It was “one of the largest investment frauds in Long Island history,” said a federal district attorney on Tuesday after Brian R. Callahan of Old Westbury, 44, pleaded guilty to securities and wire fraud in connection with his purchase of Montauk’s failing Panoramic View resort.
Prosecutors from the office of Loretta E. Lynch, United States Attorney for the Eastern District of New York, had accused Mr. Callahan of diverting monies deposited by investors in his mutual and hedge funds to prop up the motel’s shaky finances. With his brother-in-law and co-defendant, Adam J. Manson, a New York resident with offices in Montauk and Great Neck who has pleaded not guilty and will be tried later, he ran a Ponzi scheme that eventually defrauded investors of some $118 million, of which $96 million has yet to be recovered.
The two men bought the resort for $32 million in October 2006. By that time, the D.A. charged, Mr. Callahan, in his capacity as an investment adviser, had already set up a number of offshore shell accounts, creating various hedge funds that held out the promise of multimillion-dollar profits. Each fund, Ponzi-like, would hide the losses of the ones previously created. Mr. Manson is not named in any of those schemes, in which Mr. Callahan is said to have exercised sole control.
The Montauk Fire Department turned over its $600,000 scholarship fund in February 2008 to Mr. Callahan before thinking better of it and pulling the money out in time, after fire commissioners became wary.
The brothers-in-law had planned to sell the Panoramic units as co-ops. They borrowed $45 million from an unnamed financial institution to cover the purchase and renovations, but ran into trouble early on at the start of the long recession. With the units languishing on the market, they found themselves unable to meet the bank note, and, facing foreclosure, ramped up a series of come-ons designed to cover their losses. These included the fire department funds; commissioners were told the money would be invested in mutual funds. Instead, it went to cover the ever-widening debt. Mr. Callahan, who was said to be living the high life, created fake books to cover his crimes, according to the grand jury that indicted him.
In February 2012 his independent auditor resigned. That was the beginning of the end: the Securities and Exchange Commission stepped in the following month.
Under the terms of a plea agreement, Mr. Callahan now faces up to 40 years in prison. As part of the deal, he agreed to forfeit $67.4 million to the government as a fine, including money received from the sale of his properties in Westhampton and Old Westbury. He will be sentenced on Aug. 8 in Central Islip, in the courtroom of U.S. Magistrate Judge A. Kathleen Tomlinson. He remains free on a $2 million bond secured by homes belonging to his sister and father. Zugiel Soto of the D.A.’s office said Mr. Callahan’s victims would be allowed to speak as part of the sentencing process.
The 10-acre beachfront Panoramic, meanwhile, remains under the ownership of the brothers-in-law. The company did not respond to a phone inquiry made yesterday.