Feds Investigate Businessman Managing Government Agency Investments

Michael Williams, founder of Kinetic Investment, is accused of having used money from his investment clients for personal gain.

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Puerto Rico “is the place to invest in right now, because inefficiency breeds the biggest opportunities,” says Michael Scott Williams King, founder of financial firms Kinetic Funds and Kinetic International.

A native of Michigan, he arrived on the Island five years ago attracted by the incentives the government offered investors. He benefits from Law 20 on the export of services and Law 22 for the transfer of foreign investors to Puerto Rico. Since 2016, he has managed $18 million in public funds from the State Insurance Fund Corporation (CFSE, in Spanish) and the Automobile Accident Compensation Administration (ACAA, for its initials in Spanish) through Kinetic Funds.

Williams organized an investor summit from Feb. 27 to March 1, 2019 at the Vanderbilt hotel in Condado to present Kinetic International’s services. “Why [invest] now? Now is the time as the government is starting to recover from Hurricane Maria, the Opportunity Zones for investing in real estate, we begin to see investments and positive changes,” says the event page.

The Commissioner of the Office for Financial Institutions (OCIF, in Spanish), George Joyner, was a keynote speaker at the convention. As well as Noel Zamot, who at that time was the Revitalization Coordinator for the Financial Oversight and Management Board for Puerto Rico, and member of the Board of Directors of Kinetic International.

In May, Kinetic International’s lawyers informed Joyner that the Securities and Exchange Commission (SEC) was investigating Williams. The SEC is one of the federal agencies that regulates the United States’ financial market. Some common violations that it looks into include misrepresentation or omission of financial information, manipulation of stock market prices and stealing customers’ funds. The SEC can start civil cases or refer them to the courts if it finds criminal action.

The Center Investigative for Journalism (CPI, in Spanish) learned that the Federal Bureau of Investigation (FBI) has also interviewed several people regarding Williams’s financial activities.

In November 2016, Williams signed a $15 million investment contract with the CFSE and another $2 million with the ACAA through Kinetic Funds I, LLC. Both contracts are valid until 2021. The Commonwealth Employees Association (AEELA, in Spanish) in turn invested $500,000 on Nov. 29, 2016. Kinetic Funds has about 30 clients including individuals and pension plans in Puerto Rico and the United States.

Documents obtained by the CPI and accounts from three sources indicate that Williams transferred, without authorization, money from Kinetic Funds’ investment capital to the account held by KCL Services, another of his companies, from which he withdrew money in the form of loans to finance Kinetic International’s personal and operational expenses.

Bank account documents reflect that on March 21, 2017 there was a withdrawal of $1.5 million from the Kinetic Funds account and a deposit for the exact same amount in the KCL Services account. On Mar. 23, Williams paid $1,422,325 for a penthouse in Old San Juan. On May 4, 2018 there was a withdrawal of $2,676,564 from Kinetic Funds and a deposit for the same amount at KCL Services. On the same day, Williams paid $2.9 million to the Puerto Rico Conservation Trust for the building of the former Banco Español on Tetuán Street in Old San Juan through the SCIPIO, LLC firm, according to what the CPI confirmed in the government Property Registry. Williams is the president and sole member of that company, documents from the State Department show.

“In 2018, Mr. Williams-King and his team acquired the historical building Banco Español in Old San Juan. This ambitious project includes renovating the historic building and commissioning the largest fresco to currently be painted in the world. The project is being filmed for a future documentary,” said the Kinetic Financial Summit page.

Other expenses that Williams allegedly paid for with his clients’ money include designers, legal services, vacations and the costs of the Kinetic Financial Summit.

Williams told the CPI that he cannot comment on these imputations or on the SEC’s investigation.

He failed to comply with Law 20

On March 3, 2016, Williams incorporated El Morro Financial Limited Liability company in Puerto Rico, through which he benefits from Law 20. El Morro Financial has as clients KCL Services and SCIPIO, both incorporated in Puerto Rico, and Kinetic Investment Group, incorporated in Delaware and with an address in Sarasota, Florida. Williams owns all three companies.

