NASHVILLE – U.S. District Judge Todd J. Campbell sentenced Terry Kretz, 61, of Gallatin, and the former CEO of Hanover Corp., to 168 months in prison followed by three years of supervised release Friday for orchestrating an $18 million Ponzi scheme, according to David Rivera, U.S. attorney for the Middle District of Tennessee.
Campbell also ordered Kretz to pay nearly $14.8 million in restitution.
Kretz was indicted Nov. 4, 2009 and pleaded guilty Jan. 31 to securities fraud, mail fraud, money laundering and conspiracy to commit securities fraud, wire fraud and mail fraud.
“Those who prey on the investing public can rest assured that the U.S. attorney’s office will mount an exhaustive and thorough prosecution to ensure that justice is served,” said Rivera. “After convictions are obtained, we will be equally aggressive during the penalty phase and seek appropriate punishment on behalf of those who suffer financial distress as a result of the fraud.”
According to court documents, Kretz carried out the scheme along with two other defendants, Daryl Bornstein, 55, a Hanover salesman from Kingston Springs, and Robert Haley, 55, Hanover’s chief financial officer and a Lebanon resident, both of whom have also pleaded guilty.
The fraudulent scheme was carried out from January 2004 through August 2006. During that period, Kretz offered clients the opportunity to invest in Hanover through promissory notes bearing high interest rates. Through representations in the promissory notes, as well as his own discussions with investors, Kretz told clients that their money would be used for specific purposes, such as investing in stock options and startup companies. In fact, as Kretz knew, more than half the money invested in Hanover went to repay earlier investors, to pay Hanover’s salaries and overhead or to benefit him or other defendants personally. Such personal benefits included the purchase of a $600,000 residential building lot in the name of Kretz personally, contributing more than $176,000 to a church, and paying for golf memberships.
Kretz and Bornstein also issued Hanover promissory notes to reimburse individuals who had previously lost money investing in ventures recommended by Bornstein before he joined Hanover.
In some cases, the old investors contributed new money to Hanover, while in other cases they invested nothing. In both cases, money from new investors in Hanover was used to make payments on promissory notes issued to cover non-Hanover losses without the Hanover investors’ knowledge.
Haley, in his role as chief financial officer, perpetuated the fraud by sending note holders checks that purported to be for “interest” — but were in fact simply transfers of money recently taken in from new investors. Haley also prepared a false balance sheet that overstated Hanover’s financial health and that he knew would be shown to note holders.
Bornstein and Haley are scheduled to receive sentences Monday.
The FBI, IRS-Criminal Investigation, Tennessee Bureau of Investigation and Tennessee Department of Commerce and Insurance investigated the case. Assistant U.S. attorney Scarlett S. Nokes with the Middle District of Tennessee and trial attorney Justin Goodyear with the Criminal Division’s Fraud Section are prosecutors.