Diane Harkey
Diane Harkey. Campaign photo

By Lisa Hill Fenning

A week ago Diane Harkey, a Republican running for Congress in California’s 49th District, posted a statement on her campaign website that denies her former husband Dan was responsible for running a Ponzi scheme and for defrauding investors during their decades-long marriage. She says the public records confirm her version of the story. In fact, however, the public records show she is lying.

I have examined the complaint brought by the investors against Mr. Harkey and his company, various transcripts of witness testimony, the jury verdict, the rulings by the trial and appellate courts, and the records of his corporate bankruptcy case, just as I have reviewed innumerable such records involving financial fraud schemes over the decades as part of my work when I was a U.S. Bankruptcy Judge in Los Angeles and later as a corporate bankruptcy lawyer.

This record shows that an Orange County jury, trial court, and appellate court all concluded that Mr. Harkey ran a Ponzi scheme that defrauded elderly and other investors from 2000 to 2008, holding him personally liable for repaying more than $10 million in damages — plus another $1 million in punitive damages for willfully and intentionally causing great harm. In 2013, an Orange County jury found that he breached his fiduciary duties to his investors and committed financial elder abuse. Three months ago, this judgment was affirmed by the California Court of Appeal.

The appellate court specifically held that Mr. Harkey had operated “a Ponzi scheme bilking his investors.” A Ponzi scheme is an investment fraud that involves paying purported (but actually fake) profits to existing investors from fresh funds contributed by new investors who are enticed by the prospect of the high returns being received by the early investors. When the spigot of new money dries up, later investors are left holding the bag and usually recover only pennies on their dollars.

As the court explained, “The mere existence of a Ponzi scheme is sufficient to establish actual intent to defraud.” So, yes, “Ponzi scheme” and “fraud” are exactly the right words to describe Mr. Harkey’s conduct.

The jury also found that Mr. Harkey improperly took money out of the business in the form of high fees, even though he had promised investors that he would not do so. And Mr. Harkey used company assets to pay many personal expenses. Ms. Harkey herself directly received money for her political campaigns from the funds taken out of the business. In short, even though she was not held liable for the fraud (about that, she is telling the truth), she benefited from it.

As her publicly filed campaign finance reports show, in 2006 she contributed about $900,000 to her failed bid for the state Senate. She contributed about $200,000 to her successful state Assembly race in 2008. Although she claims those funds came from her own income, she testified in the lawsuit that, when she needed to pay campaign bills in 2006, she simply asked the chief financial officer of her former husband’s business for money — and got it.

Ms. Harkey also refers to her ante-nuptial agreement with Mr. Harkey (which is also part of the public record) in her effort to distance herself from his business activities. That agreement provides that he would be sole owner of his business after their 1984 marriage. But she ignores the fact that the agreement also states that any of Mr. Harkey’s income or distributions from the business would be community property — that is, her property as well as his.

The publicly available records thus show that her political career was paid at least in part by money from Mr. Harkey’s business. Exactly how much isn’t clear because Ms. Harkey hasn’t disclosed the specific sources of her $1.1 million in campaign contributions.

In her website statement, she tries to blame the collapse of her former husband’s business — and the devastating losses suffered by his investors — on the Great Recession that started in 2008. Mr. Harkey’s Ponzi scheme had been going on for years before the recession started. The Great Recession exposed his financial schemes, but did not cause the investors’ losses. Mr. Harkey did.

Ms. Harkey — and her political career — profited along with her former husband from the ill-gotten proceeds from the business. That’s the real truth about Diane Harkey.


Lisa Hill Fenning lives in the 49th District. She is a retired U.S. Bankruptcy Judge and retired corporate bankruptcy partner at a law firm in Los Angeles.