To receive tax exemptions from Law 20 for exports, by providing services to a client, “that client must be based off the island,” Manuel Laboy, secretary of the Department of Economic Development and Commerce, said in an interview with the CPI.

Can a company that receives the benefits of Law 20 provide services to a company that is owned by the same person? the CPI asked.

“No, there is an issue there. The transaction has to comply with what they say, that there is no link between A and B. Why? Because what you want is to really generate new money. When this was elaborated in 2012, the idea was to prevent a company from coming to Puerto Rico, which was established or was here, was local, then it sells services to company B, which is in Florida. But that company B in Florida really has some link of economic activity in Puerto Rico. So, if you don’t establish that, we may risk what is called a short circuit. That is, I sell services to B that’s in Florida, but that one in Florida really has economic ties in Puerto Rico. Therefore, new money never really came, it came from Puerto Rico. There is a circle, you want to avoid that. You want to make sure, so that it is truly exporting, that the money is new, that’s what exporting really is,” said Laboy.

In the State Department Corporations Registry documents, Williams identifies himself as president, and appears on his LinkedIn account as a partner of El Morro Financial. The company does not have a website and the physical address is the same as Kinetic International, KCL Services and Kinetic Financial Advisors. The CPI called a number several times that is supposed to be for El Morro Financial, according to a document, but no one answered.

If there is an agency like the SEC or the FBI investigating a beneficiary of Law 20 or 22, what action does the Department of Economic Development and Commerce take? the CPI asked Laboy.

“It will depend on the type of investigation and what kind of request they make to us,” he replied.

The Secretary said he doesn’t know Michael Williams or know about Kinetic Funds. He revealed never the less that he made a referral to the FBI about other incentive beneficiaries offered by the DDEC because “we detected strange things.” He added that they have received several requests for information from the FBI and other federal agencies related to investigations of companies and individuals receiving tax incentives in Puerto Rico, but he did not say how many or whom.

Last May the FBI arrested executive Gopalkrishna Pai, a beneficiary of Law 20, for bank fraud.

Financial Institutions Commissioner is idle

Joyner, has known since May that the SEC is investigating Williams, but his office has not opened an investigation into the investor’s business on the Island. The OCIF granted him an International Financial Entity license for Kinetic International on Jan. 16, 2019. Another Williams company called Kinetic Financial Advisors is registered with the OCIF as a financial advisor.

One of the reasons Joyner gave for not investigating the investor is that it was Williams’ own lawyers who notified him about the SEC investigation. Another explanation was that the SEC investigation is about Williams’ operations in Florida.

Under the CFSE and ACAA contracts, payments from these corporations are sent by checks to the Kinetic Funds address in Florida. Joyner said he didn’t know that these two public corporations invested in Kinetic Funds.

The complaint against Williams was filed with the SEC in June 2018. Last May, five of his   employees resigned for alleged irregularities in the investor’s financial operations. Zamot told the CPI that among the employees who resigned are Michael Sayre, chief technology executive, and James Bishop, chief operating officer of Kinetic International. The CPI learned that Williams employees informed Zamot about the complaint to the SEC involving Kinetic Funds, but when asked about that company, Zamot said, “I don’t know any entity with that name.”

“At the Board of Directors meeting on May 7, Mr. Williams resigned, of his own will, to his position as CEO [of Kinetic International] to allow working on the matter of Sayre’s and Bishop’s departure in an open and transparent way. He also resigned from his board positions saying he wanted to focus on personal and other business matters … he resigned from his position to allow the board of directors to address complaints against him, without influencing the process. The OCIF and all relevant entities have been notified,” said Zamot.

However, Zamot did not report Williams to the SEC and is still on Kinetic International’s Board of Directors with Jeanelle Alemar-Escabí, who serves as director of the Board. Williams remains the majority owner of Kinetic International while heading Kinetic Funds.

