Financier Loses Bid to Cut Prison Term : Ordered Imprisoned Despite Offer to Help Defrauded Investors

Times Staff Writer

Orange County financier John Rinaldo’s last-minute attempt to minimize his time in prison on a mail fraud conviction failed Friday when a federal judge ordered Rinaldo to begin serving his three-year sentence next week.

Rinaldo had offered to help investors in his defunct companies recover their money in exchange for reducing his prison sentence to probation and six months’ incarceration.

But U.S. District Judge Terry Hatter Jr. denied a motion to reduce the sentence and ordered Rinaldo to begin serving his time at the Federal Correctional Institution in Lompoc on Monday.

“The investors will lose millions,” said a shaken Rinaldo after the judge’s ruling. For the past 10 weeks, Rinaldo has been providing financial information to Craig Lytle, an attorney representing about 7,000 investors.

Help to Recover Millions

Lytle supported Rinaldo’s plea for leniency, saying that Rinaldo would be invaluable in helping investors recover millions of dollars. The investors, mostly from Southern California, lost between $10 million and $20 million when Rinaldo’s Costa Mesa-based American Home Mortgage Corp. and Western State Pension Corp. failed in 1982. The two companies collected an estimated $56 million from investors.


Western State collected millions of dollars from customers who wanted to invest their retirement funds in California’s rising real estate market. American Home, in turn, lent the money to property owners at high interest rates, using trust deeds as collateral for the loans.

“All of my personal assets will go to the victims,” said Rinaldo in an interview before the hearing. Rinaldo said that he plans to turn over between $1 million and $5 million to the investors if a federal bankruptcy court handling his personal bankruptcy case approves the idea.

Rinaldo, who pleaded guilty to one count of mail fraud, said that he “was reckless and breached my fiduciary responsibility” when he made certain business decisions for his two companies.

“Instead of being brilliant, I’m a felon,” said Rinaldo, who now lives in Los Angeles.

“I should have never gone into the business,” he said. “I didn’t have the heart or personality to be a lender.”

Rinaldo’s wife, Robyn, and stepdaughter, Samantha, who was the main shareholder in one of his companies, attended Friday’s hearing.

Rinaldo’s attorney, Richard Kirschner, said that he was disappointed in the judge’s ruling.

He had asked Hatter to revise Rinaldo’s sentence to six months in custody and 4 1/2 years on probation, saying that the proposal would “provide the court with a unique opportunity to help the victims and still punish Mr. Rinaldo.”

But Chief Assistant U.S. Atty. Richard Drooyan argued that changing Rinaldo’s sentence would set a “dangerous precedent.”

Meanwhile, Lytle said in an interview Friday that he believes former Heritage Bank Chairman Douglas Patty and other Heritage Bank officers are liable for some of the investors’ losses because Rinaldo’s companies kept funds at the now-defunct bank. Lytle said that he plans to go after a $40-million insurance policy that covered the officers and directors of Heritage Bank.

Patty was not available for comment Friday. His attorney, Steven Stanwyck, said that he could not comment until he reviewed a statement issued by Lytle late Friday.

Missing Funds

Lytle also said that Orange Coast Savings & Loan Assn. of Costa Mesa, which Patty once controlled, shares responsibility for some of the missing investor funds. Orange Coast has already been named in a lawsuit filed last year by Dennis Schmucker, the trustee for Rinaldo’s bankrupt American Home Mortgage Corp. That suit alleges that the S&L; violated its fiduciary duty to Rinaldo’s investors during 1982. It also describes a close personal relationship between Rinaldo and Douglas Patty, who founded and controlled Heritage Bank in Anaheim and held a controlling interest in Orange Coast.

Heritage was closed by state banking regulators last year and is insolvent. It is being liquidated by the Federal Deposit Insurance Corp.