securities and Exchange Commission’s Web site as warning signs of prime bank fraud — a scheme intended to fraudulently guarantee large investment returns through the use of fictitious financial instruments.

Williams, who was described in court documents as the company’s placement manager, told the FBI that Brown was licensed to sell securities. But the FBI did not find a record of Vertical, Cerberus, Brown or any other Vertical officer licensed with the SEC or the state of Missouri.

The FBI affidavit also mentions wire transfers in and out of a bank account under the control of Daryl and Stephanie Brown. “This wire activity is consistent with the investment business activity gleaned through interviews of victims of the investment schemes sold through Vertical and Cerberus, Inc.,” the affidavit states.

One investor, Michael Trom of Columbia, said he was approached in November by his friend and neighbor, Reuter, about “the deal of his lifetime.” Trom transferred $175,000 Nov. 4, 2004, to an account in Texas that Reuter had set up. He said he was promised millions in return from the Vertical Group. Trom said he was first led to believe he was the only investor in this deal and that he would receive his original investment back in 14 days with monthly payments to follow. Trom said Reuter called the deal a “sure thing” and gave Trom a personal guarantee in front of his wife.

When the two weeks passed and no money was returned, Trom said Reuter told a series of stories in an attempt to smooth the situation over. He said Reuter tried to distract him from reporting the investment to authorities and said the funds would immediately be frozen if the government investigated the deal. “I really wanted to believe it was real, but the farther it went I knew it wasn’t,” Trom said.