Alemar offered legal services to Williams from 2017 until the end of 2018, when Williams invited her to join Kinetic International’s board of directors. Since the beginning of May, she has been the company’s director of finance, which went from being an international financial entity to a “regular start-up corporation,” according to Alemar. State Department documents show Alemar is the administrator of Kinetic Financial Services and the authorized person for Kinetic Tech and ISX, all companies belonging to Williams.

“Neither the entity nor myself have received any notification from federal or state agencies regarding an investigation on Michael Williams,” Alemar said.

Williams also appears in at least seven companies registered with the State Department, where he occupies different positions: he is president, manager and the authorized person.

How did you meet Michael Williams? the CPI asked Zamot.

“In one of several meetings where private entities had questions about Title V,” he replied, referring to the section of the PROMESA law that establishes the process for declaring “critical infrastructure projects.”

“When the [Kinetic International] company came to present the technology to the investment world, they asked me to be part of the board of directors. I had been previously asked to be a director, but at that time I was working at the [Oversight] Board and I couldn’t do that until we got a decision from our ethics advisor … the combination of using technology to ensure transparency in investments in the public sector was something that was very close to my vision and values. That’s why I accepted that position, conditioned on the ethics advisor’s decision,” said Zamot.

The CPI asked Zamot for the result of the ethical consultation and he said that the document was available on the Oversight Board’s website, but it was not found. The CPI again asked Zamot for the document, but there was no response. The Oversight Board’s public relations officer, José Luis Cedeño, did not respond to a request for the document made to the Oversight Board’s ethics advisor, Andrea Bonime-Blanc.

Zamot was appointed as the Oversight Board’s Revitalization Coordinator in July 2017 and resigned on March 15, 2019. Days before his resignation was effective, Zamot denounced that the former Governor Ricardo Rosselló’s administration hindered the hurricane recovery process to benefit close friends. On March 20, the Oversight Board revealed it submitted information regarding Zamot requested by the Department of Justice.

Why didn’t the OCIF open an investigation into Michael Williams? the CPI asked the Commissioner of Financial Institutions.

“In the normal course of things, if they had not brought us the information about the [SEC’s] investigations, we would [have investigated]. If we learn about something from public sources, we call the person concerned and we ask for an explanation. The Office takes affirmative steps when it becomes aware of things that are out in public,” said Joyner.

So, when you learned that the SEC is investigating Michael Williams, why wasn’t an investigation opened into the two companies he has registered with the OCIF, Kinetic International and Kinetic Funds? the CPI asked.

“Again, the one that brought us the information of the SEC investigation is Kinetic International itself, through its legal representatives,” Joyner replied.

And that prevents you from investigating?

“No, but because they, Kinetic International, were the ones who brought us the information, our response was ok, I know you have a license to operate, come prepared to talk to me about the status of that… what are your future plans. So when they come and show us that they have a problem with the company’s main owner or main stakeholder, a controlling person, which is what Michael Williams is, caused by this other investigation that the SEC is doing in Florida but that does not directly impact the Puerto Rico operation, then (I ask them) ‘what’s your plan?’ Because right now we are dealing with a voluntary disclosure. It was not that a complaint was filed, but that they are presenting it, that triggers the voluntary liquidation of the license as an international financial entity.”

And after that liquidation do you believe that the OCIF has no responsibility to scrutinize Michael Williams even though he is being investigated by the SEC?

“Yes, unless the Florida SEC investigation somehow impacts his businesses in Puerto Rico. But he no longer has a business in Puerto Rico regulated by the OCIF…

Kinetic Funds is registered as a financial advisor at OCIF.

“But we are not the main regulator,” Joyner said.

Williams’s helpers

On July 11, 2018, Williams signed an agreement with The Garffer Group of Legal Advisors (G2LA) for $5,000 per month. The document indicates that Garffer offers “lobbying services” and “government relations, in particular with the CFSE and ACAA.” Jerome Garffer is not registered as a lobbyist either in the Senate or in the House of Representatives, the CPI found.

