Former Alpha Red COO Aided in Fraud Scheme, Suit Says

HOUSTON — The trustee leading the Chapter 7 bankruptcy filing for defunct web-hosting provider Alpha Red has filed suit against the company's former chief operating officer, alleging he assisted in and benefited from a fraudulent money-transfer scheme.

According to documents obtained by XBIZ, former Alpha Red COO Benjamin Pannell helped transfer $2.7 million to former CEO James McCreary's Hong Kong bank account just prior to the company's bankruptcy filing. The trustee also says more than $72,000 of the company's funds went directly to Pannell.

Alpha Red, which hosted numerous adult sites on its servers, left its clients in the dark after it filed Chapter 11 about two years ago, listing about $10 million in debt. The bankruptcy filing was later switched to Chapter 7 and subsequently McCreary was arrested by the U.S. Marshal's Service after he failed to appear at bankruptcy proceedings in January. McCreary later was found in contempt.

The initial bankruptcy filing was preceded by an emergency receiver petition by Alpha Red's largest customer, online storage and web hosting provider Megaupload, which said that McCreary had not only abandoned client obligations but also fled the U.S. taking about $875,000 of the company's money and about $1 million of other customers’ money.

The trustee's suit, which seeks recovery of funds Pannell allegedly received, said the former COO had "reasonable cause to believe that the debtor was insolvent" when the wire payments were made, mostly to McCreary's Chase bank account.

It also said that Pannell engaged in "improper self-dealing and conflicts of interest" and that he "clearly made the fraudulent transfers with actual intent to hinder, delay or defraud his creditors."

"Pannell breached his duties in numerous ways by causing or allowing the debtor to pay for unreasonable and/or personal purported 'business expenses,' causing or allowing the debtor to pay him and his wife excessive and unreasonable compensation, and generally looting the debtor," the suit said. "As a result, some or all of such amounts are now not collectible as a practical matter."

The trustee, Douglas Brickley, is seeking a court order awarding damages, plus interest, of the funds Pannell allegedly diverted in the constructive fraud case.

XBIZ was unable to contact Pannell, of Cypress, Texas, for comment.