FOR FURTHER INFORMATION CONTACT
AUSA VICKIE E. LEDUC or
MARCIA MURPHY at 410-209-4885
DECEMBER 17, 2007
FOR IMMEDIATE RELEASE
FORMER CEO OF BETHESDA INVESTMENT COMPANIES SENTENCED
FOR STEALING $3.128 MILLION AND INCOME TAX EVASION
Evaded $388,798 in Taxes on Stolen Funds
Greenbelt, Maryland -- U.S. District Judge Roger W. Titus sentenced John J. Lawbaugh, age 38, of Poolesville, Maryland, today to 33 months in prison followed by three years of supervised release for wire fraud, theft from a registered investment company and income tax evasion, announced United States Attorney for the District of Maryland Rod J. Rosenstein.
United States Attorney Rod J. Rosenstein stated, “In this major corporate fraud case, John J. Lawbaugh abused his authority as chief executive officer of two investment companies to steal more than $3 million. It is essential for us to protect investors in order to preserve public confidence in our financial markets.”
According to Lawbaugh’s plea agreement and evidence presented at sentencing hearings, Lawbaugh was the chief executive officer, chairman of the board and majority stockholder of two face-amount certificate companies, 1st Atlantic Guaranty Corporation and SBM Certificate Company, whose offices were located in Bethesda, Maryland. Face-amount certificate companies, which are required to be registered with the U.S. Securities & Exchange Commission (SEC), issue certificates to investors promising to repay their invested principal (the face amount) plus accrued interest at a specified rate when the certificate matures. The certificate companies seek to earn their profits by investing the funds at a higher rate of return. Lawbaugh started 1st Atlantic in 1997 and took control of SBM in July 2000. In August 2002, he was removed from his positions by each company’s respective board of directors.
Lawbaugh admitted that between August 1999 and August 2002, he misappropriated $3,128,581.30 in 1st Atlantic and SBM funds and diverted those funds to unauthorized uses, including for his personal benefit and for the benefit of his family, and to make interest payments to investors whose funds he had previously misappropriated. Lawbaugh carried out these thefts in four principal ways. First, on eight occasions, Lawbaugh caused 1st Atlantic or SBM to issue cashier’s checks or wire transfers of funds in amounts that were greater than were actually needed to carry out particular investment transactions. Lawbaugh then diverted the excess funds to pay for various personal expenses and purchases, including clothes, books, car repairs, gasoline, restaurants, country club and golf expenses and a trip to Mexico. By this means, Lawbaugh fraudulently obtained funds totaling $1,818,614.25.
Second, on four other occasions, Lawbaugh fraudulently diverted investment proceeds that should have been paid to 1st Atlantic into two undisclosed “off-the-books” bank accounts that he established in the name of 1st Atlantic at a bank other than that regularly used by the company. Lawbaugh exercised sole control over these two accounts, and used these funds for personal or other unauthorized purposes. By this means, Lawbaugh fraudulently obtained funds totaling $154,928.58.
Third, on three occasions Lawbaugh had loan origination or other fees relating to various real estate transactions in which 1st Atlantic or SBM were participants paid to largely inactive companies that he had previously established for other purposes, and whose bank accounts he controlled, without disclosing these transactions to the respective company’s board of directors, to their accounting departments or to the SEC. By this means, Lawbaugh fraudulently obtained funds totaling $245,038.61.
Finally, Lawbaugh misapplied and appears to have used $910,000 in invested funds received from another investor in early 1998, prior to the time 1st Atlantic was authorized by the SEC to conduct business as a face-amount company, to meet many of the company’s start-up and initial operating expenses.
Lawbaugh also admitted that by failing to report these transactions on the joint tax returns he and his wife filed for the years 1999 to 2001, he understated his taxable income by $1.092 million, resulting in an additional tax due and owing of $388,798.00.
United States Attorney Rod J. Rosenstein praised the Securities and Exchange Commission, the Federal Bureau of Investigation and the Internal Revenue Service - Criminal Investigation for their investigative work. Mr. Rosenstein thanked Assistant U.S. Attorney Jefferson M. Gray, who prosecuted the case.