Two brothers involved in the biggest post-Katrina development on the Mississippi Gulf Coast were key figures in an Internet stock scam that federal authorities say bilked investors out of more than $12 million, MSNBC.com has learned.
Additionally, one of the men was barred from the franchising business for life after federal lawyers sued him in a fraud case they said cost investors $6 million. The other brother filed for bankruptcy in 2002, and both have yet to satisfy a federal judgment against them of nearly $10 million.
And while the brothers said they had developed numerous real estate projects in Florida, California, Colorado and even Russia, neither they nor their associates would provide specific names and locations of any of the developments despite repeated requests by MSNBC.com.
Richard S. and Donald R. Kern are officials of the Paradise Properties Group, which has the preliminary blessing of Hancock County officials to build thousands of condominium units, apartments and resort facilities in buildings as high as 40 stories in the southwest corner of the county. And the company has more plans afoot elsewhere in the hurricane-ravaged county.
The "Paradise Bay" project, which was profiled on Fox News earlier this month, is stunning for its scope and size in a county with just two small incorporated cities and a pre-Katrina population of only 43,000 fulltime residents. The $5 billion value that Paradise Properties puts on its Hancock County projects would be more than 10 times the value of all taxable property in the county prior to the hurricane.
“Certainly it concerns me,” Hancock County administrator Tim Kellar said when told of the Kern brothers’ past legal problems. “That’s the first I’ve heard of it.”
Coastal Community Watch spokesman Bob Davis, whose group has been fighting the high-rise development for more than a year, said he was "not all that surprised" about the Kerns' background. He said county officials were "trying to go too far, too fast. They should have checked more. ... My gut feeling is that when you have this kind of uncontrolled development, these kind of people come in to take advantage of it."
Last year, before Katrina struck, county supervisors changed zoning in the area to pave the way for the massive Paradise Properties development and other projects near the site of the previously approved Silver Slipper casino. Officials for Hancock County, on the verge of bankruptcy in the wake of Katrina, have been counting on the projects to generate major new property tax revenue.
While construction on the casino is well under way, with an expected opening date in December, court action by Davis' group stalled the plans by Paradise Properties and other developers. Coastal Community Watch lost the first round. The verdict was appealed, but developers are so confident they’ll prevail that they have been pre-selling condominiums and looking into incorporating the area as a new city.
The Kern brothers, who both spoke willingly and at length with MSNBC.com, said they were the unwitting dupes of others in the stock case.
“That’s an old story and it’s in the past,” said Richard Kern, 50, director of strategic planning for the company. “I didn’t do anything that I’m ashamed of.”
His comments were echoed by Donald Kern, 53, the firm’s construction manager: “It’s one of those kinds of things where whoever is in a deal gets dragged along. I never had anything to do with it.”
But the U.S. district judge who ruled in the case rejected those claims.
According to the Securities and Exchange Commission, the Kern brothers worked with two other men in 1998 and 1999 to illegally inflate the stock prices of three shell companies — Citron, Electronic Transfer Associates Inc. and Polus Inc. — in which they held most of the shares. The “pump and dump” scheme used press releases and Web sites that made phony claims to hype demand for the stock among traders, the SEC said.
Ringleader got seven years in prison
The ringleader in that case, Peter Lybrand, formerly known as Peter Tosto, was a serial securities con artist who was awaiting sentencing in a previous securities fraud case and acting as a government informant when he engineered the 1998-99 scam. Facing criminal charges, he confessed to the pump and dump scam and was sentenced in 2001 to more than seven years in federal prison.
“I was simply greedy and thought I could get away with the lies I told," he said at his sentencing. He has since been released.
While not charged criminally, the Kern brothers and another defendant were successfully sued by the SEC for their role in the case. The court ordered them to pay more than $9 million in disgorgement — the return of ill-gotten gains — and interest.
In his ruling, U.S. District Judge Sidney H. Stein wrote that the Kerns “violated the security laws repeatedly and with regularity,” refused to take responsibility for their actions, did not cooperate with the SEC’s probe and could not explain the shrinkage of their assets after they had been frozen by the court.
The ruling also noted that Richard Kern had in 1994 been enjoined for life from working in the franchise industry. That came as the result of a Federal Trade Commission lawsuit that accused him and others of operating a franchise scam that fleeced 400 franchisees of $6 million.
As in the SEC matter, Richard Kern told MSNBC.com that he did nothing wrong in that case.
Because of their “essential and active roles” in the stock fraud and their behavior afterward, the judge tacked on civil penalties of $400,000 for each Kern brother, for a total judgment of over $9.8 million. He also found that Donald Kern’s 2002 bankruptcy filing did not relieve him of the obligation to pay.
