Retirees allege investment fraud and fault Philadelphia lawyer

One in an occasional series.

Fred Demeo was on edge, worried about the dark clouds hovering over Wall Street and his plummeting retirement account.

It was March 12, 2009, a bad day in a brutal recession, and financial markets had slipped to nearly half the value of 16 months earlier.

Demeo opened the door of his tiny gray ranch house in Toms River on the Jersey Shore and ushered in three well-dressed men who said they were there to help him manage his money.

Michael Kwasnik, a lawyer based in Philadelphia, handed Demeo a card that said he was "founding chairman" of Liberty Bell Bank in Evesham Township. The two others, securities salesmen Joseph Schifano and Daniel McCorry, who had been providing investment advice to Demeo for nearly a decade, had set up the meeting.

The task of separating Demeo from his money was about to begin.

As Beverly Demeo offered the visitors coffee and cake, the three men hovered over her 72-year-old husband.

They warned that one of his annuities, with ING, was "about to tank." That he was too old to be in the stock market. That the big mortgage companies and investment houses were about to fail.

They had a better idea.

They urged Demeo to take his money out of ING and invest in Liberty State Benefits of Pennsylvania, an investment company Kwasnik's father ran. According to Demeo, McCorry said Liberty State Benefits was such a good prospect that his own mother had invested in it.

"Just do it, just do it," Schifano barked to an ING representative when Demeo put him on the phone to discuss cashing out the annuity.

For Demeo, the investment in Liberty State Benefits ended badly. Although Kwasnik returned his $71,000 six weeks later under pressure from Demeo's lawyer, Demeo says he later learned from ING that cashing out the investment had caused him to forfeit a $234,000 life-insurance policy.

It was a benefit he had already paid for. He says Kwasnik and the others never told him he would lose the life insurance. Kwasnik disputes Demeo's account, saying he knew the consequences.

Yet Demeo is adamant. The retired corrections officer testified later in a lawsuit against Kwasnik and the others: "I felt confused and a little scared. I didn't know what to say, really. They said get rid of it, dump it, get into this. I knew right away I had made a mistake."

Demeo isn't the only aggrieved client or investor claiming to have been burned by Kwasnik. His lawsuit represents one of nearly a dozen complaints by attorney regulators, the Federal Trade Commission, and former clients, many of them elderly, alleging that Kwasnik misappropriated millions of dollars through investment schemes that drained their bank accounts, leaving a trail of financial havoc and misery.

Taken together, the complaints paint a picture of a lawyer who regarded client money as his own.

In case after case, his accusers say Kwasnik dipped into client trust accounts to cover expenses of his law firm, invest in family-related companies, or replace shortfalls in other client trust accounts.

Attorney regulators in New Jersey contend that Kwasnik underreported the value of a client's assets by $132,000 to the Camden County Board of Social Services so she could qualify for a Medicaid-funded nursing-home bed, ensuring her money would remain in his hands and not be paid to the government.

Liberty State Benefits has drawn some of the sharpest scrutiny. On July 1, after New Jersey Attorney General Paula Dow charged the company had violated state securities laws, a court-appointed fiscal agent issued a report raising troubling questions about the company's viability and the dim likelihood of investors' ever regaining their money.

From 2008 through 2010, the fiscal agent said, Liberty State Benefits and related entities paid Kwasnik, his relatives, or his law firm $5.1 million - nearly 40 percent of the $13.5 million taken from company investors. Yet, as of April 30, Liberty State Benefits and affiliated companies had only $3,528 on hand and a negative net worth of $11 million. Many of the company's 73 investors were elderly, the New Jersey Attorney General's Office said.

During the three years the fiscal agent examined, the company incurred $80,000 in overdraft charges. And signatures on some Liberty State checks, his report said, seem to have been forged.

"It appears that millions of dollars were misapplied, removed from the company or otherwise lost," the report said. "There are no liquid assets to be used to return money to investors at this time."

