UPDATE: Judge Finds Former Real Estate Firm Co-Owner Guilty in Ponzi Scheme Case; Defendant Faces Up To 220 Years in Prison

 

UPDATE: An Orange County judge convicted the co-owner of a now-defunct real estate firm that had offices in Long Beach and Irvine of federal fraud charges Friday afternoon for perpetuating a scheme that ended with the bankruptcy of the company and hundreds investors collectively losing as much as $169 million, authorities announced.

Michael J. Stewart, 68, was found guilty of 11 counts of mail fraud after a nine-day jury trial before United States District Judge Cormac J. Carney, according to a press release.

Stewart, who currently resides in San Clemente, was taken into custody following the verdict.

He is scheduled to be sentenced on November 2 and faces a maximum sentence of 220 years in federal prison.

PREVIOUSLY: Trial Continues in Case Against Real Estate Firm Co-Owner Accused of Ponzi Scheme

7/30/15 at 4:39PM | The trial of a Phoenix man accused of setting up a real estate Ponzi scheme during the Great Recession continued in Santa Ana on Tuesday.

According to federal prosecutors who spoke with jurors at court, Michael J. Stewart—a co-owner of a real estate firm based in Irvine and Long Beach—set up the Ponzi scheme to pay off old investors while continuing to recruit new ones for a plan to flip distressed apartment buildings during the Great Recession’s housing collapse.

Stewart’s attorney told jurors that in fact his client was innocent and thought his plan was financially prudent because homeowners who lost their property in foreclosure would need to rent apartments.

Defense attorney Kenneth Miller also placed the blame for the company's failure on co-defendant John Packard of Long Beach, who pleaded guilty in November.

According to Assistant U.S. Attorney Brett Sagel, Packard “is hoping for a lesser sentence” and will testify against his former co-owner of Pacific Property Assets. Packard is also awaiting sentencing.

According to the court, Packard and Stewart co-founded and ran Pacific Property Assets, a company that bought property, renovated it and then managed it as rental property.

Over the course of 10 years, the company acquired more than 100 properties. The two men ran the company from 1999 to June 26, 2009, when they filed for bankruptcy.

This led them to owing 647 investors about $91 million and banks about $100 million. Investors got nothing, and the banks lost about $24 million, according to federal prosecutors.

In early 2009, during the downturn of the economy, Sagel said everyone was "extremely concerned... But defendant Michael Stewart is telling everybody, every potential investor ... he has an opportunity for you to make money because his business is thriving."

Stewart failed to tell his investors his company was failing, Sagel said.

The plan he sold to new investors was to snatch up apartment buildings at "rock bottom prices'' and refurbish them to fill the void in housing when evicted homeowners look for a place to live, Sagel said.

Investors were told they could reap 15 to 30 percent interest a month, Sagel alleged.

"He was offering something too good to be true because it was,'' Sagel said.

What he was telling investors was that the economic collapse "gravely affected PPA,'' Sagel said.

Stewart's and Packard's business plan worked when they founded their company in 1999, Sagel said. They would borrow money from banks and individual investors while acquiring apartment buildings and renting out units and selling or refinancing the properties.

However, the rental income was never enough to even pay the bills, but as long as property values continued to thrive, the model worked as they sold off and refinanced the buildings, Sagel said.

Packard's job was to acquire property, deal with the banks, get loans and manage the apartments. Stewart, an attorney and real estate broker, was in charge of recruiting investors.

When the housing industry began its collapse in 2006, the company found it tougher sledding to make a profit. By the end of 2007, the company had gotten its last refinancing deal, and the income from sales and loans had driedup, Sagel said.

That left one source of income left — new investors, Sagel said. The decision was made to "step on the gas with investors,'' Sagel said.

At one point, they put $2 million in the bank and then almost immediately pulled it back out, so they could show investors a balance sheet with the money in the account, Sagel alleged.

Stewart also continued to draw a substantial salary while pulling his investments out of his struggling company, even while he was giving investors a rosy account of its future, Sagel alleged.

The money from new investors to the Opportunity Fund was supposed to be spent on acquiring apartment buildings, but it instead went to pay off old debts, amounting to a Ponzi scheme, Sagel alleged.

Miller said his client could not have anticipated that the collapse of the housing industry would spread to apartments as well.

"What the government is doing is unfairly looking at this case with 20/20 hindsight,'' Miller said. "Back when it was happening it wasn't all that clear.''

By 2009, the housing industry slump appeared to be bottoming out, Miller said.

Stewart and Packard's company had a solid track record and had earned praise for its business model before the economy cratered, Miller said.

Packard was the "hammer'' who had "always come through'' but had failed to win the financing to make the Opportunity Fund work, Miller said.

"Investors thought it was a good idea,'' Miller said. And they were warned in memos of the high risks, Miller said.

But up until April 2009, PPA had never failed to make a payment on a loan or to an investor, Miller said.

Stewart himself lost $1 million in his company's collapse, Miller said.

Packard "was great at his job and Mike Stewart trusted him to do his job,'' Miller said.

The two had $110 million in equity in 2006 and could have walked away with $40 million apiece after taxes if they had retired then, Miller said.

City News Service contributed to this report. 



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