IRS Drops Effort to Seize Confiscated $850,000 : Golden Eagle Investors May Get Some Funds

About 1,000 investors from across the country who were bilked out of $6 million in a 1982 investment scheme could get some of their lost money back, Orange County officials announced Friday.

Assistant County Counsel Arthur Wahlstedt said the Internal Revenue Service has dropped its lawsuit against Sheriff Brad Gates and Orange County, ending a three-year battle to seize $850,000 confiscated by sheriff’s detectives during the fraud investigation of Golden Eagle Investments.

The $850,000--along with weapons and personal property--was seized from the investment firm’s El Toro offices during a 40-day Sheriff’s Department investigation that ended in February, 1982. It was subsequently used as evidence in a criminal case against William Ralph McDonald, who ran the company.

McDonald was convicted in January, 1983, on 27 felony counts of bilking investors in a Ponzi scheme, whereby early investors were paid “interest” out of money taken from subsequent investors. He was sentenced to eight years in prison for fraud and grand theft.

The IRS, attempting to satisfy a tax lien against McDonald, tried to obtain the confiscated cash through a bankruptcy proceeding. The agency asked Bankruptcy Judge Peter Elliott to rule that the money was part of McDonald’s assets so that the IRS claim to the money would take priority over that of the bilked investors. The judge refused.

Not Income, Gates Says

To prevent disbursement of the money, the IRS then sued Gates and the county in federal court. Gates claimed at the time that the money belonged to McDonald’s victims and was not McDonald’s earned income.

Wahlstedt, the assistant county counsel, said Friday that officials from the U.S. attorney general’s office in Washington had asked county administrators in July if they would agree with an IRS effort to drop the suit against Gates and the county.

Wahlstedt said the county counsel agreed, and on Tuesday the order to drop the suit was transmitted to the U.S. 9th Circuit Court of Appeals in San Francisco.

In a written statement Friday, Gates said, “The way is now clear for the return of the money to the rightful owners, the victims of Golden Eagle Investments.”

But just when, how and how much the investors will be reimbursed “is a good question,” Sheriff’s Department spokesman Lt. Bob Rivas said in a telephone interview.

“The sheriff has taken the position that this is money that belongs to the victims, and he will do everything in his power to make sure they get their money back,” Rivas said. “But when that will be, we really have no idea at this point.”