Case Study: How Did Charles Banks Defraud Tim Duncan?

 

Summary

Duncan was enticed to invest $7.5 million in a private company that his financial advisor was a majority owner of and the Chairman of the Board of Directors. His advisor failed to disclose the commissions and fees he was making and diverted Duncan’s money to himself yet Duncan did not notice this. The advisor exaggerated the success and returns of the investment but failed to provide crucial information to Duncan that he should have demanded to see.

 

There were a number of red flags that should have been investigated prior to making this investment which may have prevented this $7.5 million fraud from occurring.



In all of my conversations to date with athletes, agents, financial advisors, lawyers, and others, I get asked more often about the fraud against Tim Duncan than any other. It came up twice yesterday! The consensus is if one of the smartest athletes can get taken, then anyone playing sports is shark bait.

 

Duncan’s fraud was perpetrated by Charles Banks, a man who had been Duncan’s financial advisor since he was a rookie in 1997. Due to the pressures of his failing company and overarching greed, Banks targeted a man whose trust he had gained.

In a Nutshell

With a number of misrepresentations, Banks enticed Duncan to invest $7.5 million in a private company, Gameday Entertainment. Banks was the Chairman of the Board of Directors for Gameday and the majority shareholder, owning 42% of the company. Months after Duncan invested $7.5 million, Gameday still needed more money, and Banks deceived Duncan to personally guarantee a $6 million line of credit.

 

Banks then took a $225,000 commission on the $7.5 million investment and a “guarantee fee” of $180,000 on Duncan’s $6 million without disclosing these fees to Duncan. To make matter worse, Banks illegally diverted 20% of Duncan’s 12% annual interest payments on his $7.5 million investment to himself.

 

The fraud was exposed because Duncan was involved in a divorce proceeding, and his divorce lawyer identified that Gameday was not paying Duncan his agreed upon interest payments. The fraud unraveled from there.

 

What can we learn from this fraud as detailed in the SEC’s complaint? What were the red flags that athletes can identify and question going forward?

Conflicts of Interest

When any one of your advisors offers you an investment opportunity of which he has any ownership, employment, or financial stake, you have to question their motives and compensation. Is this investment in the athlete’s best interest or the advisor’s best interest?

 

For a moment, imagine that Banks had no ownership or involvement in Gameday Entertainment. Do you think he would recommend the investment to Duncan? Solely given the fact that Gameday could not have continued operating without Duncan’s money, does this sound like a solid investment? How was the incredibly high-risk nature of this investment disclosed to Duncan? Banks “emphasized that there would be very little risk.”

 

It’s unclear in the SEC complaint whether Banks revealed to Duncan (or in the offering documents) his 42% majority ownership in Gameday, but in an email he stated his role as Chairman of Gameday. Duncan could have conducted his own Google search and found a couple websites mentioning Banks’ ownership with Gameday as well. There's this page from a press kit for a wine Banks invested in, Mulderbosch, and located on Banks’ own website, Terroir Life, which states, in the last paragraph, his affiliation with Gameday:

 

Another post announced a company Banks was creating and stated, “Mr. Banks is also the Chairman of Gameday, a sports marketing and apparel company.”

 

Banks’ ownership and involvement with Gameday are the types of conflicts of interest an athlete has to understand before he makes a private investment in a company that his advisor is recommending. These conflicts may present pressures (as discussed in this blog post) for the advisor to push this investment on you.

SunTrust Raising the Red Flags

From the complaint (paragraphs 56 - 58),

 

“SunTrust responded to Banks that it did not agree with the Investor making the Gameday investment. SunTrust further objected to the Investor borrowing the funds to invest in Gameday. SunTrust told Banks that its concerns arose from the lack of assurance that Gameday would find a second investor and the result that the Investor would not have a first security lien on Gameday's assets.”

 

Despite these explicit warnings, Banks convinced Duncan to continue with the investment and even opened an account for Duncan elsewhere at Comerica Bank, away from the prying eyes of those at SunTrust asking the right questions.

 

Banks responded to SunTrust with this email (paragraph 64),

 

"Gentlemen, [the Investor] asked me to clarify how he is comfortable going forward. [The Investor] has been happy with how we have done things for the last 16 years or so...For private deals, [the Investor] [sic] has set up an account at [C]omerica [B]ank. In the future when he wishes to invest in a private deal he will review with me and then transfer the necessary cash to the [C]omerica account where he will make the investment. This way it is clear that [S]untrust is not advising him in this capacity."

 

Duncan then responded to this email, “[t]hat sounds good to me. Lets keep it simple. Thnx.”

Don't Worry, We Have Another Investor

Duncan continued to go along with this investment with the understanding that Gameday was raising a total of $15 million. That turned out to be untrue and was never disclosed to Duncan.

