Sparta Man Admits Duping Banks Out Of $80M In Elaborate Ponzi Scam

A Sussex County man whose personal spending tastes ran the gamut from buying sprawling horse farms to giving Marine veterans a new headquarters pleaded guilty in federal court yesterday to cheating 50 financial institutions out of $80 million in a medical equipment leasing Ponzi scheme.

Relying on phony invoices and the help of a fraudulent equipment “supplier” that took a cut of the money, Charles Schwartz , 57, persuaded bank after bank to give him loans for ventilators and other items that apparently never existed — and that therefore never made it to Allied Health Care Services, his medical equipment company in Orange.

Over an eight-year period, the duped financial institutions paid out more than $135 million, while getting back less than half of that money before the Ponzi scheme went belly up, authorities said.

“This was a pretty sophisticated effort to commit fraud,” U.S. Attorney Paul J. Fishman said in an interview. “The scheme involved massive numbers of fake invoices, the establishment of a dummy corporation and the creation of false books and records.”

From 2002 to 2010, Schwartz, of Sparta, asked lenders to front money to his business so they could lease valuable medical equipment, federal authorities said. Using phony invoices doled out by the “co-schemer” — an unidentified Berkeley Heights company that purported to be a supplier — Schwartz got the banks to enter into leasing arrangements.

Under those agreements, the financial institutions would purchase equipment from the supplier, then lease the same products to Schwartz and Allied, authorities said.

Once the supplier got payments from the banks, its owner — referred to by the government as “UC-1” — sent that money to Schwartz, minus a 3 percent to 5 percent cut, authorities said.

“This is certainly one of the larger schemes we’ve uncovered but by no means the biggest,” Fishman said yesterday. “It involved some real planning.”

Authorities said Schwartz and the unnamed supplier worked hard to deceive bank examiners who wanted to inspect the nonexistent medical equipment.

For instance, Schwartz directed employees at Allied to alter and create serial numbers — so those numbers matched with phony invoices — for ventilators it did actually have. Then, when financial institutions wanted to look at documents tied to Allied’s leasing of ventilators to its customers, Schwartz lied and said the information was protected by Health Insurance Portability and Accountability Act regulations, authorities said.

During an August 2010 talk between Schwartz and the supplier, officials said, Schwartz commented that examiners had fallen “hook, line and sinker” for a fake explanation he gave them about why the supplier used his home address on some invoices.

In classic Ponzi-scheme fashion, Schwartz used money hauled in by the scheme to repay bank loans attained under the scam, authorities said.

While Fishman wouldn’t comment on how the scheme was unearthed, he noted that a weak economy can lead to the undoing of Ponzi schemes.

“Ponzi schemes often depend on the infusion of fresh capital, whether it’s investments of dollars or loans,” he said. As those resources dry up, “it’s simply harder for the person to keep repaying the original financiers. It’s a little like the tide washing out.”

By last August, authorities said, several financial institutions had sued Schwartz, saying he owed more than $20 million. Allied has gone bankrupt, authorities said.

With the money he pocketed, Schwartz spent millions on 10 properties in New Jersey and New York, authorities said, including at least one horse farm. And, as reported in The Star-Ledger on Tuesday, he also gave a needy Marines group in Nutley new headquarters space.

Schwartz faces a maximum of 20 years in prison when he is sentenced July 18. His attorney, John Whipple , did not return a call for comment.

Jason Grant :

jgrant@starledger.com