A California court has handed down prison sentences of 10 years to two men who used worthless letters of credit (L/Cs) to mask multiple frauds perpetrated through their financial services company that fleeced elderly investors across the US of more than US$22 million. The court also ordered the pair to pay more than $7 million each in restitution.

Prosecutors say the men, who operated Cross Financial Services, promised investors that their money would be used to make loans to government contractors, a relatively safe investment with reasonable returns.

Uncollectable L/Cs

Instead, Douglas Cross and Owen Fox, 57, allegedly used some of the money from new investors to pay existing investors and used some of the investors' funds for personal purposes. For example, the evidence showed that Fox used approximately US$350,000 in investor funds to buy a Cessna airplane for himself and another US$360,000 in investor funds to buy a 44-foot yacht. Prosecutors said investor funds were also used to make loans at "usurious rates of interest" to companies in dubious financial condition.

As part of the strategy to make the finance company appear solid, the pair managed to inflate its balance sheet by obtaining worthless uncollectable L/Cs from a Ukrainian bank, apparently at little cost to them.

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