“Those contracts were already there before [he started working for Williams]. What he wanted was for us to help him keep the contract. He [Williams] doesn’t know anyone (in Puerto Rico), he needed to understand the government structure. After that he started asking for other things that I was not going to do at all and I decided not to continue with the relationship … [The contract with ACAA and the Fund] had come through a friendship he had with an investment consultant that was there before and that gave him that. The consultant was no longer there and he did not understand the government agencies. And I told him that I could help him understand that, how agencies work,” Garffer told the CPI.

Why did you decide not to work with him?

“I’m going to refrain from revealing that. But there came a point where I decided that it was not in my best interest to continue that relationship … Because at some point he was selling his business or something and things got complicated and I didn’t like what I saw and decided to end the relationship,” said Garffer.

On May 10, 2017 Michael Williams donated $2,500 to former Governor Ricardo Rosselló’s campaign.

Eliseo Acosta, president of Innova Technologies Group, allegedly received $60,600 in commissions for Williams’ contracts with the CFSE, ACAA and AEELA in 2016. Between January and September 2017 Williams paid Acosta another $32,500 for seeking clients for Kinetic Funds, two sources told the CPI.

What is your relationship with Michael Williams? the CPI asked Acosta.

“You came here to start a business? Well, look, I know so-and-so, go there and if something goes well, great, buy me a cup coffee. I don’t live off of that, period,” Acosta replied in a first call. First he said he did not receive payments, but that his company did.

“I organized several meetings that did not prosper because there were other interests and other people. For example, I remember [AEELA’s], and so on with the occasional mayor. But you can look it up, nothing prospered, that is, none had a result.”

Do you mean meetings between those people and Michael Williams?

“Yes, at one point.”

What you did was arraign meetings for Williams and government agencies so he could get contracts?

“With government agencies in particular, just like anyone who calls. I work in the private sector. But I am not a lobbyist or anything like that. I am a business person…With Williams, I have a friendship… For example, I know millions of people and he was referred by a friend of mine from Florida who introduced us, and the truth is, I liked him.”

Did you do work for Williams? the CPI asked.

“But we’re talking about 2016. It’s 2019.”

In 2016, he signed the contracts with the [State Insurance] Fund and ACAA.

“If you stop me in the middle of the lobby and walk me through there, you will see that nobody knows who I am … I have not gone through there with that man at all. I can tell you that I have gone into other places yes, and nothing happened because they chose not to do things.”

What did they want to do, get contracts?

“Well if you’re investigating, I’m telling you because I have nothing to hide, that at one point when (Williams) arrived, the first thing he asked was ‘are these things regulated?’ Well, I can introduce you to someone. And that’s how it happened, you know, whatever. And I said mayor because I am trying to remember one, as well as private companies. But there was nothing.”

In those arrangements you say you did for Williams, did you receive or request any kind of commission? How did you get paid for that work?

“As I said and I repeat, I had failed efforts. If he used someone to do that and got it done, I can tell you it wasn’t me.”

The question is not whether you failed, but if you got a commission or payment for that work, the CPI insisted.

“Well, you always say ‘if something materializes, well, buy me a cup of coffee,’ or whatever. But I am trying to answer your questions but I really didn’t do what you’re saying … If you want to call it work, yes, but no,” said Acosta.

In the video of the October 2016 State Insurance Fund Corporation’s (CFSE, for its initials in Spanish) Governing Board meeting, Fund Administrator Liza Estrada-Figueroa said the contract with Kinetic Funds raised questions among the administration and the lawyers consulting on the agency’s financial affairs. The CFSE financial advisors, Consultiva Wealth Management, recommended that the contract be signed.

“When they sent us the contract, some questions came up because it was different from what we were used to seeing for this type of funds. We referred it to the attorneys who work with these matters to give us their opinion. They raised a few questions, we asked   Consultiva, and Consultiva sent what is now Attachment Two, which is a written opinion clearing up the doubts we had and that the lawyer had about this type of fund, saying it complies with the investment policy and that they recommended that we sign it,” said Estrada-Figueroa at the meeting.

