Orange County : Investment Fraud: War Being Lost

The crooks are winning Orange County’s war on investment fraud.

And their latest victories may push Orange County over the top in a three-way contest with New York City and the Miami-Fort Lauderdale area for the notorious distinction as America’s fraud capital, according to a host of federal and state law enforcement officials.

“Fraud is overwhelming in Orange County,” said Arthur Salzberg, Western regional counsel for the Commodity Futures Trading Commission, which regulates trading in precious metals and other commodities. For example, out of the 190 companies that the commission believes to be selling precious metals through various unlawful schemes, about 60 are in Southern California and more than half of those are in Orange County, predominantly Newport Beach, Salzberg said.

Records Not Kept

National statistics concerning investment fraud are not compiled, according to a statistician for the Department of Justice’s national criminal justice reference service. Law enforcement agents say overall figures on the amount of money fleeced from the public and the number of fraudulent companies are not kept because of overlapping jurisdictions and difficulty in defining white-collar crime.

The FBI refuses to publicly rank U.S. cities by their investment fraud activity for fear of creating an inter-regional competition for crime-fighting funds and manpower.

But prosecutors and investigators with state and federal agencies said they believe Orange County has more fraudulent investment operations affecting more investors than any other area of the country.

Biggest Fraud Case

“Orange County probably has the biggest fraud case in the U.S. right now--the Bank of America case,” said Steven Adler, assistant attorney general in charge of the California Department of Justice’s major fraud unit. Twelve state and federal investigators and four attorneys are working full time in Santa Ana to prosecute the real estate fraud in which the bank suffered a $95-million loss to date and ultimately it and other banks may lose $500 million, investigators said.

A federal law enforcement source said that more than $1 billion in investments is involved in just three Orange County cases, including the Bank of America case.

Despite a recent enforcement push by a myriad of agencies, the dollars and numbers of investors involved in fraudulent investment schemes in the county have soared since 1980.

According to the FBI, Orange County “is one of the areas that is experiencing a rapid and accelerating growth in federal white-collar crime violations in which the losses have reached into the hundreds of millions and impacted thousands of people in the community,” said James Annes, supervisory special agent in charge of the Orange County white-collar crime squad based in Santa Ana.

Among the more recent cases:

- On May 17, Internal Revenue Service and U.S. Postal Inspection Service agents raided the storefront office of Hawkey Income Tax and Investments in Anaheim to collect a truck full of records. Leslie (Bill) Hawkey allegedly set up tax shelters for gold mines in the California desert and Jerusalem and artichoke fields in Wyoming, among other investments. Federal investigators say several hundred investors have apparently lost millions of dollars and face perhaps millions of dollars more in back taxes and penalties. That investigation is continuing.

- Two Orange County widows lost their homes and about $120,000 in savings when William Campbell, president of Orange-based Vista Investment Properties Inc., spent $1.5 million of investors’ funds for his personal use. Campbell, who sold limited real estate partnerships to hundreds of investors around the county, pleaded guilty last September to four grand theft charges and was sentenced May 29 to four years in state prison.

- John G. Rinaldo, who defrauded hundreds of investors, mostly retirees, out of $10 million through his two Costa Mesa investment companies, was sentenced May 22 to three years in federal prison. Rinaldo’s companies took invested funds and lent them to his friends and others who defaulted on many of the loans. Court records show that Rinaldo appointed his teen-age stepdaughter as president of one of the firms.

But even with money and manpower putting some of these promoters behind bars, fighting Orange County’s investment frauds is like “hitting a ball of mercury with a hammer,” said the commodity commission’s Salzberg. When government action shuts down one company, a dozen new ones seem to spring up around it, he said. In many instances, the principals change their names and go back into business while cases against their former companies are pending in court.

Because Orange County is the land of milk and honey and real estate, countless fortunes have been made virtually overnight. To many of these land-rich Southlanders, otherwise wild claims by pitchmen do not seem out of line, investigators said. And, with population growing at a rate of about 40,000 people a year, the area has grown less suspicious of newcomers.