 

Gameday had $10 million in debt and wanted an additional $5 million to continue operations, thereby looking for $15 million in total investment. With Duncan’s $7.5 million investment, Banks told him that Gameday had another person investing $7.5 million. This additional investor was very important to Duncan because with both investors totaling $15 million, Gameday would have been allowed to pay off all of its debts, and then Duncan and the other investor would have first-lien (or basically, first priority) on all claims of Gameday’s assets in the case of a default on his loan.

 

Gameday never got a second investor. Despite Banks telling Gameday that Duncan “is VERY worried (I'm sure based on SunTrust's comments) that the [second investor isn't] real and that he's being misled into funding," Banks still perpetuated the lie of an additional investor and invested Duncan’s money through Comerica Bank anyway.

Paging Compliance at Comerica Bank

What must Comerica Bank's culture of compliance be if their loan officer (and presumably others within that department) is willing to play along with Banks’ schemes, including:

  • The CEO of Gameday, Jeffrey J. Neal, emailing the loan officer of Comerica that Duncan will personally guarantee a Gameday loan, but Banks said not to transfer any more of Duncan’s money because it would cause a red flag to Duncan.
  • After knowing Duncan already invested $7.5 million in one investment and $1.1 million in another, Comerica took a $6 million personal guarantee from Duncan without having him deposit any additional assets.
  • Banks then directed Comerica to send him the Personal Guarantee Agreement for Duncan instead of directly to Duncan.
  • Banks then directed Comerica to send Duncan only the signature page for the personal guarantee.

Really, Comerica? Whose interest are you acting in here? Another lesson to all that money trumps compliance more often than not (right, Wells Fargo?). You’re on your own.

Please Watch Your Language

Banks used language that should never be used when discussing the potential performance of an investment. Here’s a list of words to run away from:

  • “Home run”
  • “Sure thing”
  • “No downside”
  • “Hottest”
  • “Great deal”
  • “Very little risk”
  • “Personally guarantee”
  • “I can get you 12%”
  • “Make 1.2.-1.5M over the three years”

Trust in Finance Is a Fickle Thing

It’s hard to tell people to to be very skeptical of their advisors, particularly when they’ve known someone as long Duncan knew Banks. But over and over again, pressures arise for advisors that prompt them to take advantage of you, particularly with private investments. In this case, Banks had a majority ownership and Chairman position of a company running out of money. He needed money, and why not take advantage of the athlete who has trusted you for almost two decades and earned over $200 million?

 

I constantly tell people in the sports industry that they should trust their advisors and money managers, but that trust is only skin deep in finance if it’s not backed up by oversight and periodic review. Trust but verify. If advisors know that their activity is being actively monitored, it will act as a deterrent to wrongdoing. 

Private Investment - Normal or Not?

Investing in private companies is a very normal function of our capital markets. Many small companies need investor money because at times they cannot receive loans from banks due to the level of risk that the company will fail and default on their loan.

 

Therefore, these companies solicit investors, usually accredited investors (defined as an individual that has made at least $200k the last two years or has $1 million in investable assets), to provide them capital (in the form of debt or equity) in return for a potentially large return.

 

This all sounds very simple, but it is not. It takes an enormous amount of time and expertise to value a company, understand its many risks, competitors, financials, determine market conditions, and so on. If you are an athlete, odds are you do not have the expertise or time to do this right now.

Lessons Learned

In Duncan’s case, Banks conflicts of interest alone should have raised a ton of red flags. This investment was not in Duncan’s best interest and was sold to him with exaggerations on his return and lies on the details.

 

Duncan should have required evidence from Gameday that the additional $7.5 million was received since it was so important to him to make the investment. Sure, Gameday could have provided Duncan with fake agreements, forged statements or other lies, but that would have made Gameday and their CEO liable for fraud1 as well.

 

SunTrust issued warnings against the investment that Duncan should have investigated. In response to these warnings, his advisor opened an account at another bank with apparently less stringent compliance.

 

Duncan was also not receiving the agreed upon interest that he expected since Banks was diverting 20% of Duncan’s money. However, it appears Duncan was not reviewing his inflows from his investment, another error on Duncan’s part to identify the fraud.

 

To get Duncan to personally guarantee $6 million, Banks sent him only the signature page of the document. Duncan requested an explanation about this signature page, and Banks lied to him. Demand the entire document and review it yourself or pay someone else to review it.

In the End

Four years after the fraud, Banks was charged by the SEC in 2016 and one year later sentenced to four years in prison and ordered to pay restitution to Duncan for $7.5 million. As the complaint stated, “to date, none of the Investor’s investment has been returned to him.”

Footnote

1 - Interestingly, the SEC complaint stated that Gameday’s CEO told a false statement to Duncan’s divorce attorney who was asking questions about Banks diverting a percentage of interest from Duncan’s investment. But when the lawyer demanded documents evidencing the CEO’s false statements, the CEO and Banks finally admitted they were diverting funds. The point is that if Duncan requested documents of the additional $7.5 million, maybe the CEO would not have continued to go along with the lies.