Midway through his testimony this week, Wheeler Neff — the Delaware lawyer who federal prosecutors have labeled a co-architect of a business tactic that has enabled payday lenders to dodge government regulations for years — was finally asked the questions he had waited to answer since his indictment last year.
Neff had already explained to jurors how he came to the legal conclusion in 2005 that partnering with American Indian tribes would allow the multimillion-dollar payday loan industry to continue issuing low-dollar, high-interest credit nationwide despite the passage of tougher lending laws in states such as Pennsylvania. He said he had helped several lenders forge their first relationships with tribes across the United States.
"Was it your intent to create an illegal payday lending company?" his attorney, Christopher Warren, finally asked his client nearly eight hours into his testimony. "Was this all a sham?"
Neff responded: "Of course not."
That answer may prove key to the outcome in a racketeering prosecution that has put the widely adopted tribal lending model and its two chief architects in its crosshairs.
For months in a Philadelphia courtroom, prosecutors have portrayed the business alliances Neff and his chief client and co-defendant — Main Line lender Charles Hallinan — developed with American Indians as bogus partnerships that preyed upon the dire financial straits of thousands of cash-strapped borrowers. Hallinan used those tribes to continue making millions, government lawyers contend, while breaking state usury laws by charging borrowers annual interest rates approaching 800 percent.
But in presenting their own case to the jury this week, defense lawyers have pushed back, arguing that in an unsettled regulatory landscape their clients simply exploited legal loopholes. Whether or not Neff and Hallinan's "rent-a-tribe" tactic is proven in court to be illegal, they asserted, both men believed they were acting within the law — a potentially valid defense to the charges in the case.
What the jury makes of that claim remains to be seen. U.S. District Judge Eduardo Robreno dismissed the panel on Thursday until Nov. 20, when lawyers on both sides are scheduled to deliver closing remarks after 26 days of testimony.
But as the trial has dragged since September, tensions within the courtroom have begun boiling over.
Prosecutor Mark Dubnoff spent hours trying to expose Neff as a fraud in a combative two-day cross-examination this week that covered everything from his mispronunciation of tribal names to whether he lied on his resumé about grades he earned nearly five decades ago as an undergraduate at Bucknell University.
That last line of questioning prompted Hallinan's lawyer, Edwin Jacobs, to quip during a break in the proceedings: "When Wheeler was a Cub Scout, did he earn all his merit badges honestly?"
Hallinan, who chose not to testify, could also be heard venting his frustration to supporters gathered in the courtroom gallery.
Behind that courtroom sniping lies a fundamental difference in how both sides view the case.
What prosecutors describe as the paper-thin legal cover Neff generated to aid in his clients' continued illegal lending, Neff described during his testimony as a heavily researched, good-faith attempt to identify and exploit an unsettled area of the law.
The 68-year-old Wilmington lawyer spent decades practicing banking law, first as a regulatory lawyer for the Delaware Attorney General's Office in the late '70s before landing a post as a vice president of Beneficial Bank. There, he said, he helped originate the popular short-term loan program that allows tax preparers to issue tax refund checks to customers the day their returns are filed.
Hallinan, he said, first approached him about forging a possible relationship with an Indian tribe as government efforts to crack down on relationships between payday lenders and regional banks continued to cause headaches for his industry.
At the time, there was little in the way of specific law, court opinion, or legal authority to regulate tribal involvement in payday lending, Neff told jurors.
And after months of legal research, he ultimately concluded that — using a similar legal framework to that which tribes have relied upon to erect casinos on reservations in states that bar gambling — payday lenders could avoid state interest-rate caps by setting up shop on self-governing tribal lands and offering their loans over the internet.
"There were certainly no federal laws that said you couldn't do it?" Warren, the defense lawyer, asked.
"The area was wide open," Neff said. "Congress had not yet weighed in."
Acting under Neff's advice, Hallinan forged the first of what would be many relationships his companies would form with tribes across the country — ones prosecutors have sought to show were ultimately hollow.
Though the tribes were ostensibly partners in the payday lending operations, government witnesses have testified that they did little more each month than collect a payoff from Hallinan's companies for the use of their names. Meanwhile, Hallinan continued to issue and service nearly all of the loans from his offices in Bala Cynwyd.
In his cross-examination of Neff, Dubnoff, the prosecutor, challenged the very basis for his model — the idea that interest rates set by tribal lenders could be exported outside of reservation lands and that tribal sovereign immunity would protect them from lawsuits.
Later, with the jury out of the courtroom, he questioned how closely Neff had vetted Hallinan's Native American partners.
"He was not acting in good faith," Dubnoff told the judge. "He did no due diligence whatsoever."