New Haven Savings Bank didn’t turn a blind eye to a massive unfolding fraud when the bank went public and became NewAlliance, its chief financial officer testified in federal court.
The CFO, Merrill B. Blanksteen (pictured leaving the courthouse), took the stand Tuesday in the second day of a trial that’s exposing the underhanded and illegal transactions that wealthy out-of-town investors arranged with local depositors when New Haven Savings, the last significant local mutual community bank, became a public corporation named NewAlliance in 2004.
NewAlliance made sure “to put people on notice” that these transactions were illegal and “not what we wanted,” Blanksteen testified.
The bank and its actions are not technically on trial. A 34 year-old Yale School of Management grad named John Lucarelli is. The feds accuse Lucarelli of serving as the middleman for three New York millionaires who wanted to buy low-priced stock in the bank’s initial public offering (IPO). The millionaires couldn’t buy the stock themselves because only the bank’s depositors were allowed to. They wanted to make a quick mini-fortune by finding a way to buy the stock, turning around and immediately selling the stock right after the IPO when the shares became available to the general public; the share price, as is typical in these cases, jumped 50 percent in the first day. So the millionaires allegedly hired Lucarelli, a broker who grew up in Orange, to find local depositors who would take the millionaires’ money, pretend to buy the stock for themselves, sell it, and share the profits. Lucarelli allegedly arranged for $4.2 million in such sales and pocketed around $100,000 as his cut. Lucarelli has pleaded innocent.
This was allegedly one of many such illegal get-rich-quick scams uniting local New Haven Savings depositors and out-of-town moneybags they’d never met before. The feds launched an investigation and brought some of the first cases of this kind in the country.
Lucarelli faces up to 185 years in jail and up to $3.6 million in fines if convicted of all the conspiracy, mail fraud, wire fraud and securities fraud charges he faces. A parade of alleged co-conspirators, two of whom have pleaded guilty, stand ready to testify against him.
So his New York-based attorney, Dominic Amorosa, has decided to put the bank’s actions on trial — to argue, in effect, that bank officials winked at these transactions because they benefited from them. The IPO raised more than $1 billion, leading to six-to-eight-figure bonuses and stock allotments to NewAlliance execs and directors.
“Gold Rush” Warnings
The government’s lead prosecutor in the case, Assistant U.S. Attorney Michael S. McGarry (pictured), sought to rebut that assertion when he put Blanksteen on the stand Tuesday. McGarry flashed on a wall-sized screen copies of documents showing steps the bank took to warn depositors and outside investors not to engage in these transactions before the March, 2004, IPO. Smaller computer screens displayed the same exhibits at the witness stand, the defense table, and U.S. District court Judge Janet Arterton’s bench.
“It has come to our attention that you may be approaching depositors of New Haven Savings Bank” to convince them to take money to buy stock, read a March 2, 2004, “cease and desist” letterfrom the bank’s attorney. The letter was sent to out-of-town investors who’d handed out business cards to depositors in local branches. The letter vowed to notify “state and federal regulatory authorities” if the investors persisted.
McGarry enlarged a section of the stock order form depositors had to sign. “I am purchasing solely for my own account,” it read.
McGarry also displayed newspaper articles with public statements from bank brass warning the public that these transactions are illegal and against the rules of the offering.
“We wanted depositors [rather than outside investors] to get the benefit they were entitled to” through the IPO, Blanksteen testified. “We wanted to make sure the regulators knew this activity was happening. We were concerned it could harm the ability to get the transaction closed.” The offering raised $1.8 billion, more than the appromxiately $1 billion the bank sought; so depositors were allowed to buy only a portion of the shares they’d sought.
Blanksteen also testified that bank officials forwarded to regulators a Feb. 26, 2004, New Haven Advocate article detailing one such attempted illegal transaction the day the article appeared. “If you want us to follow up in any way, let us know,” the bank wrote.
In cross-examination, as his client watched intensely from the defense table with his thumb under his chin and forefinger to his lip, defense attorney Amorosa used the same evidence the prosecutor used to argue that bank officials had plenty of notice that the scam was transpiring but failed to stop it.
He cited articles appearing in the Advocate for months before the IPO detailing the emerging scam.
“Six weeks before the offering you were aware there are a lot of people” engaged in these transactions, Amorosa stated to Blanksteen.
“I was aware of what it said in the paper,” Blanksteen responded. He said he didn’t know how widespread the scam actually was.
“The article said it was ‘The Great New Haven Gold Rush,’” Amorosa pressed on.
“We made sure the regulators were aware of the article.”
That wasn’t enough, Amorosa proceeded to suggest. He walked Blanksteen through the stages of the bank collecting all these $700,000 checks from depositors who didn’t have much money in the bank.
“Checks came into the bank, a billion-eight,” he said. “Did anybody do a calculation to see how much these depostors who gave you a billion-eight, how much money these depositors had on deposit at the bank?”
No, Blanksteen responded.
“Did someone say, ‘Maybe some of this money we’re getting’” wasn’t really from the depositors?
“You were free to bring in money from other sources,” Blanksteen responded. Amorosa pressed him on under what circumstances depositors could and couldn’t borrow money to buy shares of stock. Blanksteen had trouble recalling the specific rules.
How many $700,000 checks (the maximum depositors could spend per account at the bank) did people submit to the bank? Amorosa asked.
Blanksteen: “I don’t have that information.”
Amorosa: “At least a couple of hundred?”
Blanksteen: “It’s conceivable.”
Amorosa: Does the bank have any records of how many such depositors it called to ask where their $700,000 checks came from?
Blanksteen: “I doubt we asked that question.”
Little Leaguer
It’s unclear how much the jury will be swayed to focus on the bank’s actions rather than the actions for which defendant Lucarelli is on trial. On Monday, the government began putting on the stand local people whom Lucarelli allegedly approached to participate in the scheme.
John Querker, Sr., testified that he and his sons showed up at those meetings, too, and decided to buy the shares with the New Yorkers’ money. Querker, who founded and runs a West Haven company called Firetech Engineered Systems, and his family have had accounts at New Haven Savings/NewAlliance for 30 years, he said. Querker said at one point he faxed the New York investor a copy of a New Haven Register “at his request” which raised questions about the transaction’s legality. Querker testified that Lucarelli approached the family through Querker’s son, whom he knew growing up in Orange. Querker said Lucarelli played Little League baseball and soccer with his son.
“Do you still consider that you have a positive relationship with him?” he was asked.
“It’s a difficult question to try to draw a line,” Querker responded
Querker identified Lucarelli as crucial to the deal; Lucarelli’s attorney is portraying him as a fall guy for the New York investors and for the bank.
Under questoining, Querker testified that he had “no reason to trust” the New York millionaire investor, who’s named Robert Ross.
“Who did you trust?”
“John Lucarelli,” Querker said.
Why?
“I knew him since he was 5 years old. He was never in trouble. He was a good young man.”
Lucarelli is in trouble now. Robert Ross is expected to testify Wednesday.
<i>NewAlliance made sure "to put people on notice" that these transactions were illegal and "not what we wanted," Blanksteen testified.</i>
Indeed, because only the already wealthy insiders on the board should be allowed to profit from the raping of the former hometown bank, reaping multi-millions per person. What in the world is the difference between a depositor getting a home equity line on their house and using that money to buy into the stock and getting the money as a short-term loan from someone else? The difference, effectively, is that only those who already had access to personal wealth to buy into the stock would be allowed to profit. Either all should be allowed or no one - the current laws are grossly unfair to the average former bank customer.