How a Legal Battle in the Digital Age Can Go Terribly Wrong

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John Howe runs a small hedge fund in Connecticut. In the wake of the financial crisis, he took over a portfolio of underperforming loans, offering the debtors a choice: They could hand over their property, and he would release them from their personal guarantee. Or he would pursue them in court.

But his attempt to collect $20 million from one property owner, Steven Fustolo, a certified public accountant outside Boston, took a complicated turn when Mr. Fustolo pushed back, entangling both men in a messy legal battle.

Their fight shows the perils of aggressive investing tactics. Until recently, borrowers like Mr. Fustolo had limited recourse in the face of forceful but legal maneuvers by hedge fund managers like Mr. Howe. These days, retaliation is only a mouse click away, and it can cause lasting — and expensive — damage for all parties.

Mr. Fustolo was upside down on his loan to develop a beachfront property. Feeling he was being bullied into an unfair deal with Mr. Howe, he filed federal whistle-blower claims. Two agencies dismissed them, so he paid a blogger to post his stories about false fraud investigations involving the hedge fund and then spread those stories widely, according to court documents. Mr. Fustolo admitted to writing and distributing several stories but denied any involvement as they spread to other websites.

Like other hedge fund managers, Mr. Howe has a minimal presence on the internet. He claimed the attention from Mr. Fustolo’s actions had damaged his reputation and harmed his family.

Mr. Fustolo contends that there is no proof that his actions cost Mr. Howe business. But he did plead guilty to a charge of criminal harassment in July and will report to a county jail this month to serve a nine-month sentence.

The battle also shows the power and peril of technology: What goes on the internet can spread wildly and cannot be easily removed.

“It’s a tough problem, and you have to manage people’s expectations,” said Christopher Falkenberg, a lawyer and president of Insite Risk Management, a security firm focused on wealthy people. “I’ll tell them you can spend $100,000 and we’ll do the best we can, but there’s no guarantee here.”

The root of the fight was a $12.7 million loan that Mr. Fustolo took out in early 2007 from the Patriot Group, a holding company that Mr. Howe spun off from his hedge fund, Old Hill Partners in Darien, Conn. Mr. Fustolo’s goal was to develop a 242-unit condominium complex on the beach in Revere, Mass., about six miles north of Boston.

Within 10 months, the loan was in default. A legal battle ensued in 2008 when the Patriot Group moved to foreclose on the property. Mr. Fustolo tried to buy time through the bankruptcy courts to reorganize the business.

“It was a tough time in the market,” he said. “That was an impossible time to get replacement financing.”

The dispute was similar to many involving real estate after the financial markets crashed and lending dried up. Underwriting standards for commercial real estate tightened in the second quarter of 2009, when borrowers were required to contribute 30 percent or more to get a loan approved, according to a report from the Center for Real Estate at Portland State University.

Mr. Fustolo tried again to gain control of the property, creating a group called Affinity Advisers in 2010 to buy it for $5.2 million at auction. But he defaulted, and Mr. Howe took him to court again.

In 2011, a judge in Middlesex County, Mass., ordered Mr. Fustolo to pay about $20 million, which included penalties and interest, to the Patriot Group.

“We weren’t looking to get blood from a stone,” Mr. Howe said. “We just wanted him to make a good-faith effort. I was just fulfilling my fiduciary duty to try to collect for my investors.”

After trying to collect, Mr. Howe and two other creditors forced Mr. Fustolo into bankruptcy in 2013. “We figured it was better to let the bankruptcy trustee collect for us,” Mr. Howe said.

Mr. Fustolo said the move was counterproductive because there was no way for him to find a solution to pay his creditors back. But he refused to give up his fight and filed whistle-blower claims purporting to show tax fraud at Old Hill, documents show. The Securities and Exchange Commission and the Internal Revenue Service declined to pursue his claims.

