Finance: Investment Exec Accused of Masterminding $300 Million Ponzi Scheme
The federal government’s case against Michael J. Fanghella, the former CEO of PinnFund USA, has taken a different tack, with prosecutors filing criminal charges against him for his role in an alleged $300 million Ponzi scheme.
Fanghella, 50, surrendered to federal authorities Aug. 1 and was promptly arraigned for contempt in a civil case stemming from his actions as head of PinnFund.
He was later charged with two criminal counts, including illegal wire transfer of some $7.3 million to his then-girlfriend, Kelly Cook, also known as Kelly Jaye and Kelly Spagnola. He also allegedly defrauded a federal agency by making false financial statements about PinnFund, according to the criminal complaint.
In addition to the criminal counts, Fanghella is also facing a judgment for $110 million entered against him in May when he failed to appear in the civil proceedings filed by the Securities and Exchange Commission.
In court filings, the SEC claims Fanghella and James Hillman, PinnFund’s president, defrauded some 166 investors of more than $300 million in what SEC officials described as a Ponzi scheme.
The investor money raised by PinnFund was never used to actually make loans, but to pay for Fanghella’s lavish lifestyle, and pay an higher than average interest rate of 17 percent to earlier investors, according to the SEC complaint.
Federal prosecutors allege Fanghella used PinnFund money to buy ocean front homes, expensive sports cars, jewelry, art work, and high-priced dinners at upscale restaurants. They also allege he spent more than $15 million on. Cook, whom court documents described as a porn actress, including buying her a $5 million house in Laguna Beach.
Since turning himself in to federal authorities, Fanghella has been held at the Metropolitan Correctional Center.
Last week, he was scheduled to appear in court to ask that a freeze on his assets be lifted so he can pay for his legal defense. SEC lawyers and those representing the court-appointed receiver to PinnFund are opposing the request.
“Our argument is that a bank robber should not be allowed to use the proceeds of the bank robbery for the best defense money can buy,” said Nicolas Morgan, SEC prosecutor.
Should Federal Judge Marilyn Huff agree with the SEC lawyers, she would appoint a defense attorney paid by the government. At a hearing Aug. 2, attorney Ezekial Cortez represented Fanghella.
Huff has already partially lifted a freeze on Hillman’s assets, allowing him a cap of $250,000 for his legal defense. But Hillman’s attorneys, from the Los Angeles office of Sheppard Mullin Richter and Hampton, have said they are owed about $800,000.
Charles LaBella, the court-appointed receiver, said in his initial report to the court on PinnFund that Hillman should have been “on notice of the ‘suspicion of fraud’ in June 1999,” and yet continued to raise millions from investors.
So far, federal prosecutors have filed only civil charges against Hillman. No charges have been filed against Cook, although her assets have been frozen, or Keith Grubba, PinnFund’s former chief operating officer and Fanghella’s partner.
While the civil and criminal proceedings would be kept separate, Huff said she would be willing to serve as the judge in both cases.
In addition to these cases, the PinnFund is also in federal bankruptcy court.
Founded in 1993, PinnFund was a mortgage lender to sub-prime borrowers, or those with impaired credit histories. By 1998, it had grown to 62 offices in 46 states and 462 employees, according to a federal complaint.
At the point it was seized, the company had about 200 employees.
