WAILUKU – Wailuku businessman Lloyd Kimura pleaded guilty to four counts of securities violations in 2nd Circuit Court on Tuesday morning.
Circuit Judge Joseph Cardoza accepted a plea agreement by which Kimura will be sentenced to two 20-year terms and two five-year terms, to run concurrently.
However, it was revealed in court that Kimura also plans to enter a plea to as-yet unannounced federal charges in U.S. District Court in Honolulu on Jan. 5.
Cash-only bail of $110,000 was imposed but deferred until Jan. 6, to make it simpler for Kimura to travel to his federal arraignment.
Kimura’s Maui Industrial Loan & Finance Co., also known as Maui Finance, failed this year. He filed for business and personal bankruptcy, listing liabilities of about $23 million.
It took about 40 minutes for Kimura to plead guilty, but he had to speak only a few words: “yes” and “guilty” as Cardoza read through the formalities to make sure he understood the charges and waived his right to have his case presented to a grand jury or to have a trial.
Kimura, 61, spoke in a low, even tone. After it was over, he said he had no comment.
He pleaded guilty to two charges of making false or misleading financial statements about Maui Finance to state regulators in 2007. By a plea bargain, Cardoza will impose maximum sentences of five years and a fine of $5,000 on each charge.
Kimura also pleaded guilty to two more-serious charges of prohibited securities practices. These were detailed as obtaining more than $100,000 by means of a fraudulent security, $590,655.32 from Barron and Rosaline Souza in 2007 and $235,000 from Ron and Carol Riccio in 2007 and 2008.
Kimura will get the maximum of 20 years and a $50,000 fine for each.
Supervising Deputy Attorney General Christopher Young said: “This is a good first step in finding justice in this case . . . I think an open-ended 20-year sentence is appropriate.
“It was a good thing for him that he was cooperative,” he added.
However, Young did not hold out hope for much recovery of the missing millions. That is usually the case, Young said, in certified public accountant fraud cases.
People trust their accountants, and leave their money with them for long periods.
Part of Kimura’s sentence is to surrender his CPA license. Cardoza said that would not preclude disciplinary action by the Board of Accountancy.
The sentence also includes restitution. Since there are three actions, state, federal and federal bankruptcy, by agreement between Kimura’s attorney, Phil Lowenthal, and Young, the U.S. Bankruptcy Court will determine the losses and recoveries, and that information will be used to determine restitution when Kimura is sentenced in the criminal courts.
Lowenthal said that determination should be final in 2011 but probably would not be done by the scheduled date of sentencing in Cardoza’s court, Feb. 24.
Lowenthal said he anticipates that Kimura will be taken into presentence custody after his appearance next month in U.S. District Court.
Kimura has been an accountant since the 1960s and was a partner in Maui Finance from about that time. He also had other businesses, including Wailuku Tire Co.
He increased his share of Maui Finance and by around 1980 was sole owner.
About that time, the law was changed so that industrial finance companies could no longer act as banks by taking deposits.
The business could have converted, but that would have required expensive deposit insurance, Young said. Kimura continued taking deposits without making the required changes to his business.
In various lawsuits, clients alleged he told them that their deposits were insured.
In fact, there was nothing behind Kimura’s promissory notes. This year, in depositions for the bankruptcy trustee, Kimura admitted he had run a Ponzi scheme. He would take in money, promising to invest it and pay interest to “depositors” or investors, whatever they understood they were.
Although he did make some loans, it appears he mostly just churned the money in and out.
According to statements from clients, some people took out their interest quarterly, others left it to accrue. Thus, although his personal bankruptcy listed liabilities of about $23 million (which duplicated his Maui Finance bankruptcy in most items), the amount of cash he took in was less, perhaps $6 million, Young said.
The bankruptcy trustee has sued 25 Maui Finance clients, seeking return of amounts they received as interest in excess of their total deposits. The legal reasoning is that, since Maui Finance was not making loans and therefore not earning interest, the money paid out as interest was not a real business transaction.
The effect of these suits for recovery, if successful, would be to spread the losses out more evenly, since almost all Kimura’s creditors were unsecured.
Kimura promised to pay interest up to 12 percent, at a time when bank certificates of deposit were earning 1 percent or less.
It sounded too good to be true, Young said, and it was.
How Kimura managed to continue taking deposits for more than 20 years has not been explained. Young said the state Department of Financial Institutions spotted the fraud during a regular audit, because Kimura was filing IRS 1099 forms showing interest paid out.
The auditor realized that, since Maui Finance was not supposed to be taking deposits, it wasn’t supposed to be paying out interest. In November 2009, Nick Griffin, the commissioner of financial institutions, ordered Maui Finance to cease taking deposits.
Tung Chan, the state securities commissioner, said the state frequently partners with federal prosecutors in securities cases.
“We don’t have criminal jurisdiction, so there are lots of good reasons to partner with other agencies, both federal and state,” Chan said.
“We worked with the attorney general and achieved a good result,” she said.
Kimura’s business fell apart within a few weeks, although he had been missing payments on debts in some of his businesses since June or July 2009.
Tuesday, Griffin deferred comment on the case to the Department of the Attorney General.
Kimura was sued by banks for unpaid loans and by Goodyear for $240,000 owed for tires, although a different action alleged that he had pledged $200,000 worth of tire inventory for a loan.
About 14 of his Maui Finance creditors met with Kimura last December, when he promised that he had assets and would be able to pay them when he got his affairs straightened out. Instead, he filed for bankruptcy in February.
Lowenthal said he had been discussing a plea “for months.” The state filed its four-count complaint Dec. 20. The federal complaint remains under seal, and its existence was not revealed until the matter of the bail postponement was raised Tuesday.
The state charges relate only to Maui Finance. Civil suits also allege irregular and self-dealings by Kimura.
For example, the owners of the Maui Three business condominium, which Kimura developed and sold, claim he and his wife, Jennie, retained the management of the property, which meant they should have paid the developer-manager’s share of common fees.
According to the suit, Kimura didn’t do so, and also did not register a condo association, as required.
In his bankruptcy deposition, Kimura said he transferred money among his various enterprises as needed, without clearly separating his enterprises or, in the case of the condo fees, the Maui Three suit alleges, segregating them in a recognized depositary, as required.
He and his wife also lent money, about $1.5 million, to Maui Finance.