The company, along with its parent, Liberty State Financial Holdings Corp., filed for bankruptcy protection in Wilmington on July 29. Dow opposed the filing, charging in a reply brief that the company had engaged in a "massive fraud" and that the bankruptcy petition was a thinly veiled attempt to escape regulators' scrutiny.

Kwasnik denies that Liberty State Benefits mishandled its finances. In a statement his lawyers provided, he said the court-appointed fiscal agent incorrectly analyzed the company's financial data. Similarly, he accused the New Jersey Office of Attorney Ethics of misinterpreting bank records. He denies understating the assets of the Cherry Hill widow. Clients who complained that he improperly invested their money were fully informed, he says.

And in a reply brief, he accused Demeo of being "greedy" and said Demeo had no right to complain since his money was refunded. For his part, Schifano, in court papers, denied advising Demeo to cash out his ING annuity. McCorry could not be reached for comment.

"I have advised Mr. Kwasnik not to deal with these matters in the media, and to defend himself in court," said his lawyer, Matthew Wolf.

Liberty State Benefits is in the business of life settlements. It purchases the right to collect life-insurance payouts of elderly policyholders for a premium over the surrender value, and it collects the payout when the original policyholder dies.

Some regulators and investment experts believe the transactions can help the elderly maximize the value of their insurance. Others find much to criticize.

Since the mid-1990s, when life settlements began to emerge, the SEC and the Financial Industry Regulatory Authority have filed dozens of enforcement actions alleging Ponzi schemes and other frauds costing hundreds of millions of dollars.

Although Liberty State told investors that their money would purchase life settlements and that company assets would secure their investments, the fiscal agent said that "neither of those statements were true."

Instead, the company either sold the life settlements or borrowed heavily on them.

Some of the most extensively documented allegations against Kwasnik have been filed by the New Jersey Office of Attorney Ethics.

In cases dating back to 2007, the office charged that Kwasnik engaged in "fraud, deceit, misrepresentation, and dishonesty" in representing half a dozen clients.

The office accused him of investing clients' money, without telling them, in Liberty State Financial Holdings Corp. and in the start-up of Liberty Bell Bank in 2003. Kwasnik and his father held a financial interest in the holding company, the office said, adding that Kwasnik also had served as its chairman, CEO, and general counsel.

A lawyer or special master appointed by the state Supreme Court will pass judgment on the allegations, although a hearing date has yet to be scheduled. The special master's decision would then be subject to review by the state Disciplinary Review Board and state Supreme Court.

Such complaints are rarely dismissed entirely; the ethics office says its findings typically are upheld, at least in part, in nine out of 10 cases.

Disciplinary actions can range from a simple admonition to disbarment. It is also unclear whether Kwasnik could face a criminal probe. FBI, Postal Service, and IRS agents interviewed a Liberty Bell bank executive earlier this year about Kwasnik's business activities. A spokeswoman for Paul J. Fishman, the U.S. attorney for New Jersey, declined to comment.

If the accusations against Kwasnik were isolated, they might be seen as little more than commonplace financial disputes between a lawyer and clients.

In fact, complaints like these are part of a larger pattern of financial exploitation of the elderly across the country that is drawing increasing attention from academics, law enforcement, physicians, and social service agencies.

Millions of frail elderly are bilked annually, a growing body of academic research shows. One of the latest studies, released in March by Cornell University medical school and the New York State Office of Children and Family Services, found that 4.5 percent of people over 60 contacted for the study reported being the victims of fraud or theft in the preceding year.

On a national basis, those findings suggest at least 2.5 million people in that age group are defrauded each year, often by trusted advisers or relatives who can argue they were acting on the victim's behalf.

In effect, stealing from the elderly is the perfect crime - hard to detect and harder to prove.

It is also vastly underreported. The Cornell study, which compared its results with reports of financial abuse to police and other government agencies, found that for every documented case, 44 others were never reported.