The potent mix of money and sunshine is coupled with an admittedly overworked law enforcement network, according to agents who said the situation will likely worsen. The commodities commission, for example, is facing a 15% budget cut that would trim the Western regional office’s manpower by one-third.

Another major fraud-fighting agency, the FBI, is not keeping pace with the expanding workload and accepts only cases involving large sums of money, according to state and local law enforcement officials.

Won’t Disclose Number

FBI Special Agent Annes would not disclose how many agents concentrate on financial crimes, but said about 55% of agents’ time in Orange County is spent on white-collar crime. He said the FBI has steadily increased the number of investigators assigned to the county.

Adler, of the state’s major fraud unit, said his staff has spent $900,000 investigating and prosecuting fraud cases since last September and he is asking the governor for more money.

He said that statewide the Department of Justice is prosecuting five fraud cases involving $300 million, investigating 29 others and has received information on another 18 cases that “we’re still figuring out what to do with.”

Orange County “could keep our entire unit busy,” he said. Of the cases the unit is investigating or prosecuting statewide, eight originated in Orange County with two each in San Diego and Sacramento and none in Los Angeles.

“Time works in favor of the crooks in every case,” said Adler, referring to the frustrating delays in prosecutions that enable many fraudulent operators to continue taking new investor funds.

Socializing Suspects

Law enforcement officials say Orange County investment fraud operators are very organized. Targets of fraud investigations are seen drinking together at popular hotels and clubs near John Wayne Airport, openly sharing customer mailing lists, making referrals and arranging business deals with each other, according to a police investigator who attends “happy hour” periods in a Newport Beach hotel bar to keep up on “the scam of the week.”

Police investigators in neighboring cities, who asked not to be identified, said they consider Newport’s lax law enforcement among the attractions drawing fraud operators to the area.

While police departments in the county’s larger cities have two or three detectives aggressively pursuing major fraud cases, Newport Beach has one.

Newport’s sole fraud detective, Robert Stephens, recently returned to patrol duty as part of routine beat rotation. He will be replaced by an officer with no experience in investigating fraud because Newport Beach Police Chief Charles (Pete) Gross said he wants to train new officers.

Newport’s fraud beat receives a low priority because there has been no outcry from the community for greater enforcement, Gross said.

“There is absolutely no way government can solve this problem. If anything we compound it” by tying up overburdened courts, Gross said.

Gross said in a recent interview that he does not feel uncomfortable with Newport Beach’s reputation as a haven for white-collar criminals, although it does pique his pride.

To make up for the lack of manpower, Gross said, he has asked local businessmen and attorneys to lend a hand on fraud investigations, but so far he has no volunteers. He said he relies on state and federal agencies to prosecute local white-collar criminals.

Plush Offices

Federal and state officials say they are investigating consumer complaints about dozens of investment companies headquartered along Dove Street, Quail Street, Birch Street and Newport Center Drive, where there is plenty of luxury office space available amid legitimate operations. A plush office and a prestige address to attract customers is very important to an investment fraud promoter, investigators say.

For example, in April, 1984, the Brazier Corp., then located at 1201 Dove St. in Newport Beach, was ordered into receivership by a federal court in Los Angeles. The company, which the commodities commission said sold illegal credit contracts for gold and silver, had about 1,000 customers and assets of about $4 million. In court, state and federal prosecutors accused Michael Reddin, Brazier’s president, of spending more than $500,000 in company funds on a sports car, mortgage payments and other personal expenses.

For the 1984-1985 fiscal year, the county’s criminal fraud unit budget was $650,000, compared with the $148,000 spent to prosecute consumer protection cases. County officials are requesting $730,000 for the fraud unit next year.

Then there are the victims. They lose money, they lose homes, cars, and self-esteem. Fraud investigators tell stories of despondent investors or creditors committing suicide.

The retired president of a Southern California company lost $60,000 when a Newport Beach precious metals company was put out of business under a federal court order. The man, who asked not to be identified, said he became physically ill after discovering his retirement money was gone. He said his wife was so angry with him, his once-solid marriage was ruined.

“I’m so embarrassed,” he said. “I was so stupid.”