Investors are always looking for ways to make a good return but with limited risk of loss. Pacific Property Assets (PPA), an Irvine-based real estate investment firm, claimed to be offering many such opportunities. They may have been part of a massive Ponzi scheme where money from recent investors went PPA executives and earlier investors, not put into real estate as it was supposed to, reports the Orange County Register.
In 2009 PPA offered a new “Opportunity Fund” for investors. One Orange County resident, Susan Pinkstaff, took PPA at its word and invested $260,000 from March 20 through April 13. Instead of buying buildings her money helped pay for PPA’s bankruptcy lawyers, who filed its bankruptcy papers 11 weeks later.
PPA’s 68 year old CEO, Michael J. Stewart, will soon stand trial in federal court in Santa Ana facing eleven counts of fraud based on allegations PPA changed from a legitimate business that owned about fifty apartment buildings in Long Beach, Riverside and Arizona into a giant Ponzi scheme under his direction. Jury selection starts Tuesday.
The resulting damage totals about $115 million with about 650 people “investing” $91 million over the years and banks losing at least another $24 million from PPA mortgage defaults, according to federal prosecutors.
PPA promised up to 15% a year in returns to those who lent it cash to purchase apartment buildings, repair and renovate them then sell them for a profit. PPA told them the loans would be secured by property deeds but in fact that never happened. According to court documents, the buildings were actually heavily mortgaged.
The prosecution will probably focus on,
- Star government witness John J. Packard, Stewart’s former friend and PPA co-founder. Packard plead guilty to one count of fraud with remaining charges dismissed as part of an apparent agreement with prosecutors to testify.
- Opportunity Fund solicitations which stated PPA had contracted to purchase a San Diego County apartment building with more purchases to follow. No properties were actually purchased. The $9.2 million raised paid debts and Stewart’s and Packard’s salaries.
- Stewart and Packard gave themselves raises to $750,000 in the 18 months before PPA imploded with the downturn in the economy. The two benefited from more than $3 million in additional payments from the company.
- PPA purchased a partial ownership in a Newport Beach yacht used by Stewart and Packard and the company also owned a luxury SUV.
According to the prosecution,
- PPA’s apartment rental income couldn’t cover its expenses.
- Over time the buildings’ values increased. PPA used profits from refinancing and selling properties to pay expenses as well as Stewart and Packard.
- With the economic downturn of 2008 lenders stopped refinancing and PPA’s buildings lost value.
- To make up for it, PPA relied on money borrowed from individual investors which were partly used to pay monthly payments to prior investors.
Stewart’s defense is that PPA was operating in good faith and became a victim of the economic downturn. If that defense doesn’t work and he’s convicted Steward could face a maximum prison sentence of 220 years plus fines doubling the $115 million in estimated gross losses suffered by investors and banks.
If you believe you’ve been the victim of investment fraud, or your company has falsely been accused of such fraud, contact our office so we can discuss the situation, the state and federal laws that may apply and how we can protect your legal rights and interests.