The $60 Million Pyramid

A politically wired law firm is accused of enabling a massive investment scam.

Cornerstone Project Roetzel & Andress
The first impression Joanne Schneider makes is that of a frazzled grandma.

She dresses smartly, in an old-fashioned churchgoing way. But when she tries to speak, she bursts into tears -- loud, hysterical sobbing. She is the portrait of a shattered woman.

"I surrounded myself with what I thought were really great people," she says, "and here I sit talking to you."

Schneider's at the center of what Cuyahoga County Prosecutor Bill Mason calls "one of the largest securities-fraud cases in the state of Ohio." She and husband Alan are accused of bilking as many as 740 investors out of more than $60 million. If found guilty on all 163 counts, the Schneiders could face more than 300 years in prison.

Just a few years ago, she was The Woman Who Could Save Parma Heights. Her Cornerstone Project was an ambitious bid to revitalize the suburb's sleepy business district with a $90 million retail and housing development. Its anchor would be the culmination of a lifelong dream: a family center based on a children's book she wrote.

Then it all suddenly collapsed. State regulators pored over the books. What they found bore the signs of a classic pyramid scheme. The Schneiders' assets were frozen.

Now, as a court-appointed receiver continues to sort through the wreckage, he and others have begun to question the role played by Roetzel & Andress, a politically wired law firm that represented the Schneiders.

A lawsuit alleges that the firm must have known that Cornerstone's funding was built on a foundation of sand, yet continued to push the deal forward to rake in hundreds of thousands of dollars in legal fees.

"There's no question that many people would be happy if this ended with the Schneiders holding the bag," says the couple's lawyer, Ian Friedman. "But we're not going to go away that quietly."

It all started with Claire, a beautiful doll that Joanne's family bought for her.

One day, Joanne decided to write a children's book, with Claire as the main character. She titled it Claire and the Virtue of Love. It told of how "Claire and her pony, Swift Spirit, help a selfish boy and girl learn to give their greatest treasure away."

Joanne opened a gift shop in Middleburg Heights and named it Claire's Folly. The name would prove prophetic.

The shop was popular with West Siders, but many complained that it took too long to drive there. Joanne decided to build a bigger location in Parma Heights.

Mayor Martin Zanotti got word of the idea. It meshed with his desire to tear down an old Tops building at Pearl and West 130th.

Before long, the concept had grown into an ambitious downtown-revitalization project. "The project took on a life of its own," says Friedman.

The plans called for a "city within a city" on 34 acres, where a tight-knit community would live, work, and shop in a development modeled after the classic American town.

The anchor would be the new and improved Claire's Folly: a miniature Disney World, featuring waterfalls, an atrium, three restaurants, two arcades, and a roving cast of costumed characters from the Claire book.

If it sounded like pie in the sky, Joanne seemed like the kind of person who could pull it off. By then, she had built a 22-year-track record of success, having put together a thick portfolio of rental properties and businesses, including several wineries.

City leaders couldn't wait to pour money into the plan, called the Cornerstone Project. Parma Heights City Council voted unanimously to provide $200,000 for engineering and legal fees; it pledged another $4 million for roads and sewers.

It may have helped that two of the council members had skin in the game.

A few months earlier, Councilwoman Stacy Nickles had invested $5,000 with the Schneiders, according to public records. Councilman Robert Sepak's brother Kevin had given the couple $10,000. (When asked about it later, both said the investments didn't affect their vote.)

Additional public funding was to come from a $15 million bond issued by the Cleveland-Cuyahoga County and Toledo-Lucas County port authorities.

Private financing would pay for the rest.

But Joanne didn't wait for investors to be locked up. Instead, she decided to cover start-up costs with her personal fortune, believed to be $33 million.

An extravagant groundbreaking ceremony was held on July 10, 2003. Zanotti piloted a backhoe that gouged a huge chunk out of the old Tops building. Joanne told an assembled throng of 200 how important the development was to her.

"This comes not just as a business project," she said. "This comes from my very heart and soul."

Such pronouncements were her nature. She wore her Catholicism like a fur coat, decorating her office with a three-foot statue of the Pope, often praying with business partners to consummate a deal.

What was not publicly known was that the Schneiders' $33 million fortune was a mirage, according to the court-appointed receiver. The outwardly successful couple was actually tens of millions of dollars in debt.

Not long after the groundbreaking, a man noticed something funny about his mom's finances: One of her investments was paying 18 percent interest -- four times the commercial rate.

He knew that if something looked too good to be true, it probably was, so he reported the anomaly to the Division of Securities, the branch of the Ohio Department of Commerce that polices stocks and bonds.

The agency quickly realized that the Schneiders were raising money through promissory notes -- essentially a formal version of an IOU.

