Blue Bear: ‘Birth of a Ponzi-type scheme’

WINDSOR — About 15 years ago, investors in a Windsor-based factoring company began to receive troubling hints that their investments, which at first had yielded substantial returns, were in danger.

The subsequent collapse of Blue Bear Funding LLC left more than 400 investors with worthless stock in Blue Bear or its affiliates, with many of those investors losing tens or hundreds of thousands of dollars — some losing college funds or their retirement savings.

Blue Bear turned out to be a teetering house of cards built on misplaced investor trust and worthless invoices that evolved into an elaborate shell game meant to keep regulators off its scent.

The Blue Bear saga has unfolded slowly in the pages of court documents and bankruptcy filings and as a 10-year-old trust established to manage and disburse any recovered funds comes to an end.

Just how and when the Blue Bear Ponzi scheme was first born may never be fully understood by anyone outside of a tight circle of business partners, consultants and attorneys. However, buried amid a mountain of legal filings and a maze of court documents, there lies a clue.

Perhaps the idea for the scheme, which in the mid-2000s resulted in hundreds of investors losing life savings, college funds and retirement nest eggs, was sparked as early as 1996.

That’s the year that David Karst, who would go on to be Blue Bear’s managing partner, first learned about factoring, court documents allege. 

Karst did not respond to requests for comment, however he appears to still reside in the area. A Linked In account for a David Karst in Fort Collins lists his current position as a district sales manager for Varco Pruden Buildings. Voting records from the Colorado Secretary of State’s office show a David Karst of Fort Collins voted in Larimer County as recently as 2018.

What is factoring?

Factoring is the business of purchasing accounts receivable from cash-strapped companies. The factoring companies generally purchase the accounts for around 80 percent to 90 percent of total value, then attempt to make money by collecting the entire amount owed.

Factoring has become an increasingly common financial tool in recent years. In the United States, the factoring volume increased from $80.6 billion in 2016 to $85.5 billion in 2018, according to the Commercial Finance Association’s Annual Asset-Based Industry and Annual Factoring Industry survey.

While fraud can occur with any type of business or financial transaction, factoring is an area that’s particularly ripe for abuse. That’s because it is relatively simple to falsify invoices and accounts receivable records.   

Promises of healthy returns on investments

“In May 1996, with no background in complex financial transactions or other banking experience or knowledge, Karst attended an eight-day course in factoring,” according to 2007 court documents filed in Weld County.

Several years later, “seeing an opportunity to make significant money,” Karst decided to dive into the factoring business, those documents say. In 2001, he formed Nationwide Cash Flow Specialists, referred to in court documents as “NCFS.”

The factoring firm went about gathering investors with promises of annual returns of 12 percent or higher.

Not long after Nationwide was formed, Karst began to worry about regulatory scrutiny because he was issuing too many non-accredited investments. The U.S. Securities and Exchange Commission under federal securities laws limits the number of non-accredited investors for each factoring entity to 39. To prevent the SEC from sniffing around too closely, Karst began forming separate independent factoring companies, known as IFCs. Each of the nine IFCs “would not have more than 35 non-accreditied investors,” court filings show.

“The IFCs were simply an instrument for soliciting investments in the single enterprise without becoming subject to securities regulations,” according to those documents.

Blue Bear started business in late 2003 as 1st American Factoring LLC. According to contracts dated 2004, Karst formed Blue Bear — then 1st American — with assistance from local consultant Russell Disberger in order to serve as a broker for the IFCs. Companies controlled by the two men were part owners in Blue Bear. Other owners included Don and Kris Donahoo, Gerald and Peggy Makey and Steven Short.

Disberger, who now runs the consulting firm Aspen Business Group, told BizWest that he and Short were “sucked in and drug along” with the enterprise without knowledge of the underlying scheme.

Darin DeVoe, who owned Windsor-based Home Owners Solutions LLC and The DeVoe Group LLC, is thought to be one of the original architects of the Blue Bear scheme. DeVoe, who was indicted on securities fraud in 2007 and remains on the run from the authorities to this day, is alleged to have been paid by Blue Bear for early legal fees and research.

