The difference between Donald M. Johnson, Charles Ponzi, for whom the pyramid scheme is named, and disgraced late financier Bernie Madoff, who ran the largest Ponzi scheme of all, Porter Superior Court Judge Jeffrey Clymer said in court Thursday, is that some of Johnson’s victims were repaid.
“You have lied to me since day one,” Clymer told Johnson, appearing for a hearing to go through his finances and determine how he would pay his six victims back the money he owes them.
Johnson, 59, of Porter, pleaded guilty on Jan. 25 to a single Class C felony charge of a broker-dealer registration violation, a deal under which Johnson will serve four years on probation and must pay $604,500 in restitution to all of his victims, not just the one from the guilty plea.
If Johnson successfully pays his victims back and serves his probation, he can petition the court to have the case expunged from his record. After a Feb. 20 hearing that was supposed to settle how Johnson would pay his victims back, he’s been paying $500 a month toward restitution, which started in March, according to an online court docket.
When it became obvious that the court did not have the full picture of Johnson’s finances, Clymer ordered the review of them on Thursday.
Gabriel Brown, a special prosecutor with the Indiana Securities Division, laid out quite a bit about Johnson’s finances. Johnson — and his family members — tried to file for bankruptcy multiple times; a federal bankruptcy judge barred Johnson and his mother from filing again for two years and five years, respectively, because they were so badly abusing the system.
Johnson transferred his properties to family members and different trusts and partnerships, all with business addresses that led back to his business address in the 300 block of North Broadway in downtown Chesterton. That also was the business address for the vacation rentals he owns.
All the businesses tracked back to the same bank account, too, also in Johnson’s name, Brown said. In March, one month after Clymer ordered Johnson to leave his accounts as they were and not dispose of them or any property, Brown said Johnson switched his bank account.
“It’s all a scheme to defraud creditors,” Brown said of the various times Johnson’s properties changed hands.
The possibility that Johnson’s probation could be revoked came up more than once, as did the question of where his money came from, where it was going, and if the trusts he’d established for some of the properties were even legitimate.
Johnson claimed to have a 10% interest in ownership of the various properties, which Clymer questioned, curious about “who has the other 90%.” In the bankruptcy filings, the judge said, Johnson wanted to claim full ownership of the properties, but in terms of his assets to settle with his victims, Johnson said he didn’t have full ownership.
“It appears wherever the money came from, you put that into properties and put the properties in trust to avoid paying these victims,” Clymer said.
Mark Chargualaf, Johnson’s public defender — at least until the end of the hearing, when Clymer ordered Chargualaf discharged of his duties because Johnson wasn’t indigent — argued that any rent Johnson collected wasn’t going back to him.
“That’s the problem. He doesn’t receive these rents,” Chargualaf said, adding they go into the partnerships.
“No it’s not,” snapped Clymer.
Brown also laid out the thousands of dollars Johnson earned each month from vacation rentals, including $8,122 in October when Johnson received a public defender, and said that selling even a couple of his properties could generate $200,000 to $300,000 in profit, funds, Clymer said, could go to his victims.
“Regardless of the trust agreements, he is deriving economic benefit from the rental of these properties,” Brown said, adding Johnson also received $43,000 in unemployment insurance from the state.
“He was claiming to be unemployed?” said Clymer.
Brown said he hasn’t had a chance to check with the state.
Additionally, Brown said that, with a presentencing investigation interview pending in December, Johnson liquidated $600,000 in an investment account, which he didn’t disclose to the probation department.
Johnson hadn’t been ordered not to liquidate the funds, Chargualaf said.
“I understand that,” Clymer said. “I’m trying to understand where the money went.”
Johnson, Brown said, transferred ownership interest of his properties back and forth between bankruptcy filings.
“None of it makes sense unless you’re trying to hide investments and defraud creditors,” Brown said.
One of the most heated moments in the hearing, which lasted almost two hours, came when Chargualaf put Johnson’s son on the stand. Donald Matthew Johnson — his father is Donald Marvin — set up a bank account over which he had control, clarifying it was his account and not his father’s.
He told Brown he set up the account “because it has better benefits.”
Johnson’s son owned the account, but was not the trustee or owner of the properties that were funding it, Clymer said.
“I’m not positive,” he said.
“Do you own the properties that your parents rent out?” Clymer asked. Johnson’s son said “No.”
“Why are you getting money for property that you don’t own?” Clymer asked, before both Chargualaf and Brown said Johnson’s son had to be advised of his Fifth Amendment rights against self-incrimination.
After that, Brown took a different approach.
“Are you claiming the income on your taxes?” Brown asked.
“I plead the Fifth,” Donald Matthew said, before stepping down from the witness stand.
Brown said he saw two possibilities moving forward for restitution. One of them was having the court seize the properties, auction them off and pay the victims back. The other was for the court to appoint a receiver to take over administration of the property, pay back the victims and then turn them back over to Johnson or sell them.
A receiver might be best, Chargualaf said, but he would want that determined at a future hearing because the receiver would only get Johnson’s 10% of income generated by the properties. Selling off the properties could deprive the other owners of their rights.
“A receiver might be the best thing but I’m concerned what might happen in the meantime,” Brown said, rattling off Johnson’s liquidation of his investment account at the cusp of the presentencing interview, among other other matters.
Clymer went over the recent hallmarks in the case, which began when charges were filed in March 2014. Those include Johnson submitting a guilty plea in October, learning from Brown during a January hearing that Johnson might be hiding assets, and the February hearing in which Johnson was released on bond and ordered to pay $500 a month toward his victims, all he claimed he could afford at the time.
Johnson was initially charged with 14 counts related to securities fraud, Class C felonies at the time. Two months later he was charged with one count of forgery, also a Class C felony, and two counts of theft, Class D felonies, in a related case.
An appellate court ruling trimmed that to 15 counts after determining that the statute of limitations had run out for one of the victim’s claims but the rest of the charges could stand.
The allegations stretch back to around 2007 and include multiple victims who, according to charging documents, lost hundreds of thousands of dollars in real estate investments gone bad when they did not get the returns they were promised and couldn’t get back the money they put into the deals.
Clymer also reminded Johnson that he is a convicted felon who had been ordered not to deplete his assets.
“I’m trying to determine whether these are valid trusts or a Ponzi scheme and an attempt to draw victims into your scheme,” Clymer said.
The matter would be easier to determine, the judge said, if Johnson had different accounts for each property, instead of one bank account for all of them.
Chargualaf said he could provide accounting for each trust in 30 days, and that the funds in Donald Matthew Johnson’s account, from vacation rentals, could be transferred to his father in the next couple of days.
If the properties fall into foreclosure, Clymer said, they will generate less at a sheriff’s auction than they would if they were sold by a receiver.
“It benefits everybody if the properties are sold for the greatest value,” he said. “It makes sense to preserve the value of the properties for at least a short period of time.”
Clymer asked Johnson if he could open accounts for each property and only pay bills on that property from their respective account, and not pay anything but insurance or mortgage payments without the court’s permission.
Johnson said he can’t because some properties are empty and others don’t generate income consistently.
Clymer set a July 19 hearing to appoint a receiver and said Johnson is not indigent, so Chargualaf was dismissed as his public defender.
“You have had money all along,” he said.
alavalley@chicagotribune.com