At federal trial, prosecutors use Main Line payday lender's words against him

Payday Lender-Racketeering Case
Charles M. Hallinan walks from the federal courthouse in Philadelphia, after a hearing in April 2016. His trial on federal racketeering charges opened Thursday.

Speaking to a colleague in 2012, payday lending pioneer Charles M. Hallinan laid out the mantra by which prosecutors say he amassed his fortune one low-dollar, high-interest loan at a time.

“In this industry,” he said, “to build a big book, you have to run afoul of the regulators.”

That statement — secretly recorded by the FBI and highlighted for jurors on the first day of Hallinan’s federal racketeering trial — offered the first signs that in seeking to convict the man credited with turning payday lending into a multibillion-dollar industry, government lawyers plan to turn his own words against him.

In his opening remarks, Assistant U.S. Attorney James Petkun cited copious emails, secret recordings, and sworn testimony in which he said the 76-year-old Villanova resident boasted of how he dodged financial regulations and state usury laws for decades — all the while earning upwards of $490 million for his Bala Cynwyd-based businesses and exploiting the financial distress of low-income borrowers by charging exorbitant interest.

“This is a case about loan sharks and deception and lies,” Petkun said. “For over a decade, he made loans to people across the United States and charged them an annual interest rate that amounted to 780 percent.”

Lawyers for Hallinan and for his codefendant and longtime lawyer, Wheeler K. Neff, scoffed at the loan-shark label and painted the case as nothing less than an assault on the entire payday lending industry.

“Mafioso figures breaking someone’s legs in an alley to collect a loan — that’s loan-sharking,” said Dennis Cogan, who along with attorney Christopher Warren is representing Neff. “In this case, we’re dealing with legal lending models. There is no federal crime that outlines payday loans.”

Hallinan’s case — scheduled to play out in a federal courtroom in Philadelphia over the next month — is being closely monitored both by regulators in Washington and by financial institutions across the country. The business tactics at the heart of the allegations against him — tactics that Hallinan helped to create — have been widely adopted across the payday lending industry.

As Pennsylvania and other states began cracking down on the proliferation of these loans in the 1990s, Hallinan’s companies forged partnerships with established banks and American Indian tribes to take advantage of loopholes that allowed those entities to charge higher interest rates to borrowers across the country.

His influence helped to transform a business once dominated by storefront locations in low-income urban areas into an explosive money-maker that could, through the internet, make loans to a new pool of potential customers.

Prosecutors allege that those practices — known in the industry as “rent-a-bank” and “rent-a-tribe” — were empty alliances, involving little more than Hallinan paying banks and tribal leaders to serve as fronts for his companies.

Hallinan himself described them as such in a secretly recorded conversation that will be played for jurors later, Petkun said Thursday.

“Let me tell you my thoughts on tribes and payday loans,” the lender said to a former business partner in 2012. “I believe they’re going to prove that it’s a sham … and I believe that they’re going to prove that they’re farces.”

Hallinan’s lawyer Edwin Jacobs accused prosecutors of taking that quote out of context. He said his client was referring to the business tactics of Scott Tucker, a onetime partner turned rival and professional race-car driver currently on trial in a similar racketeering case in New York.

(Their partnership fell apart in a well-documented lawsuit, in which Hallinan accused Tucker of looting their shared company and stealing their business model to launch a venture of his own.)

Jacobs maintained that the Justice Department now was trying to criminalize tactics that his client had deployed legally — and often with government knowledge.

As for Hallinan’s secretly recorded comments that regularly “running afoul of regulators” was just the price of success in the payday lending industry, Jacobs dismissed the government’s interpretation.

What Hallinan meant, the lawyer told the jury, was that government financial regulators scrutinized payday lenders at a far greater rate than other financial institutions. Hallinan accepted that and cooperated with every attempt to inspect his businesses, Jacobs said.

“They’re accusing us of hiding behind a bank?” Jacobs asked. “The FDIC was on us like three coats of paint. We hid behind the bank by showing [them] every blessed thing we did, and they never said, ‘Boo.’ ”

Hallinan and Neff have pleaded not guilty to charges including racketeering, money laundering, conspiracy, and fraud. Their trial is scheduled to resume Friday.