Months before federal regulators accused them of running a Ponzi-like scheme, executives at Denver-based St. Anselm Exploration said in a letter that they used money from new investors to pay interest on old debt.
Officials of the oil and gas exploration company said proceeds from more than $66 million in promissory notes they sold went to cover expenses, salaries and ballooning interest due on its oldest notes — some from six years ago.
“It’s how banks operate all the time, taking on new debt to retire old debt,” said Michael Zakroff, senior vice president at St. Anselm, a company he formed in 1989 with his geologist wife, Anna Wells, and partner Mark Palmer.
The Securities and Exchange Commission accused the trio in a civil lawsuit filed March 17 of running a Ponzi-like scheme over several years by relying on new investments to cover the costs of older ones.
Most companies service interest payments with profits or retire old debt with new obligations. Using new debt to cover interest payments on older debt is “a classic Ponzi,” according to one SEC investigator.
Yet Zakroff said he saw nothing wrong with how the company moved money around.
“It’s simply how business got done,” the 64-year-old Chicago native said. “Re-funding debt is a natural course of business.”
In an August 2010 letter, St. Anselm told its investors that a restructuring of their promissory notes was the only way to avoid corporate bankruptcy, according to a copy of the letter and company e-mails provided to The Denver Post. It also told them how their money was used.
“While we have been able to service current debt with a combination of proceeds from new debt and asset sales, we have decided it is not appropriate to continue raising debt,” the Aug. 16 letter said.
“Why would anyone go there (bankruptcy) as opposed to taking the restructuring and having a decent chance of recovery and profit?” Zakroff wrote to an investor in September 2010. “It is simply a choice of nothing versus a good shot at recovery and then-some.”
In a follow-up e-mail, Zakroff made it crystal clear: bankruptcy was a bad idea.
“Either we restructure cooperatively, now, or we wind up in a bankruptcy quickly,” he wrote. “We all know what to expect from that outcome.”
Letter scared investors
St. Anselm investors interviewed by The Post said bankruptcy scared them because several had already lost money in an $86 million Ponzi scheme in New Mexico just months earlier. Many who bought St. Anselm’s high-interest, short-term promissory notes also had purchased similar notes from real estate magnate Douglas Vaughan, who was indicted last month in federal court on charges of securities fraud.
Vaughan and his company, Vaughan Company Realtors, declared bankruptcy in February 2010 under crushing debt, just ahead of an SEC lawsuit accusing him of scamming more than 600 investors over more than a decade.
“It was pretty clear that with Vaughan toppling, that letter and e-mail from St. Anselm was pretty threatening,” said Melvyn Baron, a retired New Mexico attorney who holds about $450,000 in notes from both businesses. “They said it was either take their restructure or watch bankruptcy eat it all up and get nothing.”
At one investor meeting, where Zakroff explained how the company used new debts to pay interest on old ones, Baron said he leaned over to his wife and softly murmured: “Ponzi.”
“I couldn’t believe it, that I was caught in this a second time,” Baron said. “First Vaughan and then this.”
Baron refused to accept the restructuring deal, one of just four investors who would not agree to convert their notes into longer-term loans with demonstrably thinner yields — five years at 5 percent. Most of the original notes had been for three years and paid up to 36 percent.
In the case against Vaughan, one of New Mexico’s largest real estate companies, with a 35-year history, the SEC outlines how he sold short-term promissory notes with interest payments approaching 25 percent and used near-worthless property to leverage them.
Despite similarities, there are differences between the two cases. Vaughan never registered the notes he sold, deemed investment securities that require filing with state and federal regulators.
St. Anselm did file the appropriate paperwork every time it intended on selling promissory notes, according to SEC records, and disclosed some proceeds were to go toward “debt service.”
$84.5 million in notes sold
Colorado does not require companies or its principals to be licensed securities brokers when selling their own paper.
The first St. Anselm notes — about $1 million worth — were sold to 16 investors in December 2005. Of those, six investors were in California and seven in New Mexico, according to the filings. The first Coloradans didn’t buy company notes until May 2006.
In all, the company sold $84.5 million worth of notes to more than 260 investors over the course of 15 offerings between 2005 and 2010, records show.
The bulk of the buyers came from New Mexico. The salesman for many of the notes peddled there, according to interviews and the SEC, was Steven Etkind, a longtime friend of Zakroff’s. The two met when Etkind sold Zakroff a life insurance policy. Etkind is named as a defendant in the SEC complaint against St. Anselm.
Etkind, who did not return a call seeking comment, at one time sold promissory notes for Vaughan, Zakroff said — even buying $50,000 worth of them himself, bankruptcy records in that case show.
Zakroff said he told Vaughan he couldn’t sell St. Anselm notes while selling for the real estate company. He began selling for St. Anselm in 2005, Zakroff said.
David Migoya: 303-954-1506 or dmigoya@denverpost.com