Currently, the government has recovered $565,000 from the Kerns, as a result of Donald Kern’s bankruptcy, said Richard Simpson, an SEC lawyer, meaning the brothers still owe the government well over $9 million.
“All of the appeals are done,” Simpson said. “We won hands-down. The judgment is affirmed. So we have an impregnable judgment that we’re trying to collect.”
Asked about a claim by Donald Kern that his debt was satisfied in “arbitration,” Simpson laughed.
Richard Kern said he “of course” will pay the judgment but when he does so is “between myself and the SEC.”
The Kerns also would not divulge details of numerous other real estate developments on which they claim to have worked.
Richard Kern said he had developed “a myriad of projects” from apartments in Colorado to shopping centers in California, restaurants and strip centers in Arizona and “a really big project in Russia.” Asked to name one, he replied, “I’d just as soon not.”
'I can't remember them'
Donald Kern said he has worked in construction and real estate since he was in high school. Asked to name a single project, he replied, “Off the top of my head, I can’t remember them right now.”
Other members of the firm, including its chief media representative, also would not name any projects that the men had developed.
“I’d have to check and see what I’m at liberty to give out,” said Angela Kurlander. When pressed for the name of just one project, she said, “This is your focus at MSNBC, how can we make everything as negative as possible?”
Danny Coates, a Hancock County resident and local point man for Paradise Properties Group, said that he had known Richard Kern for many years. But when asked the same question, he said “I really don’t know” any previous projects that Kern had developed.
Attorney Gerald Gex, who works for the county and was assigned by Kellar to discuss the case with MSNBC.com, called the refusal by the Paradise representatives to name past projects “just the dumbest thing I’ve ever heard in my life,” adding, “That doesn’t sound right.”
Another member of the Paradise team who would not name any projects undertaken by the Kerns is Mike Cure, a well-known local businessman and the Kerns' partner in the Hancock County developments.
Cure, whose family has been represented by Gex for many years, said he was aware of Richard Kern's SEC case and was "not at all" concerned that the brothers' past legal troubles would taint his ventures with them.
"Richard seems to be a forthright guy who looks to have a good relationship with bankers," he said. Cure added that because he and his family own all of the land involved in their deals with the Kerns, "I've got control."
"What Richard has brought to the table here is a vision," Cure said. "He also has financing capabilities and I think he's going to do some good things for the community. We certainly need it in this area."
While the company won't discuss the Kerns' past projects, it is happy to talk about its ambitious current plans for Hancock County. Kurlander said there are 14 separate projects, from luxury condos to commercial space. She said the firm plans to break ground as soon as the court case is settled -- or perhaps even before -- on The Breezes, a 983-unit condo project valued by the company at $750 million; the Shoppes at Paradise Bay, a 10-acre retail-commercial project in nearby Bay St. Louis; and a 160-unit apartment project that is the prototype for nearly 2,000 more rental units in a complex valued at $40 million.
In the next few years, Paradise Properties says it also will develop hundreds of single-family homes, 500 of them around a Robert Trent Jones II-designed golf course; a “five-star” casino-marina project with another 2,700 hotel and condo units, valued at $2.5 billion; and a second hotel-casino project with another 1,500 units, valued at $1.5 billion.
Those numbers dwarf Hancock County’s pre-Katrina property tax rolls, which totaled about $450 million, according to county attorney Gex, who said county supervisors approved the zoning change in the area hoping to provide an economic “shot in the arm.” Gex said that if just $500 million worth of property value is eventually added to tax rolls, it would provide $7.5 million a year in new revenue, approaching one-fourth of the county’s annual budget.
“The Mississippi Gulf Coast is going to become a world-class destination,” said Kurlander, adding that pre-construction sales for the Breezes condo project have been brisk, with the first of four buildings in the 983-unit project already sold out.
Chief sales agent for the project, Robin Sherman of JME Coldwell Banker in Pensacola, Fla., said prices, which she expects to increase as construction nears, range from $475,000 to $800,000. Buyers are paying 10 percent non-refundable down payments to enter into contracts, Sherman said.
The Kern brothers said one of their key goals is to help provide new homes and tax revenue for the hurricane-ravaged area and they hope their association with the project doesn’t taint it.
“If your organization is going to try to destroy the project based on my record, I’ll be happy to resign from the company,” said Richard Kern, who acknowledged that financing has yet to be secured for Paradise Bay. “If you think I’m a bad person, that’s up to you. I don’t think I am and everybody who knows me doesn’t think I am.”
Added Donald Kern: “I have been working day and night to try and get this thing accomplished and I’d hate to have an old skeleton come out and get me fired.”