The "toxic" runoff of Trevor Cook's $190 million Ponzi scheme seems to be spreading.

A money management firm in Palatine, Ill., that sold itself into Mesa Holdings of Minnetonka filed a federal lawsuit Wednesday seeking to kill the deal and force the firm into a receivership.

In October 2008, Michael Kabarec sold his small financial advisory firm in Illinois to Mesa Holdings and its "alter ego," Mesa Financial Advisors Inc., seeking economies of scale. But according to the lawsuit Kabarec filed in Minneapolis, Mesa is insolvent, and it's blaming its financial troubles partly on Cook, a "toxic shareholder" who has pleaded guilty to defrauding more than 1,000 investors in a currency investment scheme.

However, the suit also blames Mesa's troubles on its CEO, L. Edward Baker, who enthusiastically vouched for Cook and the currency investment program that he claimed would safeguard investors' principal while producing double-digit returns.

Baker is a former CEO of Piper Jaffray Trust who launched Mesa Holdings to offer support services to a network of independent financial advisory firms. He could not be reached Wednesday for comment.

Kabarec was the sole shareholder in Kabarec Financial Advisors Ltd. when he sold his stock. The deal called for Mesa to pay Kabarec $2.2 million for the stock, and he and an associate were each to get 318,600 shares in Mesa.

Under the agreement, Kabarec and his associate would continue running their firm and Mesa would provide them with services like managing their 401(k) plan and handling taxes in exchange for 20 percent of their adjusted gross revenue.

The suit says Mesa defaulted on the deal in January. It alleges that Mesa diverted and misappropriated funds by collecting excessive payments from Kabarec Financial, making it hard for the company to pay its debts.

Mesa's actions triggered a contract provision that allows Kabarec to recoup 51 percent of its stock, which was being held in escrow, the suit says. But Mesa disputed that.

Mesa already was in "dire financial straits" before its deal with Kabarec in the fall of 2008, the suit says. "Among other things, defendants were heavily leveraged and facing a severe cash flow emergency because the majority of their debt had been deferred but was about to come due."

Kabarec blames Mesa for mismanaging its financial records and disbursement procedures, "as well as an improper practice of distributing cash to certain related party shareholders through 'bonuses' and undocumented 'loans.'" Mesa also improperly pledged some assets to multiple creditors without the consent of prior secured creditors, the suit says.

On May 3, Mesa Holdings sent a letter to shareholders regarding Cook, a "toxic shareholder" in the firm. The suit says the receiver liquidating Cook's assets had presented a settlement demand to Mesa to recover his assets, but Mesa couldn't agree to a deal "because it had no capital or available cash."

Mesa's insolvency was confirmed by an unaudited year-end balance sheet for 2009, which showed assets of $1.9 million, liabilities of $9.7 million, and shareholder equity at negative $7.9 million, the suit says.

Kabarec says that Baker vouched for Cook's fraudulent claims about having $4 billion in assets under management, and he raved about the performance of his investment program, describing it as "perhaps as compelling and secure as any investment we are aware of."

The receiver liquidating Cook's assets is going after investor proceeds he handed off to Baker. Cook claimed in a suit filed last year that Baker fraudulently induced him to invest $3.55 million in Mesa Holdings, plus $200,000 more in a currency fund Baker managed.

Kabarec says Baker is trying to settle with the receiver using Mesa's corporate assets, "notwithstanding the fact that Baker may be personally liable for amounts ultimately owed to the Cook receivership."

The suit seeks an order to the return Kabarec Financial's stock and the appointment of a receiver to oversee management of Mesa Holdings.

Dan Browning • 612-673-4493