"This is a tip-of-the-iceberg problem," said Mark Lachs, director of geriatrics for the New York Presbyterian Health Care system and an architect of the study.

By his own account, Michael Kwasnik has built a substantial and lucrative estates-and-trusts practice since graduating from Rutgers University Law School in 1994.

He maintains in one court document that he prepared more than 1,000 complex estate plans and appeared in 1,500 investment seminars. He told the fiscal agent in the Liberty State case that he manages trusts holding more than $70 million.

He also dabbled in politics.

In 1995, Kwasnik, who lives in Philadelphia's Bella Vista section with his wife and son, made an unsuccessful run for the New Jersey Assembly, listing among his qualifications an internship with former U.S. Sen. Bill Bradley (D., N.J.) and a citation as "the most outstanding Eagle Scout of Burlington County" for his volunteer service.

The campaign's chief issue, he said, was overburdened highways. "There is too much traffic on our roads," he declared.

From 1998 to 2008, Kwasnik appeared on a weekly radio program, You and Your Money, broadcast on WPEN, where he met Joseph Schifano, and in 2003 he led a group of investors to found Liberty Bell Bank.

He was the bank's largest single investor, putting up about $600,000 of the $13 million in initial capitalization. New Jersey Office of Attorney Ethics investigators say at least $110,000 of that sum came from the trust account of Angelina Murgidi, an 83-year-old Cherry Hill widow who had hired Kwasnik to manage her funds. It was Murgidi's assets, investigators say, that Kwasnik undervalued so she would qualify for Medicaid.

Friction between Kwasnik and other bank officials emerged soon after the bank opened. One senior official said Kwasnik urged them to refer rejected loan customers to a family-affiliated loan company, or to hire vendors he recommended. When the bank learned Kwasnik had used client funds to cover shortfalls at his law firm, it reported the transactions to the state Attorney Ethics Office, which launched its investigation.

Like Fred Demeo, Clifford Frater says he rues the day he met Michael Kwasnik.

It was the spring of 2009 and Frater, now an 88-year-old widower and retired electrician who lives in Ventnor, had been having trouble making ends meet.

He had heard Joseph Schifano on the radio and had turned to him for investment advice. When Schifano said he might have a few ideas, Frater and his wife agreed to meet with him.

A few weeks later, Schifano showed up with Kwasnik in tow. Frater says Kwasnik did most of the talking, telling him that an investment in Liberty State Benefits would yield 12 percent a year and that the principal would be returned after three years.

"He is a very smooth talker, and like a good thief, he impresses people with his knowledge," says Frater, who agreed to invest $300,000.

Six months later, after Frater's wife died and left him more than $500,000, Kwasnik approached him again, he says, warning that new inheritance laws would expose him to a huge tax bill.

Kwasnik suggested putting the money in an irrevocable trust with himself as trustee.

But on Dec. 31, 2009, the day after Kwasnik created the trust and put Frater's $500,000 into it, Frater says Kwasnik lent the money to Liberty State Benefits.

Both Frater and his son, Robert Gilmour, say Kwasnik never told them of the investment, nor did they know anything was wrong until the spring of 2010. That's when New Jersey Bureau of Securities investigators showed them documents indicating that all of Frater's money had been placed in the company, not just the original $300,000.

Gilmour hired a lawyer.

Kwasnik, according to Gilmour, just mocked him.

He said that hiring an attorney would cost Gilmour $20,000. Kwasnik's defense would cost about the same. But, according to Gilmour, Kwasnik said he planned to use Frater's money from the trust account to pay his legal fees.

For additional coverage, plus a list of places to find help, go to www.philly.com/elder.

There will be a live Web chat Monday at 11 a.m. with officials from the Pennsylvania Bureau of Securities who will respond to reader questions about thefts from the elderly by financial advisers, lawyers, and family members. Join the chat at www.philly.com.EndText