Stephen Canty, a former executive of a Kerrville consulting company, is unlike most defendants who have gone before U.S. District Judge Xavier Rodriguez to face punishment for their crimes.
Canty, 59, appearing Wednesday before Rodriguez via Zoom, pleaded guilty in January to making a false statement on a loan application that cost a Texas bank almost $13 million.
The crime carries a punishment of up to 30 years in federal prison and a fine of as much as $1 million. The sentencing guidelines for Canty recommended, but did not require, imprisonment in the range of 46 to 57 months.
Yet Rodriguez, in describing Canty’s case as “very different,” sentenced him to time served — which amounted to one day in jail at the time of his 2018 arrest — and five years of supervised release. Canty also must pay restitution to Texas Capital Bank.
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The judge seemed to agree with the prosecutor and defense lawyers that Canty only was following the orders of his boss, who has not been charged with any crimes.
“This court is going to be having to fashion an appropriate sentence … on the man who really is not the person who should be before the court,” Assistant U.S. Attorney Gregory Surovic told Rodriguez just before the judge delivered the sentence. “But, unfortunately, that’s the person we have.”
The boss’ name went unmentioned during the roughly hourlong sentencing. A plea agreement only referred to him as “person A” and as the owner of HJH Consulting Group Inc.
The document described person A as the “mastermind of the scheme” and the “architect of the alleged fraud.”
Court records in HJH’s 2018 bankruptcy case listed Harlan J. Hall as the majority owner. It had blamed its bankruptcy “on one of its employees (who) manipulated the accounting records” to HJH’s detriment.
Its lawyer had accused Canty of overstating the amount of money clients owed the company so it could tap a line of credit with the bank.
In a interview following the sentencing, San Antonio lawyer Jennifer Rosenblatt, who represents Hall, referenced Canty’s statement that he “kept it all from his boss.”
“Mr. Hall had absolutely no knowledge, and although Mr. Canty would like to have others involved with him, the reality is that is not what the state found and Mr. Canty pled guilty,” added attorney James Rosenblatt, who also represents Hall.
HJH, which has been in business for more than 30 years, provides cost and expense reduction advice to clients.
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Canty served as president of HJH affiliate U.S. Tax Recovery Partners and was responsible for managing monies owed by customers — known as accounts receivable. He also oversaw the borrowing base, which is the amount of money a bank will loan a company based on the collateral pledged to secured the debt.
HJH’s borrowing base was based upon “unearned estimates of fees to be earned under the contingent fee contracts” with its customers, rather than accounts receivable, according to the plea agreement.
At person A’s direction, Canty knowingly submitted falsely inflated figures for those unearned estimates to the bank, the agreement added. The purpose was to convince the bank to continue to loan money. He apparently had no understanding that this violated a credit agreement with the bank and accounting principles.
An investigation by the bank “supports an inference that Canty was an unwitting participant,” the plea agreement stated.
Canty blew the whistle on the scheme but then took full responsibility for the fraud, his lawyers said. Therein lies the challenge in charging anyone else with a crime, Surovic told the judge.
“He actually went out of his way to say that he kept it hidden from his boss, that his boss did not know anything about it,” the prosecutor said. “Person A confirmed essentially what was in Mr. Canty’s written statement. That makes it very, very, very difficult for the government to prove beyond a reasonable doubt now that that individual had the knowledge required in order to be charged with a fraud.”
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Canty was performing duties more in a “serving capacity” rather than an “originating capacity,” Surovic added. Still, he said Canty should serve some time in prison.
Gerald Goldstein, one of Canty’s defense lawyers, said his client “suffers the indignity of not being an ideal witness because he’s accepted too much responsibility” for the fraud.
Canty “didn’t profit from this,” Goldstein said. “He just got his normal salary. He took nothing from this scheme. Meanwhile, his boss who came up with all of this …was living high on the hog.”
Goldstein later showed photographs of the boss’ estate “with horse stables and an eight-car garage” and his yacht.
Since his termination, Canty has worked as a long-distance truck driver to support his family. It’s a field that hires those with felony convictions as long as the crimes were non-violent, he said.
Canty didn’t place blame on anyone but himself for his actions.
“I lied to Texas Capital Bank because I was afraid to take the path that was clearly filled with obstacles, turmoil and uncertainty,” he told the judge. “I made the coward’s choice to take the good old path of least resistance.”
The nearly $12.9 million restitution amount Canty owes will be offset by any payments his former company makes to the bank.
Patrick Danner covers banking, insurance, business litigation and bankruptcies. To read more from Patrick, become a subscriber. firstname.lastname@example.org | Twitter: @AlamoPD