Miss. developers' murky past includes fraud

Mike Stuckey Senior news editor • Profile • E-mail

Two brothers involved in the biggest post-Katrina development on the Mississippi Gulf Coast were key figures in an Internet stock scam that federal authorities say bilked investors out of more than $12 million, MSNBC.com has learned.

Additionally, one of the men was barred from the franchising business for life after federal lawyers sued him in a fraud case they said cost investors $6 million. The other brother filed for bankruptcy in 2002, and both have yet to satisfy a federal judgment against them of nearly $10 million.

And while the brothers said they had developed numerous real estate projects in Florida, California, Colorado and even Russia, neither they nor their associates would provide specific names and locations of any of the developments despite repeated requests by MSNBC.com.

Richard S. and Donald R. Kern are officials of the Paradise Properties Group, which has the preliminary blessing of Hancock County officials to build thousands of condominium units, apartments and resort facilities in buildings as high as 40 stories in the southwest corner of the county. And the company has more plans afoot elsewhere in the hurricane-ravaged county.

The "Paradise Bay" project, which was profiled on Fox News earlier this month, is stunning for its scope and size in a county with just two small incorporated cities and a pre-Katrina population of only 43,000 fulltime residents. The $5 billion value that Paradise Properties puts on its Hancock County projects would be more than 10 times the value of all taxable property in the county prior to the hurricane.

“Certainly it concerns me,” Hancock County administrator Tim Kellar said when told of the Kern brothers’ past legal problems. “That’s the first I’ve heard of it.”

Coastal Community Watch spokesman Bob Davis, whose group has been fighting the high-rise development for more than a year, said he was "not all that surprised" about the Kerns' background. He said county officials were "trying to go too far, too fast. They should have checked more. ... My gut feeling is that when you have this kind of uncontrolled development, these kind of people come in to take advantage of it."

County banking
on revenue
Last year, before Katrina struck, county supervisors changed zoning in the area to pave the way for the massive Paradise Properties development and other projects near the site of the  previously approved Silver Slipper casino. Officials for Hancock County, on the verge of bankruptcy in the wake of Katrina, have been counting on the projects to generate major new property tax revenue.

While construction on the casino is well under way, with an expected opening date in December, court action by Davis' group stalled the plans by Paradise Properties and other developers. Coastal Community Watch lost the first round. The verdict was appealed, but developers are so confident they’ll prevail that they have been pre-selling condominiums and looking into incorporating the area as a new city.

Sea Coast Echo Richard Kern speaks at a meeting of Mississippi Gov. Haley Barbour's  rebuilding commission.

The Kern brothers, who both spoke willingly and at length with MSNBC.com, said they were the unwitting dupes of others in the stock case.

“That’s an old story and it’s in the past,” said Richard Kern, 50, director of strategic planning for the company. “I didn’t do anything that I’m ashamed of.”

His comments were echoed by Donald Kern, 53, the firm’s construction manager: “It’s one of those kinds of things where whoever is in a deal gets dragged along. I never had anything to do with it.”

But the U.S. district judge who ruled in the case rejected those claims.

According to the Securities and Exchange Commission, the Kern brothers worked with two other men in 1998 and 1999 to illegally inflate the stock prices of three shell companies — Citron, Electronic Transfer Associates Inc. and Polus Inc. — in which they held most of the shares.  The “pump and dump” scheme used press releases and Web sites that made phony claims to hype demand for the stock among traders, the SEC said.

Ringleader got seven years in prison
The ringleader in that case, Peter Lybrand, formerly known as Peter Tosto, was a serial securities con artist who was awaiting sentencing in a previous securities fraud case and acting as a government informant when he engineered the 1998-99 scam. Facing criminal charges, he confessed to the pump and dump scam and was sentenced in 2001 to more than seven years in federal prison.

“I was simply greedy and thought I could get away with the lies I told," he said at his sentencing. He has since been released.

While not charged criminally, the Kern brothers and another defendant were successfully sued by the SEC for their role in the case. The court ordered them to pay more than $9 million in disgorgement — the return of ill-gotten gains — and interest.

In his ruling, U.S. District Judge Sidney H. Stein wrote that the Kerns “violated the security laws repeatedly and with regularity,” refused to take responsibility for their actions, did not cooperate with the SEC’s probe and could not explain the shrinkage of their assets after they had been frozen by the court.

The ruling also noted that Richard Kern had in 1994 been enjoined for life from working in the franchise industry. That came as the result of a Federal Trade Commission lawsuit that accused him and others of operating a franchise scam that fleeced 400 franchisees of $6 million.

As in the SEC matter, Richard Kern told MSNBC.com that he did nothing wrong in that case.

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