THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Thursday, March 21, 1996 TAG: 9603210363
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY EDWARD POWER, STAFF WRITER
LENGTH: Long : 203 lines
Some of Virginia's and the nation's most reputable banks were duped out of as much as $323 million - money that supposedly was funding for a super-secret project by the Philip Morris Cos. to test cigarette ``alternatives'' of the future, the FBI has charged in an extraordinary affidavit.
The FBI's 15-page account describes phone conferences involving the impersonation of a Philip Morris attorney, faxed letters on bogus Philip Morris corporate stationery, and the fabrication of a multinational cigarette testing program code-named ``Project Star.''
The arrest of two people occurred after a NationsBank official concluded Saturday that something was amiss. On Tuesday, FBI agents arrested on bank fraud charges Edward J. Reiners, 51, of Somers, N.Y., a former Philip Morris employee, and Judy Rose Bachiman, 38, of Cliffside Park, N.J.
After appearing Tuesday before a federal judge in New York, Reiners remained in custody and Bachiman was released on a $40,000 bond. If convicted, they each face up to 30 years in prison and a $1 million fine.
The FBI's investigation into Reiners' and Bachiman's alleged scheme culminated Tuesday morning in Rye Brook, N.Y., as an FBI special agent secretly recorded a meeting between Reiners and officials from NationsBank and Signet Bank, two of the primary lenders allegedly bilked in the scheme. An unidentified woman at the meeting pretended to be Diane M. McAdams, a New York City-based Philip Morris secretary.
Meanwhile, the FBI was able to confirm that the real Diane McAdams was in her Philip Morris Midtown Manhattan office.
Tuesday morning's meeting was one of a series of FBI-monitored conferences, most of them via phone, that bank officials had with Reiners after they became suspicious of his relationship with Philip Morris and the alleged ``Project Star.''
Between the two of them, Charlotte-based NationsBank and Richmond-based Signet had agreed to loan Reiners $145.5 million. Other financial entities that might have lost money were Philadelphia-based Core States Bank N.A., Bank of Montreal, Hitachi American Credit, Signet Leasing, Credit Anstaldt, and Long Term Credit Bank of Japan, the FBI said.
Reiners' and Bachiman's alleged scam began in 1993. The two banks and other financial institutions extended about $323 million in loans to Reiners' ``Project Star.'' The loans were used to finance false leases for computer equipment.
Reiners, who until 1992 worked in the computer systems department at Philip Morris, had done business with one of the bank officials previously, the affidavit said. Until last week, the banks might have had little reason for concern, because Reiners had paid back about $69.5 million of the loans.
The plot first began to unravel, however, in March 1995, when Richard A. Nelson, chairman of Nelco Ltd., a Richmond area computer company, arranged a meeting with a NationsBank official.
At the meeting with NationsBank senior vice-president Mike Keck, Nelson said he had an opportunity to lease millions of dollars in computer equipment to a special Philip Morris research project. Nelson needed to secure a credit line with the bank to finance and secure computers for the deal. Nelson and his company had a nearly 10-year relationship with the bank that was described as ``profitable,'' the FBI said.
Nelco said Wednesday it had not been implicated in the possible fraud.
Nelson's entry into the Philip Morris deal had been arranged through a company called Worldwide Regional Exports, the firm that supposedly had a contract with Philip Morris to further ``Project Star.''
The ``chief operations officer'' of WRE was Edward Reiners.
When Reiners had approached Nelson and his computer leasing company, he had indicated that Philip Morris wanted to keep financing for this secret operation separate from its usual bank deals, according to the FBI. So Nelson was asked to help arrange financing through his lending relationships.
There was one other catch, said the FBI: As part of the loan deals, all of the banks were asked to sign ``confidentiality agreements.'' These agreements limited the banks' contact with Philip Morris to one person - Edward Reiners.
The banks, the FBI said, signed on the dotted line.
The charade was so elaborate, says the FBI, that NationsBank was told that IBM was producing and shipping computers without serial numbers for the Philip Morris program.
According to the FBI, NationsBank also was told that ``Philip Morris has established each research center with a non-descript operating name. Employees in each facility maintain the computer testing equipment and do not know the ownership structure of the research entity that employs them.''
Reiners' alleged scam continued into the early fall of 1995, when Nelco, the computer leasing company, approached NationsBank again and requested $70 million in credit in addition to the $64.5 million the bank already had granted. NationsBank agreed to extend the company $20 million more, the FBI said, but began farming out pieces of the additional financing to other lending institutions. One of the firms, Long Term Credit Bank of Japan, agreed to loan $20 million.
Within a few months of that agreement, officials began to get suspicious about Reiners and his alleged relationship with Philip Morris.
The first question was raised by Long Term Credit Bank of Japan. The Japanese bank had been given a certificate attesting that Reiners and his company had full authority from Philip Morris, until the year 2003, to execute leases and other deals on the cigarette maker's behalf. The certificate appeared to have been signed by Reiners and Diane McAdams.
Concerned about the document's authenticity, the Japanese bank faxed a copy to McAdams - at Philip Morris' Manhattan office.
