Investment Figure Donovan Declared Bankrupt by Court

Richard E. Donovan, the charismatic entrepreneur whose controversial investment programs have drawn fire from state regulators, was placed in involuntary bankruptcy this week at the request of Wells Fargo Bank, a major creditor.

The action in U.S. Bankruptcy Court here Monday adds uncertainty to the prospects of 10,000 investors in Financial Dynamics and Donovan’s other investment enterprises recovering their money. Those investments total $50 million to $60 million, according to Nancy R. Schauer, a Los Angeles attorney close to the situation. She added that it is also likely to trigger the liquidation of Donovan’s assets, which reportedly include at least one airplane, a boat and real estate.

“There are thousands of investors that will lose whatever investments they made with Donovan because of this bankruptcy,” said Schauer, who has been charged with unraveling Donovan’s investment dealings since her court appointment in June as Financial Dynamics’ receiver, just before officials of the state Department of Corporations entered the firm’s Covina headquarters and seized its records.

Scheme Alleged

Among the officials’ complaints at the time was that Donovan operated a Ponzi scheme, in which money of new investors was used to pay earlier ones, and that he switched cash between funds without informing clients. Schauer said Thursday that Donovan’s many investment activities included 60 partnerships and that about $14 million had gone into the Ponzi-like factoring operations.

A Wells Fargo spokesman said the bank moved for the bankruptcy declaration a week ago in order to recover some of the more than $1 million it lent Donovan and because its officials were disturbed by the size of legal fees charged by the receivership. “We are owed money that hasn’t been paid to us,” said Kim Kellogg, a bank spokesman in San Francisco. “We had the right to act, and we did.”

Kellogg said that for one month alone, the legal fees were $100,000. However, Schauer disputed that, saying they peaked at $50,000 in July, the first month of the receivership.

Schauer defended the billings, noting that the unraveling of Donovan’s financial situation has been an extraordinarily demanding task, particularly in the days immediately after the receivership took control of Financial Dynamics: “For the first month, we were there virtually 24 hours a day to take control of an incredibly complex estate and begin solving problems,” she said. “They (Wells Fargo) didn’t object while we were doing the work.”

It is not clear, however, how much Wells Fargo will recover, particularly since much of the money lent was unsecured, according to Schauer, who estimated the total at $1.5 million.

Although Donovan became bankrupt in an “involuntary” manner, he did not resist the move by Wells Fargo. His attorney, Steven Stanwyck, said Thursday: “It is hoped, and is our belief, that in the bankruptcy court there will be an orderly way of handling these matters and . . . (creditors) will receive the greatest amount.” He added, however, that his client’s reaction to the bankruptcy is one of “resignation and disappointment.”