DeVoe’s involvement with Blue Bear appeared to end at its early stages, but that involvement would prove to be significant. Virginia Brinkman, who set up Sierra Factoring LLC, also acted as the manager of DeVoe’s Home Owners Solutions, according to Colorado business registration documents. Sierra was one of Blue Bear’s IFCs. Brinkman likely still lives in Northern Colorado — she voted in Larimer County as recently as 2018.

Once up and running, “Blue Bear then raised enough initial capital to purchase all of the assets of [Nationwide Cash Flow’s], the proceeds of which were paid to [Nationwide’s earlier] investors,” according to court documents. “The assets received by Blue Bear, however, were non-performing accounts receivable and loans that were … transferred to one or more of the IFCs.”

This is the turning point of the scheme: the firm was paying out early investors with new investors’ money and taking on essentially worthless accounts receivable.

“Almost from inception and unbeknownst to investors, Blue Bear and the IFCs … were insolvent,” according to court documents. “As new investments were made, existing investors were paid regardless of which entity they had invested in, and new investors were sought to pay the previous round of investors…”

Funds to pay those previous investors were raised by new investors, according to a 2006 Blue Bear financial disclosure statement. “In short, the birth of a Ponzi-type scheme.”

Blue Bear formed an investment committee to review and approve funding and other investment decisions. But “Karst would regularly invest and direct” company funds “without consulting such committee,” the disclosure statement said.

Ponzi schemes are by their very nature unsustainable over long periods of time and by the end of 2004, Blue Bear was running out of cash.

John Davis, who joined Blue Bear in 2004 as a broker, became the firm’s chief operating officer in early 2005. He soon began making a series of startling discoveries.

According to BizWest reporting from 2006, Davis found:

• Incomplete client files, including a lack of information on Blue Bear’s security interests or lien positions.

• The IFC monthly earnings statements prepared primarily by Karst on an accrual basis did not reconcile to the existing accounting records of Blue Bear.

• Entries in the general ledger that had no supporting documentation or explanation.

• The 2003 audit was not completed, so no financials had been prepared or generated.

• Several major accounts were nonperforming.

• All Blue Bear funds were being co-mingled in one bank account.

• There was no credit limit on the existing accounts.

• The IFC executive directors did not know what accounts they funded and to what extent.

In mid-2005, Davis brought Fort Collins-based accounting firm Sample and Bailey to help him get his arms around the problem.

It was then the extent of the scheme began to seep out and ultimately unravel, leading to Blue Bear’s bankruptcy.

It’s unclear what Davis is up to now, but there is an active Linked In account for a John Davis who worked for Blue Bear from 2004 to 2009. That account indicates Davis lives in Illinois.

Related cases

The story doesn’t end with Blue Bear’s bankruptcy, and the web of related schemes stretches from Northern Colorado to New Hampshire.

One of Karst’s early investors with Nationwide Cash Flow was a company called Managed Cash Flow, operated by Gene Little.

Fort Collins-based Managed Cash Flow operated as an investment vehicle, bringing on board more than 400 investors with promises of healthy returns.

Little, whose Linked In account suggests he still lives in Fort Collins and works as a project manager at Shoenberg Farms Commercial Center in Westminster, was indicted in 2007 in Colorado on 42 counts of securities fraud and one count of theft related to Managed Cash Flow’s investments.

The indictment charged that Little actually invested a tiny fraction of the roughly $11 million he solicited from investors in Nationwide Cash Flow. The rest of the money was allegedly used to pay the promised 15 percent return to MCF investors and to pay Little’s company.

In 2008, Manchester, New Hampshire-based investment outfit Noble Trust Co. went belly up and the state’s banking department took control of its operations after allegations surfaced that it had hidden $15 million in lost investments.

Who, according to Noble president Colin Lindsey, was responsible for losing all that money? Well, the Blue Bear and Sierra Factoring folks, naturally.

Lindsey was sentenced in 2009 to 51 months in prison for the development of his own Ponzi-like scheme in which he lured in new investors to pay off the $15 million he lost investing in the Colorado firms.

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