The owners of a now-defunct real estate investment firm with offices in Irvine and Long Beach were arrested today for an alleged Ponzi scheme that ended with their company bankrupt and banks and investors losing more than $110 million, according to the U.S. Attorney's office.
Michael J. Stewart, 66, of Phoenix, and John J. Packard, 63, of Long Beach, were arrested by FBI agents without incident in connection with a 16-count indictment handed down by a federal grand jury last month. They each face 11 counts of mail fraud, three counts of bank fraud, and two counts of bankruptcy fraud that subject them to up to 320 years in federal prison with convictions and millions of dollars in fines, according to the U.S. Attorney's office in Santa Ana.
R. Scott Moxley previously wrote about the case the Securities & Exchange Commission also have against Stewart and Packard, alleging that after their previous company Pacific Property Assets (PPA) entered bankruptcy, they formed Apartments America to replicate PPA's failing business model and, as they accused of doing with PPA, misled investors. The SEC has been seeking civil penalties from the pair since a partial settlement of that case.
The chief executives created PPA in 1999 to purchase, renovate, operate, and resell or refinance apartment complexes in Southern California and Arizona. Properties were typically financed through mortgages and renovated with money raised from private investors. After several years, PPA would usually refinance or in some cases sell each property. Stewart worked mainly in the Irvine office, raising funds from investors, while Packard was based in the Long Beach office arranging for bank financing and managing the properties.
But, according to the feds, PPA did not make profits through renting out the apartments but by refinancing them. This strategy worked as long as property values continued to rise. As anyone who's lived through an upside-down mortgage knows, the market hit the skids in 2007. Over a decade, PPA acquired more than 100 real estate properties, raised tens of millions of dollars from hundreds of investors and paid Stewart and Packard annual salaries of $400,000 to $750,000, as well as millions more in additional payments. But by the end of 2007, when the real estate market began to decline and credit became scarce, PPA's business model was no longer feasible, according to last month's indictment.
Stewart and Packard are accused of going on to raise tens of millions of dollars from new investors through April 2009 to pay earlier investors, mortgage lenders, other company expenses and their own high salaries. To do this, Stewart and Packard misrepresented PPA's financial condition when the company had effectively become a Ponzi scheme, the indictment states.
Following the company's final investor offering in 2009, virtually none of the investors' funds were used to invest in new property purchases, as promised, but was used to pay the owners, earlier investors, banks and PPA's bankruptcy attorney, according to the indictment. The company is also accused of having given false financial information to at least one lender, Vineyard Bank, to obtain more loans and maintain a line of credit.
When PPA and a group of related companies filed for bankruptcy in June 2009, 647 private investors were owed more than $91 million, and banks were due about $100 million, according to the feds, who note the banks wound up losing about $24 million and the investors lost everything after bankruptcy proceedings.
Speaking of which, the indictment also accuses Stewart and Packard of having committed fraud in connection with the bankruptcy process by transferring $165,000 from PPA to Packard's personal bank account just before the bankruptcy filing to shield those funds from creditors. After PPA entered into bankruptcy, Stewart and Packard arranged for $131,000 in funds due to the company to be transferred to outside accounts and then to the owners and their personal attorneys, thus circumventing the bankruptcy process, according to the feds.
Packard was to be arraigned in federal court in Santa Ana today, while the same is expected of Stewart in Phoenix.