In a letter dated March 15, 1996, McAdams faxed back to the Japanese bank a response that, in part, said: ``This is a phony certificate. Mr. Edward J. Reiners is not an elected officer of the Philip Morris Companies, Incorporated. I do not know a Mr. Edward J. Reiners, and the signature that appears on the certificate is not mine.''
Things began to happen quickly.
Saturday, Robert R. Wetteroff, a Richmond-based executive vice-president of NationsBank, learned of the concerns raised about the certificate. He and other bank officials, including representatives of Signet, began an investigation. That resulted in a phone call to Richard Nelson of the Nelco computer firm. He, in turn, called Edward Reiners.
In the midst of this, Reiners contacted an Atlanta NationsBank attorney, Gerald Blanchard. Reiners placed a conference call to Blanchard and said he had a third party on the line - G.P. Holsenbeck, a Philip Morris lawyer.
When asked about the letter from McAdams stating that she did not know Reiners and that her signature had been faked, Reiners explained that such a response ``was a standard operational procedure for any inquiries regarding Project Star'' because of its super-secret status.
NationsBank's Blanchard, however, was suspicious, the FBI said. So, using the Richmond law firm of Hunton and Williams as a go-between, he arranged another call between himself and Philip Morris. He asked to speak to Holsenbeck, the cigarette maker's lawyer.
One of the first things Blanchard asked Holsenbeck was whether they had spoken earlier in the day.
``No,'' Holsenbeck said.
Late Sunday night, a two-page document was faxed to NationsBank that supposedly was a refutation by Diane McAdams of her earlier letter stating that she did not know of Reiners or the secret project.
``I responded in order to protect the confidentiality and high level of security surrounding Project Star,'' the document said. It was signed ``Sincerely, Diane M. McAdams.''
Minutes later, a NationsBank officer called to confirm receipt of the fax, and a female who answered ``declined to discuss the contents of the fax, stating she was tired and wanted to go home.''
The FBI said it checked the area code for the phone number and found that it was not in Manhattan but in the White Plains, N.Y., area.
On Monday, FBI Special Agent James M. Glynn went to the Philip Morris Manhattan office and showed McAdams a copy of the two-page fax. She said she had never seen the letter and that the signature was not hers.
Meanwhile, Holsenbeck, the Philip Morris attorney, was reviewing the story with the FBI. He told agents that Philip Morris did not have a ``Project Star'' research program and that the company had no records of any such financing agreements with NationsBank, Signet or any of the other institutions.
Even as details of the alleged deception were being discovered, the FBI said, Reiners continued painting an increasingly elaborate picture of a Philip Morris cover for the project, saying that if asked ``the company's official response would be to deny his employment.''
The FBI began to close in on Reiners and Bachiman.
On Monday, Nelson, head of the Nelco computer firm, set up a meeting with Reiners. He said he would charter a plane and fly, along with representatives of NationsBank and Signet, to the Westchester, N.Y., airport. From there they would proceed to Rye Brook and a meeting with Reiners and, supposedly, with Diane McAdams of Philip Morris.
On Tuesday morning, as the FBI electronically monitored the meeting, an FBI special agent contacted the real McAdams in Manhattan and confirmed that she was not in Rye Brook.
Later, Reiners and Bachiman were arrested and charged.
In its affidavit, the FBI concluded ``the so-called Project Star research project is completely fictitious.'' The FBI document is an affidavit filed in the U.S. District Court in Richmond. MEMO: Banks say impact on earnings will be negligible/A13
ILLUSTRATION: Banks and financial companies involved:
Signet Bank
NationsBank
Bank of Montreal
Hitachi American Credit
Signet Leasing
Core States Bank N.A.
Credit Anstaldt
Long Term Credit Bank of Japan
What some of the banks say their losses could total.
Signet Bank: $81 million
NationsBank: $60 million
Bank of Montreal: $87 million
Core States Bank N.A.: less than $20 million
HOW IT HAPPENED
1993: Edward J. Reiners secures an $81 million loan from
Richmond-based Signet Bank for a supposed top-secret research
project by cigarette maker Philip Morris. Reiners insists that the
financing be separate from other Philip Morris accounts and that all
contacts about the loans go through him. (From then until early this
year, Signet and other banks would loan more than $323 million.)
March 1995: NationsBank agrees to loan $64.5 million.
Fall 1995: After being asked for an additional $70 million,
NationsBank agrees to loan $20 million and the Long Term Credit Bank
of Japan agrees to loan $20 million.
Friday, March 15: The Japanese bank asks about a loan document
and receives a fax that says, in part: ``This is a phony
certificate.''
Saturday, March 16: A NationsBank official makes a conference
call to Reiners, who says he has a Philip Morris attorney with him.
Later, the real Philip Morris attorney says he was not on the
call.
Tuesday, March 19: Reiners and an associate are arrested after
the FBI confirms that Reiners had deceived bank officials at a
meeting earlier in the day.
KEYWORDS: ARREST PHILIP MORRIS PROJECT STAR BANK FRAUD by CNB