Two Texas attorneys have been charged with misappropriating $13.8 million in escrow deposits from more than two dozen small business owners who were seeking loans from a commercial lender.
The U.S. Securities and Exchange Commission said J. Mac Rust, 41, and Christopher Brenner, 66, acted as escrow agents for Atlantic Rim Funding, siphoning off $1.25 million in client funds to pay themselves and others and gambling the rest on risky securities derivatives.
According to court papers, the alleged scam was orchestrated by “Individual X,” a convicted felon and recidivist securities law violator who is currently serving a 20-year prison sentence in an unrelated fraud case.
Rust and Brenner allegedly told prospective clients if they
deposited cash in an equal to 10% of the loan requested, they would use the funds to purchase securities that Atlantic would
then “leverage” to obtain commercial loans for the borrowers ten times the size of their deposit.
SEC examiners detected the scheme during an examination of one of the brokerage firms where Rust and Brenner allegedly placed trades.
“We allege that these attorneys betrayed the trust of their clients by luring them with promises of small business loans that never materialized,” Andrew M. Calamari, Director of the SEC’s New York regional office, said in a news release.
The SEC said Individual X approached Rust to act as an escrow agent for Atlantic Rim in November 2010. The attorney had previously acted in the same capacity for Individual X in 2008, receiving $650,000 from two investors in New Jersey, the SEC said.
The SEC’s complaint does not identify Individual X but it says the New Jersey investors sued both Individual X and Rust. That lawsuit identifies Rust’s co-defendant as Steven Dean Kennedy.
Brenner agreed to replace Rust as escrow agent for Atlantic in September 2011. Both attorneys allegedly used new escrow deposits to repay earlier escrow clients who had demanded refunds. Clients collectively suffered more than $6 million in losses, according to the SEC.
“Atlantic was unable, or never had any intention, to obtain any loans for any escrow client of Rust or Brenner, a fact that became apparent to each not long after his respective association with Atlantic began,” the SEC said.