Finance: Failed Carlsbad Mortgage Firm in Hands Of Federal Investigators
The latest alleged financial scam in San Diego, the collapse of PinnFund USA, described by federal prosecutors as “a typical Ponzi scheme,” appears to have plenty of parallels to two of the area’s most notorious investor frauds: Pioneer Mortgage and the J. David Dominelli case.
“It’s d & #233;j & #341; vu all over again,” said Tim Cohelan, a local attorney who once represented investors in a federal class-action case against Pioneer Mortgage and its CEO, Gary Naiman. “The similarities are all there, in terms of how the operation is structured, in the lack of accountability of the top man and in how few controls are built into the business.”
In all three cases, investors sunk millions of dollars into what appeared to be a legitimate and successful enterprise, only to be eventually wiped out when the ruse was discovered and the stream of new investor money dried up.
In federal documents filed last month, attorneys for the Securities and Exchange Commission charge that Michael Fanghella, CEO for PinnFund USA, had millions of dollars of investor funds transferred to accounts he directly controlled.
Federal lawyers allege Fanghella burned through some $107 million starting in 1997 on such things as expensive cars, trips and houses, including one in Laguna Niguel that cost nearly $5 million. That house was given to Fanghella’s girlfriend, Kelly “Jaye” Cook, also known as Kelly Spagnola, described in the complaint as a former porn actress.
Although PinnFund was engaged in an ostensibly legitimate business, making and selling mortgage loans to sub-prime borrowers, the company was really operated as the cash cow for Fanghella, who has fled the country, federal officials said.
Nick Morgan, senior counsel for the SEC, said the latest statement from Fanghella’s credit card shows he charged a room at the Holiday Inn at Los Angeles International Airport, and $1,100 for a ticket with American Airlines on March 22, the day after the SEC filed its complaint. The following day, Fanghella’s card shows $35 in fee charges from a Barbados currency exchange house, Morgan said.
Unraveling PinnFund Case
In federal court last week, the SEC was granted a preliminary injunction freezing the assets of PinnFund and its related entities, Fanghella, Cook, and James Hillman, a top PinnFund executive.
According to the complaint, PinnFund altered its financial statements and forged auditors’ reports to make it appear as though the company was profitable, and paying investors more than 17 percent annually.
In reality, PinnFund racked up net losses of $22 million in 1998; $32 million in 1999; and an unaudited loss of $36 million last year, according to financial statements contained in the complaint.
A key similarity in all three local fraud cases is the luring of new investors with the promise of above-average returns, said Mike Aguirre, an attorney who specializes in securities fraud and represented investors in both the Pioneer Mortgage and Dominelli cases.
“As in all frauds, there is no magic bullet that disconnects risk from returns. The higher the return, the greater the risk,” Aguirre said.
In the J. David case, eccentric stockbroker Dominelli set up an international currency trading operation in La Jolla in the early 1980s that supposedly generated more than 40 percent annual returns. Of course, Dominelli was doing little in actual trading and simply paying off existing investors with new investor funds, the essence of a standard Ponzi scheme.
Like Fanghella, Dominelli and his partner and girlfriend, Nancy Hoover, were conspicuous consumers with an opulent lifestyle, purchasing luxury cars, houses and artwork. The principals in both schemes often showered lavish gifts on employees and friends and were heavy contributors to nonprofit organizations.
Among the seized assets from Fanghella were five properties, including a house and condo in Rancho Santa Fe, Cook’s Laguna Niguel house, a house in Huntington Beach and one in Barbados. The SEC also seized a dozen cars, including several Mercedes’, Jaguars and BMWs, original artwork, jewelry, and bank accounts containing millions of dollars.
Pioneer Was Different
In contrast, Gary Naiman’s Pioneer Mortgage, a hard-money lender that specialized in second and third-trust deeds, was less ostentatious, said some familiar with the case.
“There were no actresses and no fancy houses,” said his former attorney, Bob Rose.
Some 2,800 investors put more than $200 million into Pioneer Mortgage. The business had been handed down to Naiman by his father, but as the California real estate market plunged in the late 1980s and early 1990s, the values of the deeds pledged to the company by borrowers dissolved. In his attempt to prop up earlier investors, Naiman illegally commingled funds and defrauded other investors. He also allegedly used funds provided him by several prominent local banks, although most of these arranged court settlements that admitted no liability for their participation.
Naiman pleaded guilty to mail fraud and money laundering in March 1995 and was sentenced to 78 months in prison. Naiman is now on parole, living in the Las Vegas area after serving about five years, Rose said.
Another difference between Pioneer Mortgage and the other frauds was the type of investors who were recruited. In Pioneer, while there were a few wealthy investors, the majority were elderly and retirees, said John Wertz, an attorney who represented Pioneer investors in the federal class-action case.
“A lot of them were recruited through Naiman’s synagogue,” Wertz said. “When the economy went on the skids and the recession occurred, the basic real estate values fell markedly and there was no security in the second trust deeds. They needed to bring in more money to service the obligations, and at that point, it morphed into a Ponzi-like situation.”
In the J. David & Co. swindle, Dominelli and Hoover curried the company of many well-heeled, prominent investors. Although many were skeptical about the operation, few argued when they received checks with returns that were far in excess of anything they could obtain in the stock market or from more mundane investments.
Cohelan said a common thread in many Ponzi frauds is how the funds are used. About a third of the money is used to pay off previous investors; about a third goes to support the lavish lifestyles of the principals; and the remaining third goes for administrative pretense, including employees, real estate and costs related to keeping the fraud alive.
Inevitably, the bubble bursts, resulting in giant and extensive lawsuits, criminal charges, and the loss of most investor funds, Cohelan said.
Aguirre, speaking of PinnFund, said it resembles J. David & Co. in that the investment was presented as if the principals uncovered some trading advantage and were sharing it with a relatively small group of people.
Yet, as in similar Ponzi schemes, the collaboration of others is essential if the fraud is to grow and continue, which appears to be the case with PinnFund, he said.
PinnFund USA was started in 1993 and grew to 462 employees in 62 offices in 46 states by the end of 1998. At the time the SEC seized PinnFund’s assets, about 200 employees were based at its two-story headquarters off Palomar Airport Road in Carlsbad.
According to published reports, many PinnFund employees have not received all their paychecks and vacation time.
The total size of PinnFund’s fraud, now estimated about $300 million, is larger than that lost in Pioneer Mortgage. SEC documents state Fanghella and Hillman raised the money from “at least 166 investors.”
With Pioneer, the estimated loss was $200 million, while about $93 million was lost in J. David.
Aguirre discounted the evidence that San Diego seems to be particularly susceptible to Ponzi operations, saying he’s handled similar cases in Orange County and knows of others. It’s more a Sun Belt phenomena and generally targets elderly investors, he said.
Wertz had a more cynical take.
“It seems like there’s a recurrence of this type of thing all too often in our community,” he said. “There’s an old saying that I don’t claim is mine, and that is, ‘San Diego is a sunny place where shady people live.'”
