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Hookers and booze: Your tax dollars at work
Published On Wed Oct 27 2010
Millions of dollars in federal small business loan money was blown on prostitutes, booze, partying and fast cars.
A Toronto Star investigation shows the department managing the program — Industry Canada — allows banks to loan money with lax or no controls.
In one case, at least 16 loans — more than $4 million doled out $250,000 at a time over eight years — were given to a loosely associated group of GTA businessmen whose leader’s past included bankruptcy and a poor credit rating.
The businessmen defaulted on each loan, but banks always approved another. Taxpayers’ money usually refunds banks when loans go into default.
David Scenna, the alleged mastermind, went on a spending spree that included lavish parties at Toronto’s Muzik nightclub, high-profile charity functions, Porsches and Mercedes cars; and thousands of dollars paid to high-end escort agencies. One series of Scenna’s credit card bills for hookers was $38,000, according to documents found by a Royal Canadian Mounted Police investigation.
He partied so hard with two escorts in his condo one night that his bathtub overflowed, damaging the unit below.
The RCMP, in a document filed in court to obtain banking records, has called the case “an elaborate fraud” against the government.
Scenna and 12 other businessmen are charged with using the money for personal — not business — purposes. The case is before the courts with the next hearing Friday, Oct. 29.
Scenna did not respond to numerous interview requests. The allegations against the men have not been proven in court.
Court documents and Scenna’s business associates say the loan money was advanced through accounts controlled by Scenna.
The federal government does not know how often the loan program is a victim of fraud. About $1 billion a year is lent in small business loans. The number of defaulted loans is steadily increasing. Last year, $106 million of taxpayers money was paid back to banks for defaulted loans. That’s up from $75 million a year in defaulted loans three years before.
Scenna’s loan applications made it seem like he was going to set up legitimate ventures, such as modernizing the funeral memorial business with digital memory albums for grieving loved ones.
Under the Canada Small Business Financing Program, Industry Canada gives banks the job of approving applications
It only sees the paperwork if the loan goes into default.
One of the problems the Star uncovered is there is little incentive for the banks to conduct detailed background checks.
That’s because banks get a guarantee that the federal government will refund up to 85 per cent of the money to the banks if the loan goes into default. The banks typically also take a personal guarantee from the borrower for the remaining 15 per cent.
Most of the $4 million, about 85 per cent, lost by the banks in the Scenna case will be paid back to the five banks involved, according to the terms of the loan agreements. The banks include TD Canada Trust, CIBC, Royal Bank, ScotiaBank and Bank of Montreal.
Scenna, 38, grew up in Richmond Hill and attended Bayview Secondary School. He dabbled in several businesses before declaring bankruptcy in 1997, owing $105,500 to creditors, mainly credit card and car-leasing companies.
Around that time his short marriage to a local woman collapsed and they divorced.
Through a church group, Scenna hooked up with a man whose Toronto firm made photo plaques to attach to headstones, which gave Scenna the idea of preparing memorabilia albums.
Beginning in June, 2001, Scenna enlisted various businessmen, including friends and his brother-in-law, Massimo “Max” Pizzoferrato.
Scenna’s own credit “was not good” and he asked Pizzoferrato to sign the application for a $250,000 loan on his behalf, according to an allegation filed in court by the RCMP. Scenna did all the paperwork. Pizzoferrato, who cooperated with police, has not been charged.
Industry Canada gives the bank the option of running a credit check or getting a credit reference. Scenna, using shell companies, manufactured his own credit references, the RCMP investigation alleges.
Three weeks after applying for the first loan, the federal government and Toronto Dominion Bank (now called TD Canada Trust) issued a $250,000 loan, the maximum amount allowed at the time.
Scenna was able to supply credit references through a fictitious company called Kingsbridge Financial Associates (he lived at the time on Kingsbridge Garden Circle in Mississauga).
In one of the loan proposals — this was for a car-wash service — Scenna submitted a bogus financial review to ScotiaBank by Kingsbridge, showing an Etobicoke address. Had anyone checked, they would have discovered an eclectic shop that sold exotic coffees and artwork.
Another rule of the loan program stipulates banks should only release money if the borrower shows he is purchasing business equipment.
The RCMP alleges that Scenna supplied fake invoices to the banks coming from fictitious suppliers Scenna incorporated with names like “Huge Corporation” and “M-Power Sales and Consulting”.
