Detroit — A failed $10 million Detroit pension fund investment led to one businessman's suicide and an international hunt for his partners, who have fled the United States amid a search for the missing money.
The developments are swirling as the city's pension funds cope with more than $84 million in losses from failed investments that have drawn FBI scrutiny and led to an indictment against former Detroit Treasurer Jeff Beasley.
"This is what movies are made of," said George Orzech, a trustee on the Detroit Police and Fire pension fund.
Court records and interviews chronicle the fallout from one Police and Fire pension fund loan in 2008 intended to buy and restore more than 1,400 foreclosed homes in Metro Detroit. Instead, many of those homes are facing foreclosure — or demolition — after Detroit businessman Abner McWhorter killed himself amid accusations he was involved in a Ponzi scheme that defrauded the pension fund.
The pension fund sued McWhorter's company and 17 related parties last year, and alleged his partners, South Carolina couple George and Teresa Kastanes, helped perpetuate the fraud and divert loan money.
The couple — who were featured in a 2007 Wall Street Journal article about entrepreneurs specializing in the so-called "sub-subprime market" — faced a series of escalating challenges in recent months: The pension fund lawsuit. A $16.2 million default judgment against the wife's company. Arrest warrants, bankruptcy and allegations they would flee from it all in a private plane.
Flee, they did.
"I'm in St. Kitts," George Kastanes, 62, said during a phone interview Tuesday from the Caribbean island.
Where's his 53-year-old wife? He won't say.
Kastanes said he didn't flee with any pension fund money.
"We're not crooks," Kastanes said. "Trust me."
The controversy dates to January 2008. That's when the pension fund loaned $10 million to McWhorter's company, Paramount Limited, which was formed in January 2008 to borrow money and buy foreclosed mortgages.
Beasley, the indicted former pension fund member, voted in favor of the deal, which The News has learned drew the interest of federal investigators.
Paramount had said it was going to use the money to buy foreclosed mortgages and resell homes.
"The way it was presented was to revitalize residential areas in Detroit," Police and Fire pension fund chairman Sean Neary said.
As part of the deal, McWhorter teamed up with Kastanes and his wife.
In all, the couple sold McWhorter's firm about 3,000 homes from 2008 to 2009, George Kastanes said.
"We received shy of $6 million and can account for all of it," Kastanes said.
McWhorter spent another $2 million making interest payments, Kastanes said.
That leaves $2 million from the original $10 million investment unaccounted for, Kastanes said.
"There is no money left in our offices or that has gone offshore or anywhere else," he said. "I'm broke."
The once-promising business venture now is mired in litigation.
The pension fund alleges McWhorter's company had defaulted on the loan by fall 2010.
Instead of maintaining, rehabilitating and marketing the homes, Paramount and others are accused of grossly mismanaging the real estate portfolio, failing to maintain the properties or pay property taxes, according to the pension fund.
Paramount was not profitable and was repaying the loan with the pension fund's own money — a classic Ponzi scheme, according to the pension fund's law firm Racine & Assoc.
In May 2011, the pension fund sued Paramount and the Kastaneses in Wayne Circuit Court. After the lawsuit was filed, a judge appointed a receiver to protect the thousands of homes purchased with pension fund cash.
The receiver quickly ran into obstacles, according to court records.
The South Carolina couple failed to turn over documents, according to the pension fund's law firm.
An FBI-trained expert was hired to analyze computers from the Kastanes' offices. He discovered 30,000 files had been shredded.
"That's a smoke screen," Kastanes told The News. "The documents that were shredded were totally innocuous. It shouldn't have happened, but it did."
Meanwhile, McWhorter was under mounting legal and financial pressure.
Besides the pension lawsuit and alleged loan default, the Detroit entrepreneur's company Paramount Limited, filed Chapter 11 bankruptcy July 21, 2011.
Five weeks later, McWhorter was dead.
He shot and killed himself inside The Commodore building near Midtown on Aug. 25.
He was 41.
The death was ruled a suicide, Detroit Police Sgt. Eren Stephens said.
By then, the accusations and lawsuit had clouded McWhorter's reputation.
He was a serial entrepreneur. He co-owned a doughnut stand in Trappers Alley, started an art supplies retailer as a teen and won a three-year, $130,000 contract to provide art supplies to Detroit city government.
McWhorter also was a magazine publisher and started a company in the late 1990s to manage single-family and multi-unit buildings.
He also created the "Show Up to Blow Up" scholarship program. The program awards $1,000 scholarships to Detroit Public School students with perfect attendance in the ninth through 12th grades.
The nonprofit is still active, according to state records.
"He was a great guy, he was a family man and really did a lot for the community," cousin Cheryl Burke said.
Friends and associates were hard-pressed to pin the suicide on any one problem.
Ben Gonek, an attorney representing Paramount, said it was tough to say whether the lawsuit explains why he committed suicide.
"Put it this way: It would be a huge stress factor in anyone's life," Gonek said.
Pressure continued to mount against George and Teresa Kastanes in the months following McWhorter's suicide.
In November, the couple was found in contempt of court for failing to turn over files.
On Jan. 5, one day before the pension fund asked a judge to issue warrants for the couple's arrests, the Kastanes' filed Chapter 7 bankruptcy.
The pension fund called the bankruptcy filing a blatant attempt to delay the arrest warrant hearing.
Arrest warrants were issued Jan. 6.
Marie Racine, the pension fund's lawyer, labeled the couple flight risks. She noted George Kastanes had a pilot's license and access to a Piper Aerostar plane.
"They intend to flee the country and take their ill-gotten monies to a jurisdiction intended to be outside the reach of this court," Racine wrote in a court filing.
Early this month, the couple fled ahead of a March 6 court hearing in Florida.
George Kastanes said the pension fund's lawyer threatened them with arrest if the couple showed up at the hearing.
Kastanes said he fled to St. Kitts because he has business ties to the island.
"We were planning to relocate here anyway," he said. "This just accelerated things.
"My wife is elsewhere. She's very upset and has health issues. I could not stand the possibility of her being incarcerated in Detroit."
The United States has an extradition treaty with St. Kitts and the pension fund is in the process of requesting help to find them.
Orzech, the pension fund trustee, wonders if some of the pension fund's money is overseas, too.
"We know they've got some money somewhere," he said. "Now we've got to go find it."