Sources: Feds probe possible $90 million fraud tied to Bohemia firm
Federal law enforcement officials are investigating whether nearly $90 million in bank loans to a Bohemia finance company were the object of a "massive fraud," according to court records and sources familiar with the case.
The investigation involves Oak Rock Financial Llc, at 3900 Veterans Memorial Hwy., a commercial lending company that often provides capital that other lenders would then loan for transactions such as automobile and business-related purchases.
Last week, Israel Discount Bank of New York, the lead institution of the five banks that have loaned as much as $90 million to Oak Rock, asked a federal bankruptcy court judge in Central Islip to appoint a trustee to oversee the operation of the company on an emergency basis to preserve any of its remaining assets. The banks stated in court papers that Oak Rock falsified its financial position in order to borrow money.
Attorneys for Israel Discount Bank said in court papers that they had learned that the founder and head of Oak Rock, John P. Murphy, had resigned and can't be located -- and the manager who took over at Oak Rock estimated that the fraud went as high as $70 million.
"Oak Rock had perpetrated a massive fraud upon its senior secured lenders," the attorneys allege in the court papers.
As an example of the fraud allegation, the banks said in court filings that Oak Rock claimed recently to have $2.5 million in credit available when it actually was over-advanced by $47 million. The other banks that loaned the money to Oak Rock were identified as Bank Leumi USA, Capital One, Bank Hapoalim, and First National Bank of New York.
Lawyers for Oak Rock did not return telephone calls or emails seeking comment. Attorneys for the banks also declined to comment.
Murphy, who legal sources said had more than 20 years' experience in commercial lending, didn't return phone calls to his Nesconset home.
New chief discovers fraud
A longtime associate of Murphy's, Tom Stephens, took charge of Oak Rock, court papers said. Stephens later told the attorneys for the banks that on April 17 he discovered "that Murphy had been perpetrating a long-running, extensive fraud with Oak Rock by creating fictitious records," court papers said.
Murphy then resigned, the court papers said. According to state records, Oak Rock was incorporated in July 2001 as a Delaware corporation. The incorporation papers listed Murphy as president and said the company had four employees.
Further, Stephens said he informed the FBI and the U.S. attorney's office in the Eastern District of the situation at Oak Rock and they are investigating, the court papers said.
Sources confirmed the FBI's and U.S. attorney's inquiries into Oak Rock. Spokesmen for both the FBI and federal prosecutors declined to comment.
Stephens also said in light of the company's situation, "Oak Rock cannot possibly continue as a going concern and must be orderly liquidated," the papers said.
Two Oak Rock workers told Newsday that Stephens resigned Friday. Attempts to reach him were unsuccessful.
According to the court papers, Stephens began this past January to visit Oak Rock's offices to get a firsthand look at the company's operations and its books and records.
During the week of April 15 Stephens noticed unusual collection activity with respect to one of Oak Rock's customers and confronted Murphy, the court papers said. It was at that point, according to Stephens, that Murphy admitted to Stephens "that he had been creating fictitious records in order to increase Oak Rock's borrowing base," court papers alleged.
Though Stephens had told the banks about the problems at Oak Rock, the banks' attorneys now say they do not believe Stephens has the financial skills to operate Oak Rock and they want an experienced trustee appointed to oversee the firm, the court papers say.
A hearing on the banks' request for the trustee is scheduled for Monday in federal bankruptcy court in Central Islip.
The banks said in court papers that Stephens "has essentially hijacked" Oak Rock and accused him of denying the banks access to critical information about the company's financial health as well as failing to take steps to safeguard its assets.
Oak Rock specializes in a variety of businesses that involve credit -- in effect, borrowing money from banks and then loaning the money to other lenders or businesses or financing its own credit transactions.
The lending of money to other lenders or businesses is known as asset-based lending. Such loans can allow businesses to engage in installment financing for the purchase of consumer products or other business transactions, the court papers stated.
Oak Rock also had other companies participate in its loans to spread the risk, according to court papers and legal sources.
Jerome Reisman, a Garden City attorney who is representing AmeriMerchant LLC, a firm that borrowed from Oak Rock to advance to merchants, said the matter has the potential to dry up credit for some consumers and merchants.
"Right now it is catastrophic to the borrowers who can't draw down [from Oak Rock] on funding needs to fund their operations," Reisman said.
He explained that firms such as auto finance companies and merchants who let consumers make credit card purchases aren't able to fund their consumer accounts and commercial accounts.
"The end result is that [some] commercial and consumer funding has been cut off, pending a court hearing," Reisman said.
He declined to give specifics about AmeriMerchant's borrowing from Oak Rock, but stressed that the company had obtained alternate financing so it could pay off what it owed Oak Rock.
By noon Friday, an "administrative hold" on Oak Rock's operating bank account was lifted, court records stated.
With Chau Lam