For sophisticated investors, promissory notes can be a smart bet. They typically offer a high interest rate and relatively little risk.

But when offered to the public at large, they're usually a scam. The people issuing the notes often can't deliver the promised returns. So they'll use money from new investors to pay off old ones -- a hallmark of pyramid schemes.

Last year, a national securities watchdog ranked bogus notes as the No. 4 threat to investors. That's why they're closely regulated by the Division of Securities, which requires their registration with the state.

But the Schneiders hadn't registered theirs. Now the state wanted to know why.

On October 9, 2003, the Division of Securities sent a letter telling the Schneiders that they were being investigated for possible securities violations. The letter requested detailed financial information.

Joanne couldn't make sense of it, she says. "I didn't understand why I was getting it, so I contacted my attorney."

That attorney was Ken Lapine of Roetzel & Andress, the firm she hired when launching the Cornerstone Project.

Roetzel was a natural choice, says Mike Unger, a lawyer representing the firm: "It's a top firm, with a significant amount of expertise in handling projects of this type."

A few months later, the agency summoned the Schneiders to an interview. Enforcement attorney Sheldon Safko conducted the inquiry. Lapine and fellow Roetzel lawyer Jeffrey Fromson represented the Schneiders.

Joanne explained to Safko that she had owned and managed real-estate properties for 22 years.

The first building was a breeze. Joanne paid a little more than $130,000 for a pristine six-apartment complex in West Park that was fully rented.

Flush with success, she decided to pluck nine townhouses on Clifton Boulevard out of foreclosure, for a total of $250,000. Additional money would be needed to redecorate.

For a project of this magnitude, Joanne needed a loan, but every bank she went to balked. The rehab project was too risky, loan officers believed. Finally, Chrysler First Business Credit agreed to lend her the money. Nine months later, the project was done.

Joanne enjoyed playing real-estate tycoon, but wasn't eager to revisit the banking hassle. Luckily, she wouldn't have to.

"My family and friends knew of the plight I went through," she told Safko, according to a transcript of the interview, "so they said, 'The next building you do, Joanne, I'll loan you the money and you give me a good interest rate.'"

Her next rehab was funded by family. She offered healthy returns: 16 to 18 percent. Word of the high yields spread quickly. "And then just one thing led to another and I had people calling me," she explained.

On the advice of a previous attorney, she offered investors liens on the properties as collateral. But by 1995, some of her customers began asking to invest through their IRAs. So she went to a national brokerage. The broker didn't want to fuss with liens as collateral, she claimed. She was told that a promissory note would suffice. So she began issuing IOUs without collateral.

The explanation didn't mollify Safko. His initial letter had warned of possible securities violations, but Joanne continued to issue notes even after she received it. Bank records showed that $750,000 had been deposited into the Schneiders' escrow account the month after they received the letter. Deposits reached almost $2 million the following month.

"The reason I did those, sir, they were a work-in-progress from at least eight months ago," Joanne explained. "Even though Ken Lapine told me not to talk to any new people, I didn't take any new people. These were works in progress."

Lapine assured Safko that the situation was already being rectified. "They've been notified that the notes should not have been issued and they're being repaid," he said, according to transcripts.

Joanne told Safko that she didn't realize she was violating the law. Now that she knew, she would go back to providing collateral.

"So if I'm understanding you correctly, you're still going to raise capital through promissory notes, but this time in compliance with securities law?" Safko asked.

"Yes, sir," Joanne answered.

"You're not going to stop raising capital?" Safko asked.

"No, I would like to carry on," Joanne said. "I've built a beautiful business here the past 22 years."

Still, Safko made clear that he thought Joanne's operation was illegal. "I do believe, unless your attorneys are going to tell me there's some defense, that you definitely have an unregistered securities case here," he said, according to transcripts.

On May 21, 2004, the Schneiders and Lapine signed off on a cease-and-desist order in which they acknowledged the illegal sale of promissory notes and agreed not to sell the notes in the future.

But the Schneiders continued to sell them. Over the next five months, the couple raised nearly $8.3 million. Only now their methods had changed: They offered liens on their properties as collateral.

The problem was that the Schneiders didn't have nearly enough property to cover the massive borrowings. So they would offer the same property as collateral to multiple investors.

In one case, an $80,000 house on Hood Avenue was used as collateral for 15 different people who had invested a total of almost $900,000.

"She says, 'I got a lien for you' and doesn't tell them they're 40th in line" if they need to recoup their money, says Dan Kasaris, the assistant Cuyahoga County prosecutor handling the case.

The Schneiders were in desperate need of money. They had promised interest rates well beyond their means, according to the receiver. Much of the new money was simply going to pay off guarantees from the past.

