CHAMPAIGN — Details of how Timothy Roth put together a $16 million fraud scheme — and how he got caught — emerged in a 32-page plea agreement filed in federal court in Peoria last week.
On Tuesday, the former Urbana resident pleaded guilty to one count of mail fraud and one count of money laundering in connection with a scheme that cost several companies millions of dollars.
Roth, 56, of Stonington admitted he defrauded 12 victims — companies and individuals — in the scheme that started in May 2004 and continued until March of this year.
Beginning in 2004, Roth began fraudulently removing money from the investment plan accounts of individual mutual fund clients for his own personal and business use.
As a result, four clients lost about $1.63 million.
Then, in August 2006, Roth began transferring, liquidating and removing shares from the accounts of seven mutual plan option clients for his personal and business use.
As a result, seven companies and organizations that had option plans for executive compensation lost a total of $14.3 million.
The first institution to be victimized was River Forest-based Dominican University, with about $340,000 being misappropriated over an eight-month period.
Two years later, Roth began misappropriating money from Virginia-based Sentara Healthcare, which eventually suffered the biggest loss: nearly $7.6 million.
The misappropriations picked up steam in late 2010 as Roth began misappropriating funds from five other companies and organizations.
Roth also pleaded guilty to defrauding a 12th victim — who, like the four individual clients, was not identified in the plea agreement.
In that case, Roth served as treasurer of the entity and removed $128,000 from its accounts, using it for unauthorized purposes.
That brought the total loss for all victims to an estimated $16,151,964.76, according to court documents.
Here's how the fraud scheme came about, according to the plea agreement:
In 1999, Roth formed Keysoft Consulting Group, which offered third-party administrators of mutual fund option plans a software program that would help them track the plans.
In June 2002, he became an investment adviser for an affiliate of New Jersey-based Comprehensive Capital Management. In that role, he managed mutual fund option plans for client companies.
Keysoft Consulting provided various services for clients. In some cases, it offered record-keeping functions for the plans. In other cases, it helped manage distributions to employees who exercised mutual fund options.
In 2002, Keysoft began providing services to TIC Holdings, a Colorado-based industrial contractor, and later extended services to other clients including Sentara Healthcare, Great Lakes Higher Education, Dominican University and North States Industries.
Keysoft also provided services to Qualified Plan Services, a third-party administrator for the plans of Western Disposal and the Speciality Equipment Market Association.
In March 2003, Roth created a company called Keyop Exercises to help simplify distributions to employees who exercised their options.
He established accounts for Keyop at Merrill Lynch, CUNA Mutual, Prudential and TD Ameritrade.
The accounts at Merrill Lynch, CUNA Mutual and Prudential were cash investment accounts, meaning Roth could buy additional securities in those accounts only if sufficient cash was available.
But the TD Ameritrade account was established as a margin account, meaning TD Ameritrade could lend Keyop part of the market value of securities in the account to buy additional securities.
That allowed Roth to buy securities on loan, using other securities as collateral.
Eventually, Roth moved mutual fund shares from client accounts to the TD Ameritrade margin account he held in Keyop's name.
"These fraudulent transfers allowed Roth to use the mutual fund assets as collateral to purchase stocks on margin intended for Roth's personal gain," the plea agreement stated.
Roth also transferred mutual fund shares from client accounts to the Keyop account. He then sold the shares, reducing his margin loan balance, while generating cash in the Keyop account.
"These fraudulent transactions allowed Roth to transfer cash to finance his personal expenses and business ventures, including companies like VCN Celect and Mezolink," the plea agreement said.
VCN Celect, based in Evanston, marketed various services — including website design, online social networking and online financial management — to fraternal, business and faith-based organizations. Roth served in several roles for that company, including CEO.
Mezolink was a data services company based in the M2 building in downtown Champaign. Roth was its CEO.
As the misappropriations picked up steam in late 2010, Roth took steps that eventually led to the discovery of his misdeeds.
On Dec. 2, 2010, he made a call to TD Ameritrade, requesting that shares of two mutual funds be moved from Great Lakes Higher Education's account to Keyop's margin account.
Five days later, he sold the shares, resulting in the deposit of $1.65 million in his Keyop account. None of that money was returned to Great Lakes.
Two months later — on Feb. 11 of this year — Great Lakes asked that some of its mutual fund shares be liquidated and distributed to four employees.
That's when an attempted cover-up began.
On Feb. 15, Roth altered the distribution requests and faxed them to TD Ameritrade. But because he had already liquidated many of the shares, the accounts no longer had enough money to cover the distributions sought by Great Lakes.
To help conceal the fraudulent withdrawals, Roth on Feb. 16 wired $45,000 from Keysoft's bank account. That money consisted of income from Chapter Communications — a business with which Roth was affiliated and a forerunner of Celect.
Roth issued and mailed checks to the four employees who had requested distributions. But the checks were returned because the Keyop account had insufficient funds.
According to a press release from the U.S. attorney's office, the federal investigation into Roth's actions were triggered by a telephone inquiry by an investment advisory company to the Champaign Police Department in March 2011.
The case eventually involved the FBI, the Internal Revenue Service, the Postal Inspection Service and the Illinois secretary of state's securities department — as well as the Securities and Exchange Commission, which filed a civil suit against Roth in U.S. District Court this spring.
Roth is scheduled to be sentenced July 24, 2012, on the criminal counts. Mail fraud carries a maximum penalty of 20 years in prison, while money laundering carries a maximum prison sentence of 10 years. He could also be ordered to pay restitution to victims.
Prosecutors said they would recommend a sentence toward the low end of sentencing guidelines, given that Roth gave timely notification of his intention to plead guilty, allowing the government to avoid having to prepare for trial.