PROVIDENCE -- A federal bankruptcy judge yesterday told lawyers seeking to recover millions of dollars scammed by rogue broker Dennis S. Herula to "dig a little deeper and a little faster" before the money is gone.
Judge Arthur N. Votolato granted a trustee's request to convert Herula's bankruptcy case from a Chapter 11 reorganization to a Chapter 7 liquidation, but said he is most concerned about putting a stop to Herula's spending.
"It's all of you against him -- without a lawyer," Votolato said. "Please don't let him outsmart us all."
Herula, 55, is a former broker with Raymond James Financial Services in Cranston who was found by a federal judge to have taken $16.7 million in an elaborate investment scheme involving others, including his wife.
The U.S. Securities and Exchange Commission alleged that Herula, his wife, Mary Lee Capalbo, and six others enticed investors to put more than $50 million into phony "credit enhancement" or "balance sheet enhancement" programs.
The scheme promised exorbitant returns of up to 300 percent in 12 days, according to the SEC.
The lawyers working on the bankruptcy case told the judge they believe that the sometime-resident of Warwick may have money stashed away that he is now spending in violation of two court orders freezing his assets.
"We're trying to find the other assets apparently Mr. Herula is living off of now," Providence lawyer Peter Furness said.
In November, Herula filed for bankruptcy protection in an apparent bid to shield himself from a U.S. District Court judge's order to pay $19.2 million as a result of the fraud charges brought by the SEC.
But the move backfired when Votolato appointed a Chapter 11 trustee to oversee Herula's assets and recover as much money as possible for creditors -- essentially the people he was found to have defrauded.
In U.S. Bankruptcy Court yesterday, the trustee in the case, Marc D. Wallick, and Furness, a lawyer working with him, asked the judge for an order to convert Herula's case to a Chapter 7 liquidation. That would allow them to sell off his assets, including million-dollar homes in Westerly and northern California.
Furness told the judge that Herula did not show up for several meetings at which he was to be questioned about his finances.
Furness and Wallick said they are doing everything they can to secure Herula's assets and make sure they are not sold, but that they have been restricted by orders freezing Herula's assets. Those orders resulted from two fraud cases the SEC brought against Herula. The rulings are in the process of being modified to allow the bankruptcy trustees to take control of Herula's property.
Furness said a Florida accountant hired by Herula indicated that he may be in that state now.
Votolato told Furness and Wallick he is "going to keep a short leash on this" and advised them he does not want the case to end with, "We tried, and it's too late now.' I don't want to hear that."
Herula's activities have drawn the interest of criminal investigators.
His wife, who also has been charged with investment fraud, refused to appear for questioning yesterday by the bankruptcy trustee after she received a subpoena from a federal grand jury in Colorado, Furness said in court.
Herula has been charged by the SEC with investment fraud that allegedly targeted a Colorado man, an heir to the Coors brewing fortune.
U.S. District Court Judge Mary M. Lisi is expected to issue a final order in the SEC case against Capalbo later this week.