It was a vicious cycle: To make the payments, the couple had to issue more notes. But that only led to increased debt.

On September 8, 2004, almost a year after the initial letter was sent, the Schneiders were summoned for a second interview with the Division of Securities. Safko had caught wind that the couple was continuing to sell promissory notes. He wasn't pleased.

Joanne said that she had understood the cease-and-desist order to mean that she could continue offering notes, as long as they were secured with collateral. "I didn't think I was doing what you had told me to cease and desist on, sir," she argued.

But the new investors weren't warned that they might lose their money, Safko replied. "None of these people were aware that there was a cease and desist order issued."

It was time for the Division of Securities to play hardball. The agency would seek a court injunction preventing the couple from selling notes and appoint a receiver to serve as watchdog.

Yet for some reason, almost three months passed before the injunction was filed. In the meantime, new investors were pumping money into the ill-fated project.

On December 1, 2004, Cuyahoga County Judge Jose Villanueva granted the court injunction. The Division of Securities promptly sent out a self-congratulatory press release.

It was the first public warning the division had issued on the Schneiders, though it had been aware of her operation for almost 15 months. During that time, the couple had raised approximately $18 million from investors.

"They knew she was in deep financial trouble and never publicized it," says Ralph Eagleeye, who gave the Schneiders $175,000 just two weeks before the court injunction was issued. "They knew what she was doing was completely illegal and never publicized it for a year and a half. They're the ones who are at fault."

It doesn't help that in seeking the court injunction, the division was represented by Attorney General Jim Petro. And Petro and Roetzel have lately become well known for having a mutually beneficial relationship.

Last January, Akron lawyer Ray Weber accused Petro of taking away his state contracts at two universities because he "did not pony up with Mr. Petro."

Instead, Petro gave the specialized patent work to Roetzel & Andress, though the firm didn't even have a patent department to handle it.

Under Petro, Roetzel's legal business with the state has boomed, ballooning from $264,000 in 2002 to $1.7 million in 2005.

The hike in business corresponded with Roetzel's generosity to Petro's campaign fund, which was profligate even by lawyers' standards. In 2004, for example, Petro's campaign finance report lists 241 contributors from Roetzel & Andress -- one-tenth of his overall donors.

Lee, of the Department of Commerce, admits that Petro's office was involved in the decision-making process when it came time to seek the court injunction. "Of course, we would confer with our legal counsel, and the Attorney General's Office would be our legal counsel."

Yet she maintains that Petro's relationship with Roetzel in no way affected how the case was prosecuted. "The division did not hold back in any way on this," Lee says.

But that isn't the impression left by an e-mail from Roetzel attorney Jeffrey Fromson.

The message was written to the Schneiders on November 23, eight days before the injunction was issued. Unger, the lawyer defending Roetzel, confirms its authenticity. In it, Fromson says he has just finished a teleconference with the Division of Securities.

"They stated that because of the manner in which we were handling the matter and cooperating, they are taking what they consider a minimalist approach, although you may still find it somewhat harsh," he wrote.

He went on to explain that the division was seeking an injunction.

"All of us need to discuss plans for dealing with any publicity resulting from the filing of this complaint," Fromson wrote.

Then Fromson explained why they were getting favorable treatment: "They literally said it was our relationship with the division that is keeping them from alleging a Ponzi Scheme."

It's unclear whose "relationship" Fromson is referring to. But it couldn't have been the one Joanne had with the agency, says her attorney, Ian Friedman. "There was certainly no relationship between Joanne and the Division of Securities," he says.

Unger says he doesn't know what Fromson meant either. "I haven't asked him, so I can't tell you." But he says that Fromson wasn't implying that the law firm had pull with politicians.

"I don't think that that's indicating there's any kind of big sway," Unger says. "What I do think it was indicating was, there was effective lawyering by Jeffrey Fromson. After all, one of the goals when dealing with regulators is to try to work with them and work things out to your clients' advantage."

The injunction was the beginning of the end for Cornerstone.

Judge Villanueva appointed Matthew Fornshell as receiver to scrutinize the Schneiders. Fornshell was abundantly qualified -- he'd been the Division of Securities' head of enforcement before going into private practice.

After analyzing the books, he came to believe that the Schneiders weren't the only ones to blame for the Cornerstone collapse. Fornshell filed a malpractice suit against Roetzel & Andress, alleging that the firm "could have and should have prevented this disaster."

"Any attorney with a rudimentary knowledge of the law" would have recognized that the Schneiders were violating the cease-and-desist order in the six months after its signing, Fornshell argues.

