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Two Arrested in Real Estate Ponzi Scheme

NationalMortgageProfessional.com
Feb 06, 2014

The owners of a now-defunct Southern California real estate investment firm have been arrested for allegedly perpetrating a Ponzi scheme that ended with the bankruptcy of their company and caused private investors and banks collectively to lose well over $110 million when the scheme collapsed. Michael Stewart of Phoenix, and John Packard of Long Beach, California, were arrested without incident by special agents with the FBI. The two men were named last month in a 16-count indictment returned by a federal grand jury. The two men each face 11 counts of mail fraud, three counts of bank fraud, and two counts of bankruptcy fraud. Stewart and Packard owned and were the chief executives of Pacific Property Assets (PPA), which had offices in Long Beach and Irvine. The two men created PPA in 1999 to purchase, renovate, operate, and resell or refinance apartment complexes in Southern California and Arizona. Typically, PPA financed property acquisitions through mortgages, and it raised money from private investors to pay for renovations to the properties. After several years, PPA would usually refinance (or sometimes sell) each property. Although PPA’s apartment rental operations were not profitable, it was able to raise cash through refinancing. As real estate values were generally increasing until approximately 2007, the properties were refinanced at ever-higher values, which enabled PPA to use the extra refinancing proceeds to not only pay off the original mortgages, but also to make payments on other loans, make payments to investors, to pay other business expenses, and to pay Stewart and Packard. In its 10 years of operations, PPA acquired more than 100 real estate properties and raised tens of millions of dollars from hundreds of investors. Stewart and Packard paid themselves annual salaries of $400,000 to $750,000, and each received millions of dollars in additional payments.    According to the indictment, 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. As the value of PPA’s properties was falling, PPA could no longer raise money by refinancing its properties with increasingly large mortgages. Furthermore, PPA faced large debt payments to its mortgage lenders and private investors, while it was continuing to lose money in its business operations. To keep PPA afloat, from late 2007 through April 2009, Stewart and Packard allegedly continued to raise tens of millions of dollars from new investors. The defendants are accused of using these new funds to pay earlier investors, mortgage lenders, other company expenses, and Stewart and Packard themselves. The indictment alleges that during the course of this continued fundraising effort, Stewart and Packard misrepresented PPA’s financial condition, claiming that its business model was still working, and that PPA was still financially stable and able to raise money through refinancing. Stewart and Packard allegedly concealed from investors the fact that the business had effectively become a Ponzi scheme, using new investors’ funds to pay back earlier investors. Moreover, following PPA’s final investor offering in 2009, virtually none of the investors’ funds were used to invest in new property purchases, as had been promised to investors; instead, the money was used to pay earlier investors and banks, to pay Stewart and Packard, and to pay PPA’s bankruptcy attorney. The indictment also charges that PPA provided false financial information to at least one of its bank lenders—Vineyard Bank—in order to obtain loans and to maintain its line of credit with that bank. In particular, PPA allegedly substantially overstated its income (including its rental revenue) and assets (including its cash position), concealing the fact that its operations were unprofitable and it had limited liquidity. PPA and a group of related companies filed for bankruptcy in June 2009. When the bankruptcy was filed, PPA owed 647 private investors more than $91 million, and it owed banks approximately $100 million. In the bankruptcy proceeding, the private investors received nothing, while banks lost an estimated $24 million. The indictment further charges that Stewart and Packard committed fraud in connection with the bankruptcy process. After PPA had retained bankruptcy attorneys and shortly before it filed for bankruptcy, Stewart and Packard allegedly transferred $165,000 from PPA to Packard’s personal bank account, ensuring that those funds were not available to PPA’s creditors through the bankruptcy process. The indictment also charges that after PPA entered bankruptcy, Stewart and Packard arranged for $131,000 in funds due to PPA to be transferred to outside accounts and then to Stewart, Packard, and their personal attorneys, thus circumventing the bankruptcy process.  
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