The State Insurance Fund provided documents to the CPI that show that Kinetic Funds makes monthly investment status reports through Gavion, the firm that currently manages the Corporation’s investment portfolio.

How could the investigation against Williams affect the investments of the Fund and ACAA? the CPI asked Myrna Rivera, founder and senior adviser of Consultiva.

“We would have to see what the nature of the investigation is and what the outcome is to determine what impact it could have on that and any other portfolio,” Rivera replied.

Can investments be affected as long as there is no final determination on the investigation?

“The Kinetic fund appears in Bloomberg’s systems and other systems. As a fiduciary, this is information that you are giving me that is of concern. But we have to wait for what the SEC says. We have to see what started the investigation and what the nature of the investigation is, which may or may not have to do with (the Insurance Fund) portfolio. The SEC can evaluate individuals as it can evaluate investment processes, it is a highly regulated business. In this case, Gavion has to make sure that it is properly monitoring that investment.”

Rivera explained that part of the evaluation process that investment firms do is to study the structure of the company, its management, the background, the technical experience, how the company is constituted, what its strategy is, how it is executed and what the benefit is.

“We did that analysis, we met with Michael Williams, we went through that whole process. Consultiva has an investment committee that, as an internal protocol, interviews and evaluates documents and creates an evaluation memorandum,” said Rivera.

Claudia Motta-Vélez, of the Reichard & Escalera law firm, is the resident agent for Scipio and El Morro Financial, owned by Michael Williams and incorporated on March 3, 2016. In June 2016, Reichard & Escalera signed a contract for $150,000 with the State Insurance Fund Corporation valid until June 30, 2017. One of the services that the law firm had to provide under the contract was “legal consultations and opinions in matters regarding   investments.” The contract between Kinetic Funds and the Insurance Fund to manage $15 million in investment was signed in November 2016, while the Reichard & Escalera law firm advised the public corporation on financial matters.

Luis R. Ramos-Cartagena, deputy administrator of the Insurance Fund from August 5, 2016 to January 3, 2017, signed the contract. The CPI contacted Ramos-Cartagena to ask about commissioning Kinetic, but he said he did not remember that contract and that investment management issues were consulted with Reichard & Escalera.

Vance Thomas, director of the Governing Board at that time, and Liza M. Estrada, former Fund administrator, also told the CPI that they did not remember signing the contract with Kinetic Funds, although the videos show that they participated in several meetings where the contract with that company was discussed.

Service charges with Kinetic Funds are capped at $750,000, according to the CFSE and ACAA contracts. Williams signs the documents as Managing Member of LF42, LLC, and Managing Member of Kinetic Partners, LLC. None of these companies are incorporated in Puerto Rico, but rather in Delaware.

Payments for these contracts are sent by check to Kinetic Funds’ address in Sarasota Florida, and by electronic transfer to an account at BMO Harris bank in Chicago. Kinetic Funds focuses on income generation through investments in corporate and government bonds, according to the contracts. By June 2019, it had a total of assets valued at $43,869,000. Its main investments are in Goldman Sachs Group, Simon Property Group, 3M Co, Pfizer and Johnson & Johnson, according to Bloomberg.

The contracts with Puerto Rico public corporations, which were signed in the midst of the economic and fiscal crisis and during the government’s bankruptcy proceeding, have a clause that states: “The person who signs understands the risks associated with this offer, including the speculative nature of the investment and the financial dangers, including the risk of losing all of the investment.”

Williams, a Navy veteran who served in the Persian Gulf war, began his career about 25 years ago as a stockbroker, according to his biography. He has made presentations for the Securities and Exchange Commission that is now investigating him, he is co-author of the book “Fundamentals of the Options Market” of the McGraw Hill publishing house. This year he finished writing his first novel, entitled “Journey to Masyaf.”

 

Luis J. Valentín Ortiz contributed to this story.

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