Although he declined Scene's interview requests, Fornshell claims in his lawsuit that "Roetzel & Andress either advised the Schneiders that they could proceed with their sale of promissory notes or failed to advise them fully and accurately of the consequences of their actions."

Fornshell asserts that the firm "either facilitated or willfully ignored the illicit means by which its clients were funding" the Cornerstone Project.

He also believes he knows the motive: "Roetzel & Andress had a strong incentive not to interrupt the flow of cash, be it lawful or otherwise -- a significant chunk of what the Schneiders raised apparently went to the law firm itself, " Fornshell claims, estimating that the firm raked in "hundreds of thousands of dollars in legal fees (perhaps approaching $1 million) in connection with the Cornerstone transaction."

The Schneiders' attorney shares Fornshell's concerns.

"The question that now needs to be answered is how the Schneiders were able to operate without any one of these experienced professionals even hinting that what they were doing was wrong," says Friedman.

The answer, Unger says, is that the firm was in the dark.

"Roetzel had no knowledge whatsoever that she was continuing to sell promissory notes after the cease-and-desist order came down," he claims. "Roetzel didn't know what the source of her personal wealth was. From all appearances, they were dealing with a client who had an enviable net worth, who was able to carry projects through to fruition, and who was in a position to execute this project."

Even if the firm did have concerns, its hands would have been tied, Unger adds. "Lawyers, once they're engaged, have no choice under the code of professional responsibility but to be zealous advocates on behalf of their clients. Period. End of story."

The firm was indeed zealous. Too zealous, according to Donley's Inc., a construction company suing Roetzel to recover $1 million it lost on Cornerstone.

In January 2004, the Schneiders asked Donley's to build an $8 million parking deck at Cornerstone. Donley's was skeptical. The Schneiders had no track record with projects of this heft.

At the time, though, Donley's was being represented by Roetzel & Andress in another matter. The firm's voice carried weight.

In March 2004, Donley CFO Patrick Powers asked Lapine if he knew of anything that might threaten the financing of Cornerstone, according to court papers. (John Chapman, Donley's attorney, declined comment on behalf of himself and his clients.)

Lapine knew the Division of Securities was investigating; he was knee-deep in answering the agency's questions at the time.

Yet he painted a rosy picture to Powers, the lawsuit claims, and never mentioned the state's warning of possible securities violations. Reassured, Donley's agreed to build the parking garage.

(Roetzel & Andress claims it had no obligation to tell Donley's, because the promissory notes didn't directly relate to Cornerstone. "Those were earlier deals that had been done by the Schneiders," Unger argues. "It had nothing to do with Cornerstone.")

But, according to the lawsuit, it wouldn't be long before the Schneiders stiffed Donley's on its first payment: $250,000. Two weeks later, Donley's took its workers off the job and demanded that the couple pay up.

On June 1, Lapine convened a meeting between Joanne and Powers. It got off on the right foot when she made good on the $250,000 payment. She further assured Powers that a private investor had made a binding commitment to fund Cornerstone, the suit maintains.

So Donley's got back to work. But the next month, the Schneiders missed another payment. Donley's once again shut down construction.

To get the project back up and running, Roetzel & Andress invited Powers and CEO Malcolm Donley to the firm's downtown office. Lapine was joined by Roetzel attorneys David Gunning and David Harbarger.

The three lawyers assured Donley's that it had nothing to worry about, the lawsuit says. They even offered to provide a $650,000 IOU from the Schneiders -- a different document from the securities Joanne had promised not to offer two months earlier.

A week later, according to the lawsuit, Gunning sent Powers an e-mail to seal the deal: "Pat, this e-mail will confirm that Joanne Schneider or one of the Cornerstone entities will make the $650,000 payment to Donley's Inc., on or before August 31, 2004. I will forward you the original promissory note on Monday. Please begin the remobilization process ASAP."

Donley's got back to work. But when it came time for the $650,000 payment, the Schneiders begged for an extension. Financing was just around the corner, they claimed.

But that deal didn't pan out. And what was really coming was financial collapse.

When the injunction came down in December, it cut off the Schneiders' main source of income. Deprived of promissory notes, the couple couldn't shoulder their share of Cornerstone's costs. Work on the project ground to a halt. It was left half-born, at the mercy of the Ohio winter.

Sitting in her attorney's office, facing criminal charges that add up to more than 300 years, Joanne is cautious about what she says.

She won't talk about discussions she had with Lapine or other Roetzel lawyers. She also can't discuss how much the firm knew about the promissory notes she issued after they had all signed the cease-and-desist order.

But Joanne has a message for the people who are out money.

"This is my only opportunity to let them know that I've been fighting behind the scenes for them," she says. "I never meant to hurt them, and I didn't do it on my own."

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