HRK Holdings founder faces $2 million fraud lawsuit

jsalman@bradenton.comOctober 21, 2012 

PALMETTO -- HRK Holdings LLC founder and Chairman William "Mickey" F. Harley III financed operations at Piney Point and other business interests with an investment fund supported in part by a charity, court records show.

The New York financier is now facing a federal lawsuit from a massive Pittsburgh nonprofit that claims he defrauded the organization of $2 million.

Following promises of big returns, Harley used the investment to instead buy himself shares in the lingerie company Frederick's of Hollywood that he also oversees, according to the lawsuit filed Aug. 28 by the Claude Worthington Benedum Foundation.

Harley later used the account to loan HRK operating funds just before dredging at Piney Point and during the company's bankruptcy, according to emails, court records and financial statements obtained by the Herald.

But when things took a turn for the worse -- and the Claude Worthington Benedum Foundation came calling for the remaining assets -- Harley cut the phone line of the company that managed the account, packed up his office and quietly moved the operation into the basement of a Hooters restaurant on Long Island, the lawsuit claims.

The Benedum Foundation donates a portion of its proceeds to charities in Pennsylvania and West Virginia. Officials from the group declined to comment Friday.

In its lawsuit, the Benedum Foundation claims that "Harley admitted to a representative of the Foundation ... that in late 2007 the fund had started to have problems and, further, that a number of large investors wanted to pull out of the fund, having made redemption requests."

The foundation claims Harley committed fraudulent negligence, misrepresentation and breach of fiduciary duty, and the lawsuit is

seeking the $2 million plus punitive damages and attorneys' fees.

Justin Romano, an attorney representing Harley, did not return several phone calls made to his Pittsburgh office.

Lawsuit tracks shrinking fund

The Benedum Foundation invested $2 million in 2005 into an "offshore multi-strategy fund" managed by Harley at Mellon Financial, according to the lawsuit. After a merger three years later with the Bank of New York, Harley purchased the fund and continued to manage it through his newly formed company, Fursa Alternative Strategies LLC.

At that time, he told Benedum the investment had grown to $2.5 million, the lawsuit states.

But in the months that followed, reports from Harley's company showed substantial losses -- slimming the account down to $306,000 by March 2008, according to the lawsuit.

In 2009, Harley told the foundation he would liquidate and return the remaining assets. Benedum has yet to see a penny, the litigation states.

The lawsuit points to Fursa's investments in Frederick's of Hollywood Group Inc. Fursa owns just less than half of the total stock of Frederick's, which lists Harley as an active board member.

Shares at the company have fallen from more than $4.50 at the time of Benedum's investment to Harley down to just 29 cents last week, according to the U.S. Securities and Exchange Commission.

Despite $91 million in sales, the company reported a $2.56 million loss for the nine months that ended April 28.

Thousands in loans to HRK

Harley has since turned the fund holding Benedum's investment into the Arsenal Group, according to the lawsuit. Arsenal has provided hundreds of thousands of dollars in stopgap loans to keep HRK operating through its Chapter 11 bankruptcy.

The majority of shares at HRK Holdings and its sister firm HRK Industries LLC, created for the leasing business at Piney Point, remain controlled by Arsenal, according to the federal bankruptcy court in Tampa.

HRK's CEO Jordan Levy and Chief Financial Officer Lionel Singh both are listed as Arsenal employees on the telephone voicemail directory of the Amityville, N.Y. company. Neither responded to voicemails.

During a hearing in July, Harley testified before a trustee representing the federal government that he personally loaned $800,000 to HRK in the 24 months leading up to February 2011, when he collected the owed funds.

Harley told the trustee that during that same month, Arsenal lent $2.8 million to HRK for operations at Piney Point. Plans for repayment were stymied by the toxic spill, bankruptcy records show.

The Benedum Foundation believes the account that ultimately became Arsenal at one time held upwards of $108 million, with the nonprofit as one of the smaller investors.

Piney Point is a former phosphate facility purchased by HRK in 2006 to serve as disposal grounds for Port Manatee's Berth 12 dredging project, the focus of a $200 million decadelong expansion to accommodate larger cargo ships.

In May 2011, the pipes and liners housing the dredged material sprung leaks, sending 170 million gallons of toxic water into nearby ditches and ultimately Bishop Harbor on southern Tampa Bay.

A series of Bradenton Herald reports show the spill could have been averted had the state stopped the project when a tear was discovered in the liner months before a similar rupture polluted the harbor.

HRK and state officials never notified port staff of any previous problems before the disaster.

The Department of Environmental Protection also never applied a commonly used protective dirt cover on the exterior of the gypsum stack, which could have prevented some of the damage that's believed to have contributed to the rips, reports show.

Since Mulberry Phosphates abandoned the fertilizer processing facility in 2001, the state has spent more than $143 million in taxpayer money trying to close Piney Point. At least $15.8 million worth of cleanup will fall again on taxpayers if the embattled firm crumbles before May 1, records show.

Harley is the original founder, primary financier and chairman of HRK. But port officials say they never worked with Harley during meetings planning HRK's role in the project.

"We don't even know the name," said Steve Tyndal, senior director of trade development and special projects for the port. "There's no recollection from anyone on staff having interactions involving him. To us, HRK is just three letters."

But at least one other stakeholder said the port was warned of Harley's background.

"This is no surprise," said Jim Mikes, who is also legally pursuing Harley for his role in Piney Point. "I told the port about his history a long time ago and they just dismissed it. They knew about his problems."

When Harley and HRK acquired Piney Point from Mulberry's bankruptcy estate, the DEP issued a $3.8 million mortgage to assist HRK, which was later reduced to $1.2 million, an amount still unpaid.

DEP spokeswoman Dee Ann Miller said in an email statement Friday that her department has little authority to determine the eligibility of a applicant "Because HRK's owners, officers, and employees had no previous violations of Department rules or permits, the Department had no authority to deny its application for a permit, to object to its foreclosure of its mortgage by purchase in the bankruptcy court."

Environmentalists argue that the state has the responsibility to perform due diligence.

"The state was just trying to move quickly, and didn't do the due diligence it should have," said Thomas Reese, a St. Petersburg environmental attorney. "They have these types of issues all the time when the state should be requiring more financial securities."

Harley also operates three Hooters restaurants in Long Island under Strix LLC. The company announced last week it will break away from the franchise, closing one of the restaurants and renaming the other two.

Ed McCabe, an attorney for Strix, who also serves as a spokesman for Harley, did not return calls to his Amityville office Friday.

A company profile lists Harley as a graduate of Yale University, with degrees in economics, engineering and business management.

He served as president of the uranium company Xemplar Energy in Vancouver until early September, when the board removed him and sued him for investing in a competitor, according to a company press release.

Harley gained national recognition, including articles by Forbes Magazine, when his investment firm provided more than $30 million in 2004 to help save Denny's restaurants from bankruptcy. That return paid him 140 percent in one year, according to Forbes.

Josh Salman, Herald business writer, can be reached at 941-745-7095. Follow him on Twitter @JoshSalman

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