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(Donald Weber/Donald Weber)
(Donald Weber/Donald Weber)

How did $170 million go missing? Add to ...

Finance officials in Patterson’s home state of Idaho were the first to investigate Derek and Catledge, after investors started to complain. They accused the pair of violating the anti-fraud provisions of the state’s securities laws, misrepresenting their investments and using unregistered sales agents. In 2007, Catledge and Derek each signed a cease-and-desist order and paid $150,000 and $40,000 in fines, respectively. They also agreed to refund Idaho investors, including Patterson, but they later reneged. Derek, for his part, says he couldn’t afford to pay. The state then launched a civil lawsuit, accusing both men of pocketing cash from sales of “fraudulent” securities. In July of this year, an Idaho judge ruled against Derek in that civil suit and entered a default judgment, demanding $2.6 million. Idaho’s case against Catledge is still grinding along.

As 2007 drew to a close, the economic tide began to go out in the United States, leaving the Elliotts stranded on the beach. Bookings at the Sun Village resort slumped, and time-share sales slowed to a trickle. This presented a number of problems. Though Derek denies his operation was a Ponzi scheme—which uses money from new investors to pay returns to existing ones—he acknowledges that sales for units at the Juan Dolio hotel were pumped into the money-losing Sun Village resort. Relations with Catledge, Derek says, were getting worse. According to the Elliotts’ countersuit, Catledge had told Juan Dolio clients, who had only put down half the money they owed, that they didn’t have to pay up the rest, leaving the renovation project short millions of dollars.

In June, 2008, Fred took over his old role as CEO. He flew to the Dominican Republic and ordered senior staff at the resort to take pay cuts. He also spoke to a group of leading Impact Net Worth agents in Provo, Utah, telling them, among other things, that at least one more round of non-use fees would flow to investors. But by September, relations with Catledge had hit a low point, as sales dwindled and customers continued to complain about missed payments.

In October, 2008, the Elliotts had their long-time (and now former) Toronto lawyer, William Lambert, demand $29 million in legal fees and refunded sales from Catledge. The letter, which was submitted to the Florida court, accused Catledge of using “reprehensible sales practices,” of engaging in “malfeasance and frauds” and failing to get his sales force licensed to sell securities as promised. It also warns that in any lawsuit, the Elliotts would “request (and likely receive) punative [sic]damages of $100,000,000.”

Catledge struck back. The Elliotts say he helped orchestrate a pair of lawsuits filed in U.S. district court in Miami by hundreds of the Elliotts’ clients in March, 2009. They name Derek and Fred as defendants, along with a long list of their offshore companies and associates. The lawsuits accuse them of engaging in a $170-million fraud related to the sale of time-shares, and promising “double-digit” returns to investors but instead using the money to “finance fanciful Hollywood productions”—including a Ben Affleck bomb called Man About Town—to “produce self-promotional videos, purchase a half-million-dollar yacht and pay off personal gambling debts in Las Vegas.”

Catledge himself initially appeared as a plaintiff in one lawsuit, but it was later dropped without explanation. The plaintiffs in the remaining suit have also filed actions in the Dominican Republic and the Turks and Caicos, where the Elliotts’ main company is registered, obtaining freeze orders or liens on the resort properties. Neither the lawyer representing the plaintiffs, nor lead plaintiff Klaus Hofmann—a Utah resident who says he lost $112,000 investing in the Elliotts’ projects—would comment.

The Elliotts have filed a $120-million countersuit that lays the blame at Catledge’s feet—though it stops short of naming him as a defendant. Almost two years later, the allegations against the Elliotts have not been proven. In fact, by October, 2010, they appeared on the verge of being tossed out, despite the submission of thousands of pages of documents and months of legal wrangling.

o help sort out the Florida allegations, the court appointed retired judge Thomas Scott as “special master” for the Elliotts in the case. His job was to investigate, seize documents and essentially take over their operations in the Dominican Republic. In late 2009, he filed a report with the court that accused the Elliotts and Catledge of operating a “two-tier criminal enterprise” involving a “Ponzi or Ponzi-like scheme” and the “essential theft” of investor money.

According to Scott’s report, of the estimated $140 million raised from selling time-shares and fractional interests since 2004, $74 million was paid in sales commissions or other fees. Catledge and his related entities took $42 million in commissions alone; the Elliotts and their related parties, $16 million. Some $12 million in non-use fees were paid to clients. The Elliotts’ books claim $11.5 million was spent renovating the Juan Dolio hotel—though Scott is skeptical that $11.5 million worth of work was actually done.

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