A highflying Chicago aviation entrepreneur fought Monday in federal court to keep his company from crashing to the ground, as federal regulators tried to convince a judge that he has actually been operating a "massive Ponzi scheme."
Brian Hollnagel, 34, acknowledges that his company, BCI Aircraft Leasing Inc., engaged in some sloppy bookkeeping, but he says the firm remains worth more than $100 million and is willing and able to buy out any unhappy investors.
Lawyers for the Securities and Exchange Commission say that privately held BCI is actually worth about negative $6.6 million and that the firm has used some investors' money to make payments to others, creating an illusion of profit.
They levied the "Ponzi scheme" charge in a civil lawsuit filed last week against Hollnagel and Chicago-based BCI.
BCI lawyer William Holmes defended Hollnagel and the company on Monday as a firm that makes a legitimate profit buying and leasing aircraft.
"This is not a Ponzi scheme," Holmes said, pounding the lectern for emphasis. "I vehemently object to that characterization. It is flat-out wrong."
The SEC lawyers want U.S. District Judge Elaine Bucklo to appoint a receiver to take control of the firm to protect investors. Bucklo said she may rule as early as Tuesday.
SEC officials also allege that Hollnagel improperly loaned himself about $8.2 million in company funds -- with no interest and no documentation.
In the lawsuit, SEC officials say Hollnagel used "these purported loans to purchase a Porsche, a Bentley, a Range Rover, a yacht, two homes totaling about $850,000 and a $3 million down payment on a third home in Aspen, Colorado."
Hollnagel's lawyers argue that the money he borrowed did not come from investor funds.
Bucklo did not indicate how she would rule, but she quizzed SEC lawyers about whether they could show that BCI cheated investors out of a specific amount of money.
"Their accounting is terrible," Bucklo said. "They've done some things they shouldn't have done. ... But were investors ultimately harmed?"
SEC lawyer Gregory von Schaumburg said BCI officials didn't tell investors key facts, such as how their poor accounting would prevent the company from knowing exactly where investor money went.
"They were not given the complete information they needed," von Schaumburg said Monday in court. "Material facts were omitted."
That BCI might have been struggling with its bookkeeping was no excuse, von Schaumburg said. "They shouldn't be able to hide behind their accounting problems," he said.
SEC officials said Hollnagel raised at least $82 million from investors from 1999 to 2006.
Hollnagel's lawyers say the investors who have stepped forward want to keep Hollnagel at the helm.
In letters and testimony several agreed with BCI officials that if Bucklo appoints a receiver banks would rush to call in their loans and the company might not survive.
SEC lawyers argued that the critical issue was not what investors said they wanted but rather whether BCI and Hollnagel had told them the truth about the state of the company.
SEC lawyers also urged Bucklo to consider an unrelated federal case in which U.S. Magistrate Judge Morton Denlow had heard Hollnagel's testimony and found him "not credible.'
BCI lawyer Paula Junghans said after the hearing Monday that she did not believe the government's case against Hollnagel would escalate.
"This is a civil case where the SEC is struggling to prove that anyone lost any money," Junghans said. "I can't imagine that anyone would make this into a criminal case."
Hollnagel, a self-described "aviation geek," started his company in 1999. He raised $5 million from friends and local investors and received a loan from Bank of America to buy two 737-200s for $18 million from aircraft leasing company AAR Corp. that were on lease to Aloha Airlines.
By 2006 the firm owned 97 aircraft worth nearly $1 billion, he told the Tribune last year.