Invoices for several different loans listed the purchase of a state-of- the-art copier so sophisticated and expensive it is only used by intelligence agencies such as the CIA and the Mossad in Israel. Scenna’s associates never actually purchased the $350,000 copier.
The Star asked all five banks to explain what steps they take to ensure a potential borrower is legitimate. Royal Bank responded saying it “follows a standardized due diligence process when evaluating all credit applications.” TD Canada Trust said its “internal due diligence process assesses many factors, including the client’s personal credit-worthiness, as well as their business plan, history, operations, prospects and financial viability.” The other three banks did not respond.
The Star also found on at least five occasions, Scenna and his associates used the same Brampton office space as a business address on loan applications.
As far as the Star could tell, no banker ever checked to see if there was actually copying equipment in suite 200 at 45 Railroad Ave. in Brampton.
But they did send collection agencies there when the loans went into default and found no signs of the company.
Of the at least 16 loans handed out to Scenna and his group, he was the signing authority on three, according to the RCMP. In one period in 2005, Scenna personally received a $250,000 loan from ScotiaBank (March 4); a $250,000 loan from Bank of Montreal (June 21); and a $250,000 loan from the Royal Bank (Nov. 25). Scenna defaulted on all three loans within a few months, even defaulting on the June 21 loan before applying for the Nov. 25 loan.
The RCMP found frequent and large payments of loan money to Scenna personally.
Visa bills obtained by the RCMP show that in one short time period Scenna paid $38,000 to Neodec Services, a Toronto company that processes credit card receipts from high-end escort agencies.
Two former friends of Scenna said he frequently used escorts and, for his birthday one year during the loan period, he spent $10,000 to have an escort spend several days with him. They said he frequented downtown Toronto clubs including This Is London and Muzik, at Exhibition Place, where the cost of entertaining in a VIP area starts at $225 per bottle of liquor. Muzik requires hosts to reserve a minimum of 10 or 15 bottles depending on the party size.
“There would be 100 people in his booth,” said one man. “He would pay for everybody — thousands of dollars a night.”
Another former friend recalls Scenna dropping $40,000 over a weekend of partying in Montreal during the Formula 1 auto race.
“There was nothing cheap about David,” said Zdravko Galinec, one of Scenna’s former business associates (he was not involved in the loans). “Everything he wore was right out of the pages of GQ.”
Galinec, who joined forces with Scenna in the late ‘90s to start up a software company, called Scenna a “success magnet.”
Galinec said Scenna befriended lobbyists who helped secure meetings with government officials at Human Resources Development Canada, the Department of National Defence and Canada Post.
“I don’t think there was a day gone by when he wasn’t in a night club or a strip club the night before,” Galinec said. When a business plan they worked on collapsed in 2001, Scenna started pursuing small business loans.
By 2005, Scenna and girlfriend Zoe Coop were living in a two-bedroom condominium unit Scenna purchased for $340,000 in west Toronto near the lake. Doormen recall Scenna and his fleet of fine cars and a steady parade of escorts in the early hours of the morning.
One morning, at 2 a.m., building security had to open the door of his sixth-floor unit because water was gushing into the unit below. They found Scenna and two escorts in the overflowing bathtub, drinking and having a “grand old time”, a worker recalled.
Scenna, who by this time had received (with his group) at least $2 million in loans, cheerily paid for all the damage.
Police investigating the case have been unable to find any assets and believe they partied the money away.
His sister, Gabriella (Max Pizzoferrato’s wife), said her brother involved them in the small business loan scheme and bankrupted them.
“We lost big time. We lost everything. We are starting from scratch,” Gabriella said.
“He brought a lot of despair to us. We are a very close family and we supported him and look what happened.”
In her statement to the RCMP, Gabriella said their father “died a pauper” because her brother took all the family’s money.
The Scenna case surfaced when an Industry Canada employee noticed the same address listed on numerous loans that had gone into default.
A media relations spokesman for Industry Canada (the minister is Tony Clement) said “department officials take the potential for fraud very seriously.”
“They carefully review lenders’ claims, monitor compliance and refer cases where fraud is suspected to the RCMP for further investigation,” the spokesman said in a prepared statement.
In the case of the Scenna loans, Industry Canada did not suspect fraud until eight years after the first loan was approved.
The Industry Canada spokesman said the government does not automatically refund banks when fraud is suspected and did not say what repayments were made to banks when each Scenna-related loan defaulted.
Restoring Sanity and or Keeping Fear Alive!
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