Mr. Fustolo used those filings as the basis for posts, on a website called Whistleblowers International, that claimed Mr. Howe was being investigated for fraud related to the tax treatment of loans in the portfolio, according to the Massachusetts attorney general, Maura Healey, who charged Mr. Fustolo in 2015 under a new online-harassment statute.

“I wanted to get on the record that I believed the bankruptcy was frivolous,” Mr. Fustolo said. “I didn’t really have a hope at that time. I wanted to notify them. I wanted to call them out.”

Mr. Howe said he had brushed off the posts at first. But when he saw how they were affecting his business, he hired a cybersecurity firm to determine what had happened.

The firm traced the posts to a Florida blogger, Dylan Potter, who admitted to investigators that Mr. Fustolo had paid him to create Whistleblowers International. With Mr. Potter’s cooperation, the authorities issued an arrest warrant in Massachusetts for Mr. Fustolo.

Mr. Potter said in the arrest warrant that Mr. Fustolo had asked him over email in 2014 to conduct a “negative internet P.R.” campaign and directed him to use search strategies that would produce the articles when people searched for Mr. Howe’s name. He also paid Mr. Potter to use online services to send out releases containing the false information.

Around the same time, the arrest warrant said, Mr. Fustolo contacted someone who specialized in ranking negative articles high in searches, asking for assurances that the campaign would keep the negative articles visible.

A United States Bankruptcy Court ruling in February deemed the filings and postings an attempt to intimidate Mr. Howe, with the judge, Joan N. Feeney, calling the whistle-blower claims “utterly bogus.” Mr. Fustolo said he would appeal the ruling.

Mr. Howe said in Massachusetts criminal court that Mr. Fustolo had also posted attacks on his family, including his wife and daughter. Mr. Fustolo denied his involvement in other postings against Mr. Howe, particularly those involving his family. He admitted only to the ones involving the initial posting.

Over the years, the posts about Mr. Howe spread across the internet. They appeared on sites like ripoffreport.com and complaintsboard.com. One post repeating the unsubstantiated fraud claims carried a time stamp from Romania — and no details to back up the claims.

Because those posts originated overseas, they would be nearly impossible to take down, said Mr. Falkenberg of Insite Risk Management.

“You can send as many letters as you want to the service provider in Morocco or Croatia, and they’re going to throw them in the trash,” he said. “You need to replace them with your own news.”

Online harassment claims rose 84 percent in 2018 and 15 percent this year, according Chubb, the insurance company, which offers coverage for such harassment.

Mr. Howe estimates that he has spent several million dollars on legal bills and security experts, but he said the costs to his firm in lost assets were far higher. He said he had to cancel a $300 million fund in the fall of 2014 when the attacks ramped up.

The fight was costly for Mr. Fustolo, too. He said he had borrowed money from friends and family to pay about $2 million in legal bills for the criminal and bankruptcy trials. He said his debt from the loan was more than $40 million.

Mr. Fustolo will also spend the next nine months in jail, after pleading guilty to a misdemeanor charge of criminal harassment in the case brought by Ms. Healey, the Massachusetts attorney general.

Mr. Fustolo considers this case a First Amendment battle in which Mr. Howe’s money and connections have made what would be a civil matter — defamation — into a criminal one. He said he had pleaded guilty only because he had run out of money.

“I fell on the sword to get rid of the thing,” Mr. Fustolo said. “Every day I wake up, I think I should have fought it.”

Mr. Howe said he was grateful to Ms. Healey for pursing the case, but said he would have preferred a trial to clear his name.

“In my world, investors want you to make money for them, and they don’t want controversy,” he said. “If you’re a very large institution, an attack like this is very manageable. But if you’re a small one like us, it has a huge impact.”

Despite winning in the bankruptcy and criminal courts and posting an explanation on the Old Hill website, Mr. Howe said, “we still get asked by investors about it all the time.”

What started out as a typical financial dispute, like so many during the financial crisis, ended up involving millions of dollars, damaged reputations and enough legal filings for a lifetime, with one man trying to rehabilitate his reputation and another going to jail.