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CaroLinks founder accused of fraud by AG
By Dan McCue
Staff Writer
The S.C. Attorney General’s office has filed a formal administrative charge of securities fraud against CaroLinks’ founder Lucy Duncan-Scheman for allegedly using nearly $5 million of 27 investors’ money for personal and household expenses.
The investments were to be used to create an intermodal logistics network linking a private cargo container operation to an inland site in Orangeburg.
If the charges contained in the 19-page order signed by Assistant Attorney General Tracy A. Meyers on Oct. 12 stand, Duncan-Scheman and her company could be liable for at least $50,000 in civil penalties as well as the costs related to the state’s investigation.
Duncan-Scheman now has until Nov. 12 to answer the charges or request an administrative
hearing.
Alan Capper, spokesman for CaroLinks, said word of the charges came “as a bolt out of the blue.”
He described the situation as a “serious misunderstanding of the facts and the measures taken by CaroLinks to protect its shareholders,” adding that the company intended to “vigorously contest the matter.”
At the same time, Capper added that CaroLinks is cooperating with the attorney general’s office and is in the process of resolving the issue.
According to the order, Duncan-Scheman committed securities fraud — violating the South Carolina Uniform Securities Act of 2005 and the S.C. Prior Act — by telling investors between Aug. 1, 2005, and Sept. 1, 2007, that she would use the money for certain purposes, then using some of it for personal and household expenses.
The Prior Act defines the type of investment opportunity CaroLinks offered potential investors as a “security.” It also makes it illegal for any person to transact business in the state as a broker-dealer or agent unless that person is registered under the Prior Act or somehow exempt from licensing.
The South Carolina Uniform Securities Act not only encompasses those definitions, but also makes it unlawful to engage in a scheme to defraud and gives the attorney general’s office broad powers to investigate such matters.
The agencies said it first received information regarding these allegations on April 20, 2006.
The investments detailed in the order begin on Aug. 1, 2005, 11 days before Carolina
Linkages LLC filed papers of its creation with the S.C. Secretary of State’s office. On Sept. 2, 2005, a bank account was opened in the name of “Carolina Linkages LLC” at Carolina First Bank. A little more than a month later, a second CaroLinks account was established with Bank of America.
Over the course of the next two years, the order states, investments of as little as $18,000 and as much as $500,000 poured into the company and was deposited into an account CaroLinks maintained with the Bank of America.
However, according to the attorney general’s securities division, the money rarely stayed there long, often being “used by Duncan-Scheman for her own benefit.”
The attorney general’s allegations include using later investors’ money to pay off earlier investors, using invested funds to offset overdrafts in the Bank of America account, and, on one occasion, May 5, 2006, transferring $50,000 from CaroLinks’ Bank of America account into the individual retirement account of Ronald Scheman, Duncan-Scheman’s husband.
That latter transfer caused an overdraft of CaroLinks’ Bank of America account that was made up 10 days later by an investment by an unidentified family.
On May 16, 2006, just six days after the investment covered that overdraft, a $50,000 investment by another party was used to cover another overdraft of the account.
Other money transfers also allegedly went into an a separate Bank of America account Duncan-Scheman maintained for two earlier business entities she founded, Diplomatic Resolutions and Safe-Ports.
The order states that in early spring 2007, securities division staff arranged for Duncan-Scheman to give a statement under oath.
During her May 1, 2007, statement, Duncan-Scheman testified that Safe-Ports and Diplomatic Resolutions were no longer operating entities.
Securities division staff said they subsequently confirmed this statement through an analysis of
the Diplomatic Resolutions/Safe-Ports account that showed the account was used primarily or exclusively for Duncan-Scheman’s personal and household expenditures.
The order said Duncan-Scheman also admitted under oath that neither she nor CaroLinks was registered to sell securities. She also agreed not to offer or sell any securities in or from the state of South Carolina for at least five years.
The securities division issued the Oct. 12 order after it learned recently that Duncan-Scheman violated a promise made in May not to sell more securities. The order does not preclude the filing of lawsuits against Duncan-Scheman or CaroLinks, nor does it preclude the filing of future criminal actions against the company.
The charges come at a time when CaroLinks’ principals thought they had put the company’s hardships behind them. Just last week, CaroLinks settled a lawsuit filed by a North Carolina developer over a $500,000 loan given to the Charleston-based logistics company in support of its plans to establish an inland port, and it also satisfied an outstanding tax debt to the state of South Carolina of more than $82,000, and another outstanding tax debt, of nearly
$483,000 to the federal government.
Only days before news of the attorney general office’s action, Capper said confidently that the company had settled all its outstanding liabilities.
“We’ve settled everything,” he said.
Capper went on to say that the company’s principals had “learned a lot” over the two years that transpired since it originally announced its inland port and intermodal plan.
“The experience has made us tougher and very, very focused on our company’s purpose and objectives,” he said. “I think the future is going to be an extension of what we’ve been about
all along. What we are doing is offering our clients turnkey solutions on site selection, property development and logistics…and we’ll be far more than simply a consultancy.
“We could also consider doing a commerce park again. It all depends on what our client base is going to need.”
Capper also said the company would be focusing its energy on projects throughout the United States.
“What we see now is that we will be a national company,” he said.
Despite the gravity of the charges against the company’s founder, Capper still sounded hopeful when discussing the securities fraud charges.
“We do believe that we can resolve this issue satisfactorily,” he said.
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@setcommedia.com.
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