In nearly two decades of payday lending, Charlie Hallinan, a resident of the Main Line, stayed one step ahead of state laws while amassing a fortune one high-interest loan at a time.
Now federal officials are preparing a racketeering case against him, gathering evidence in an attempt to show he conspired to evade usury laws, according to four sources with knowledge of the matter, who asked not to be identified because the proceedings are secret. One of the payday lenders with whom Hallinan worked, Adrian Rubin, 58, of Jenkintown, faces a prison term of 10 to 65 years after pleading guilty Wednesday to racketeering charges.
"Rubin conspired with other people to evade state usury laws and other restrictions on payday loans by engaging in a series of deceptive business practices," Zane Memeger, the U.S. attorney in Philadelphia, said last month in a statement when Rubin was charged. "Rubin and his co-conspirators reaped tens of millions of dollars."
The case against Rubin describes a "Co-Conspirator No. 1," who is not identified. That's Hallinan, according to two of the sources.
Hallinan declined to comment, as did Michael Rosensaft, his attorney at Katten Muchin Rosenman L.L.P. in New York. Rubin is to be sentenced Oct. 28 in federal court in Philadelphia.
Hallinan, 75, was among the first to start offering payday loans over the phone in the 1990s, allowing him to operate in states that had tried to ban the costly cash advances. He pioneered two tactics - now nicknamed "rent-a-bank" and "rent-a-tribe" - that payday lenders have been using for years to stymie state regulators. The industry he helped create has since shifted to the Internet and now makes about $16 billion in loans a year, charging rates that often top 700 percent annualized.
With state regulators unable to stop the elusive online lenders, federal prosecutors are turning to a racketeering law created to crack down on the Mafia. A grand jury in Pennsylvania has been investigating Hallinan for more than a year, the sources said.
Hallinan got into payday lending in the 1990s after selling a landfill company for about $120 million. A former investment banker, he graduated from the University of Pennsylvania's Wharton School. He owns a house in Villanova and a condo in Boca Raton, Fla.
Payday-loan stores are common in states where they are legal. They offer cash-strapped workers advances of a few hundred dollars, to be repaid on the next payday, generally charging about $20 for every $100 borrowed. Most states restrict the size or cost of the loans and about a dozen ban them altogether.
That created an opportunity for Hallinan. In 1997, he approached County Bank of Rehoboth Beach, Del., to see if the firm would help him make payday loans over the phone in states with restrictions, according to documents filed in a civil lawsuit brought six years later against the bank and companies owned by Hallinan and Rubin. The case was filed by Eliot Spitzer, then New York's attorney general.
Banks that are licensed in states that allow high interest rates on short-term loans, such as Delaware, may lend to customers across the country using those limits.
Hallinan and County Bank struck a deal under which the bank would be the lender on paper in exchange for a fee, while Hallinan's companies would run the business and earn the bulk of the profits, according to documents filed in the case.
Customers would fax over their pay stubs, and Tele-Ca$h would deposit money in their accounts, then withdraw it two weeks later, along with fees that exceeded 500 percent on an annualized basis, according to Spitzer. Tele-Ca$h started offering loans online as the Internet became more popular.
Hallinan introduced Rubin and other payday lenders to County Bank, and the business took off, earning the nickname "rent-a-bank." That caught the attention of regulators. Spitzer filed his lawsuit in 2003, calling County Bank "a front for an illegal loansharking operation."
County Bank and the firms owned by Hallinan and Rubin settled the New York lawsuit in 2008 for $5.5 million, without admitting or denying wrongdoing. David Gillan, County Bank's current chief executive officer, did not respond to a message seeking comment.
Hallinan did not set out to evade the law, according to Hilary Miller, the lawyer who represented him in the case.
"The law was pretty clear that the bank was the lender," Miller said in a phone interview. "He was as surprised as we were that the New York attorney general sued him."