Paul Kolen is a San Diego State University professor of electrical and computer engineering known for patents and scholarly papers in the field of miniaturization. But unbeknownst to him, a self-professed financial advisor who was to provide capital for Kolen’s inventions was practicing the opposite of miniaturization: bloated valuations of his clients’ investments.
The result was another San Diego County Ponzi scheme. On December 30, the California Department of Corporations charged Ramona’s RMC Capital Management, its chief executive Burgess Hallums, Innovation Fund 2000, and other entities with “fraudulent, manipulative, and deceptive investment advisory activities” in which “money from new clients [was] used to pay existing clients.” That’s a Ponzi scheme.
RMC was closed down, and a receiver, San Diego attorney Eric Benink, was appointed by a superior court judge. Between 2000 and last year, $11.5 million was heisted from at least 59 clients, says the Department of Corporations.
Through Innovation Fund and through direct investments, Hallums’s clients put money into a group of related enterprises such as Immcapnmotion, Magneto Inertial Sensory Technology (called Mist), and other Mist-related companies, such as Mist Net, Mist Nevada, and Mist Delaware. A control person of those companies was Donald Courtney, who along with Hallums planned to provide capital to companies attempting to market Kolen’s inventions. Courtney keeps a postal mailbox in Carlsbad.
These entities received “ill-gotten gains,” charged the department, which made them relief defendants, or those who have enjoyed unjust enrichment from the illegal activities of primary defendants.
“To say I was surprised to hear about Mr. Hallums’s hanky-panky is an understatement,” says Kolen. “He seemed to be a straight-up gentleman — a good ‘Christian’ was what I kept hearing.”
As part of RMC’s financial advisory business, Hallums put his clients in brokerage accounts for the trading of listed stocks and options. However, Hallums lost money in those accounts in seven of ten years, says Benink. But Hallums also moved customers’ money into infant companies that Benink calls “start-ups that hadn’t yet started.” And some of those clients didn’t know their money was going into these extremely speculative entities, says Benink.
Hallums put outrageous valuations on these unstarted start-ups, says the Department of Corporations. Hallums sent his clients statements saying that the Innovation Fund was worth $43 per share. He claimed that this valuation was based on the fund’s total value of $15 million. Later he admitted that the fund was worth $7.5 million. But Benink found that Innovation had only $12,000 in liquid assets. So Innovation, it would seem, was hardly worth anything. Similarly, Hallums put the value of one entity at almost $3 million when it was actually shuttered.
Hallums gave his customers “regular statements, but they contained valuations dreamt up by him, based on future valuations of the start-up companies,” says Benink. For example, “Any valuation above $12,000 [of Innovation Fund] was based on the hope that the investments would be wildly successful.”
When Hallums’s customers wanted to redeem Innovation shares, they got $43 a share — the vastly exaggerated value. It was a Ponzi scheme built on vapor because there was no realistic valuation of the entities.
The Department of Corporations cites one example of the Ponzi. In September of 2010, Innovation Fund had only $331.05 in its bank account. Two new clients put $190,000 in the fund. Of that, $40,085.89 went right out the back door to cover funds being withdrawn. The maneuver “was a classic Ponzi,” says Benink. Although the investigations are not completed, he points out an apparently unusual aspect of this scam: “There are no signs of extravagant payments, expensive vehicles, luxurious vacations. [Hallums] does not appear to be living high on the hog on investors’ money.”
Most inventions weren’t successful. Courtney originally funded his inventions, says Kolen. “The modus operandi was to develop the technology, get it patented, then license [it] to a company already in the applicable market,” says Kolen. “This was successful sometimes, most of the time not. Most of the adventures ended in abandonment.” The Immcapnmotion, Magneto, and Mist entities were set up to market Kolen inventions. “Mist was a wireless sensor network I developed.… Turned out it was a great technology but was applicable to only a small niche market and was abandoned due to my limited available time to develop these various ideas.”
A company named Fed Tag was initially funded by Courtney. Hallums was given a 10 percent ownership position without plunking in any money; he got the 10 percent on his promise that he would bring in more funding. “He only provided a small amount,” says Kolen, and on that which he brought in, Hallums charged a 10 percent commission. This “pissed me off big-time, as he was supposed to be paid for monies brought in via the 10 percent equity [in Fed Tag].”
There were other clues of Hallums’s proclivities. In 2005, when RMC was in San Diego and not Ramona, the Department of Corporations slapped it with a fine for not submitting annual reports to the department from 1999 through 2002. Hallums had also not filed RMC’s annual report in 1997, and in 1998 he had assured the department that RMC would not fail to file again.
In the current action, the Department of Corporations cited Hallums’s misadventures in real estate. Beginning in August of last year, Hallums began raising investor money to build affordable senior housing in Perris, California. He failed to reveal to investors that one of his partners in the deal, Wallace Benward, had defaulted on a $16.5 million loan from the former La Jolla Bank, which was later seized by the government. The Federal Deposit Insurance Corporation sued Benward for the money. Benink has shut down that operation.
Hallums did not return a call seeking comment. His attorney, Michael Lipman, would not comment because the case is pending. Courtney’s lawyer, Stephen Cummings, would not say anything for the same reason. I could not reach Courtney.