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Feb.28, 2010, 3:06 am

Benny Lee Judah turned to day-trading and making internal loans with bondholders’ funds to keep Excel Financial afloat after the firm began losing money, Judah told the court-appointed receiver of his assets in a deposition last year.

“I started trying to find other ways to make some money, and then we got into some stock trading and, you know, that didn’t work out. And so it just kind of dominoed from that point,” Judah told attorney Fernando Bustos during a May 27 deposition regarding Excel’s business affairs.

Judah agreed to the receivership as part of settling a civil fraud complaint brought against him in April by the Securities and Exchange Commission over $50 million in unregistered debentures Judah sold between January 2006 and April 2009.

A debenture is a form of unsecured corporate debt. In this case, bondholders bought five-year notes with a minimum 10-percent interest rate, based on Judah’s offering circular that said Excel “historically averaged 19.8 percent annual return on its portfolio of leases and other investments.”

The SEC charged Judah and Excel with misrepresenting the company’s financial health and assets, and failing to give a true account of how the money would be used.

Bustos could not be interviewed for this story because of a gag order imposed by U.S. District Judge Sam Cummings in the case. The context of the deposition, however, indicates Bustos had three reasons for deposing Judah:

n Determining how much of a role Judah played in a local accountant’s attempt to organize Excel’s debenture-holders as a partnership to repudiate the receivership and take control of Judah’s businesses themselves.

n Discussing why Judah applied for unemployment insurance benefits from the Texas Workforce Commission after agreeing to having his assets frozen and placed in receivership.

n Gathering background information on Judah’s business practices with Excel.

In a portion of the deposition concerning Excel’s business operations, Bustos asked Judah to talk about when the company started losing money and why.

Judah said he thought the company was profitable in 2006, and estimated Excel’s net operating loss in 2007 at $3 million and possibly $3.5 million for 2008.

“Why did Excel start losing money?” Bustos asked, during a string of questions about Excel’s collections practices when leases went into default.

Judah indicated things started to slip with the nation’s economic struggles after the Sept. 11, 2001, al-Qaida attacks on the World Trade Center and the Pentagon.

“Seemed like 9/11 hit and the economy started going down, and we started having some lease defaults,” Judah said.

“We had a lot of leases in Houston, and Louisiana was a pretty good market for us, and we had those hurricanes that hit.. And it just seemed the economy started going down and we started having more and more lease defaults,” he continued.

Making internal loans

Under questioning, Judah estimated he had loaned as much as $15 million from the lease fund business to himself and other businesses he controlled.

In the loan estimates, he said, some $5 million was loaned to Clearwater Farms, a 5,169-acre farm Judah and his then-wife, Julie, owned near Seminole. According to federal farm subsidy records, the land had been used primarily for cotton, but also corn, sorghum, peanuts and wheat.

Judah also estimated some $3 million had been  loaned to Excel Development, the real estate business that developed Sunridge, Suncrest, The Falls Country Club and Solaris.

Those loans, he explained, had no collateral securing them in the event of default.

He also said some loans had been made to Excel bondholders, and personal loans were made to company employees, sometimes to buy vehicles that Excel had repossessed in lease defaults.

Investors ‘alternative’

About a month after Judah settled with the SEC, a group of investors assembled by Lubbock-based accountant John Beakley met privately to consider forming a partnership that would ask Cummings to dissolve the receivership and let them manage Judah’s assets.

The plan was eventually dropped, but not without a lot of frustration for Bustos and a brief delay in some of the early forensic accounting work.

Judah admitted giving an older list of investors to Beakley and discussing asset values with the accountant at a meeting, but told Bustos and SEC attorney Timothy McCole during the deposition Beakley said nothing to him about plans to organize investors and oppose the receivership.

“You understand that if I thought from the evidence that it looked like you were acting in concert with Mr. Beakley to frustrate the plan of the receivership, to hinder my duties as receiver, that I would haul you up in front of Judge Sam Cummings and ask for you to be held in contempt of court. You understand that?” Bustos asked.

Judah said, “Yes.”

Judah said Tom Darden, a personal friend and former local banking executive, invited him to meet with Beakley because they said they’d gotten permission from Bustos to form an investors’ group to look out for bondholders’ interests in the case.

Bustos asked if Judah was aware Darden is a convicted felon.

Judah said, “Yes, and Tom Darden is a friend of mine.”

Darden, former president of First State Bank, was convicted in 2005 of numerous federal charges including bank fraud, money laundering and conspiracy in connection with an attempt by two bank customers to use stock as collateral for brokerage margin loans at the same time as it was being used as collateral for a bank loan.

 Judah said he was asked if he could bring a list of investors to the meeting, which included Darden, Beakley and Judah’s brother, Allen.

Benny Judah said he asked his brother to bring a list of assets that they had prepared for a meeting with the SEC.

Under questioning from SEC attorney McCole, however, Judah admitted that he’d seen no proof that Bustos had authorized Beakley to form an investors group, didn’t ask Bustos if he’d approved such a move, or get Bustos’ permission to give Beakley any documents about Excel investors or assets.

Judah told Bustos he wasn’t aware Beakley was proposing an alternative to the receivership until his father-in-law showed him Beakley’s letter, which put the proposal forward.

He said his understanding was that Beakley was “just going to try to get the group of investors together to — to try to get the most money out of the assets as possible.”

When asked whether he agreed with Beakley’s idea of dissolving the receivership, Judah said that while he opposed the idea, “there’s some people that had debentures that has a lot of experience in restaurants and development and real estate, and I think that they can be a great asset to try and get as much money on these assets as possible.”

Later in the deposition, Judah said he didn’t remember all of the documents he’d reviewed with his attorney, Michael Carper, when he signed off on the agreements.

Filed for unemployment

After signing the settlement and agreeing to the receivership, Judah applied for unemployment payments, saying he’d been permanently laid off.

The Texas Workforce Commission initially approved the claim, but an appeal tribunal reversed that decision on the grounds that agreeing to the receivership meant Judah had voluntarily quit the job.

Bustos asked: “Did I ever lay you off?”

Judah replied: “Well, I mean, you particular didn’t, but I was told not to come back.”

In later questioning, Judah acknowledged that he’d neither been fired nor laid off.