Judge rules Vertical Group CEO owes defrauded investors $2.76 million

Thursday, April 15, 2010 | 5:51 p.m. CDT; updated 11:58 a.m. CDT, Wednesday, May 5, 2010

COLUMBIA — A Columbia man owes $2.76 million to a group of investors defrauded nearly five years ago by his investment group, a federal bankruptcy judge ruled Wednesday.

Nathan Reuter, 51, founder and CEO of Vertical Group, LLC, filed for Chapter 11 bankruptcy in 2007 when a group of nine investors sued him for losing their money in an investment scam coordinated by Reuter and three other men who have been convicted in federal court on charges related to the scandal.

Daryl Miles Brown, the president of Cerebus Inc., which was tied to Vertical, was sentenced to 15 years in a federal prison for three counts of fraud. Sylvester Mitchell and Bud Wofford, who were officers in the company, pleaded guilty to federal fraud charges. All three men worked in Columbia.

Reuter was not charged in the scam.

According to court documents, the investors who lost money in Reuter’s company are entitled to recoup the money they invested, plus punitive damages equal to twice the amount they invested. Five of the investors will also receive money for attorneys’ fees.

Reuter testified that he had been “duped” in the scam along with the investors, according to court documents. U.S. Bankruptcy Judge Dennis Dow of the Western District of Missouri, wrote in the opinion that Reuter’s testimony was “completely disingenuous.”

Dow wrote that Reuter, who graduated from MU in 1980 with a degree in agricultural economics and had partly or fully owned two mortgage finance companies, created a “false impression of legitimacy, trustworthiness and credibility” to the company’s investors when encouraging them to invest funds in his company.

“He was tremendously wealthy, owned real estate in the community, owned the beautiful building in which Vertical’s offices were located and was known as a man of his word,” Dow wrote.

Reuter’s debts to the investors, Dow wrote, are the result of his “false pretenses” and “false representations.” 

David Brown, an attorney for the investors, who is not related to Daryl Miles Brown, said in a release that his clients were “vindicated” by the ruling. 

Mike Trom of Columbia was Reuter’s friend and neighbor when the fraudulent investments began in late 2004 and was the first to invest in the scam, to the tune of $175,000.

He and the other investors were told their money would be placed in an escrow account and that the funds would be used to acquire “standby letters of credit,” which would generate huge returns. Trom said he was told he would receive $500,000 a month two weeks after his investment.

Trom said he was happy with the court’s ruling.

“It’s been a long time coming, but it ain’t over yet,” Trom said.

Under a Chapter 11 bankruptcy, Reuter’s debt to the investors has been restructured, and he must act in “good faith” to pay them back. According to a court-approved plan, he must make payments funded by the sale of some of his personal stock and the income he makes from his work as a carpenter. But Reuter has said that he has no income because of the downturn in construction.

Dow ruled in favor of the investors, however, who claimed Reuter has used the bankruptcy to conceal the true amount of his income. The judge wrote that Reuter filed the bankruptcy with the intention of avoiding payment of civil claims filed by investors to the greatest extent possible.

David Brown said the judge’s ruling indicates that Dow favors converting the bankruptcy into a Chapter 7 bankruptcy, in which Reuter’s assets and holdings in a trust fund that he entered into with his wife could be liquidated. He said the judge could make the decision to alter the bankruptcy within 30 days.  

It is unclear at this point when the investors will get their money back, but David Brown said they could receive damages within a year.

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