Operators of Failed Costa Mesa Investment Firm Indicted

The operators of a defunct Orange County precious gems investment firm, whose clients allegedly were bilked out of more than $5 million, were among 10 defendants indicted on 28 counts of mail fraud Thursday by a federal grand jury in Los Angeles.

Ronald Allen Smith of Fullerton and Michael Edward Smith of Fallbrook were charged with defrauding clients of Crandall Financial Corp. by using deceptive sales tactics to sell gems, money market programs and annuity plans and by using investors’ money to purchase gems without the investors’ permission, according to the indictment.

The Smith brothers could not be reached for comment. Their attorneys said the two men will plead not guilty to all charges when they are arraigned sometime next week.

Crandall Financial, formerly of Costa Mesa, sold more than $5.5 million in gems between July, 1983, and September, 1984, and investors placed more than $3 million in money market accounts that the firm was selling during the same period, according to Assistant U.S. Atty. Sharon McCaslin.

“The real purpose of the money market accounts was to get the investors’ money to buy gems for inflated prices,” McCaslin said. “Sales people received a commission on the gem sales, but not the money market accounts.”

The firm was shut down in September, 1984, by a federal judge in Los Angeles after the Securities and Exchange Commission accused Crandall Financial and a Nevada mining securities firm of fraudulently selling investments to about 800 people, mostly Southern Californians.

The SEC complaints, which named the Smiths and several affiliated companies, said the Crandall companies preyed on elderly people looking for safe investments.

Soon after learning of the SEC investigation of Crandall Financial, the Smiths withdrew most of the company’s money, then opened a gem investment in West Covina called Global Marketing, to which they transferred Crandall Financial assets, according to the indictment.

In addition, the indictment charges that the Smiths used investors’ money market funds to pay themselves more than $1 million in salaries, bonuses, expenses and loans.

The Smith brothers’ attorneys said federal officials were blaming their clients for the actions of subordinates.

“I think it’s very unfortunate that the U.S. attorney has chosen to indict them for what is clearly the misconduct of some of the independent sales people who, while working on commission, engaged in clearly inappropriate conduct,” said Marcus Topel, Ronald Smith’s lawyer.

Richard G. Hirsch, Michael Smith’s attorney, agreed Thursday with Topel’s interpretation of the case. “It was their intention to run a legitimate business,” Hirsch said.

If convicted, the defendants face a maximum sentence of five years in prison and a $250,000 fine on each count, McCaslin said.

Also named in the indictment were Frederick Terrazo, Raymond Girard, Frank Labasso, Alphonso Lewis, Michael Zenesky, who were sales managers, and James McGuire, Virginia Lukei and Thomas Newell, who were company salespersons. Terrazo also is identified in the indictment as Frederick Terr, and Labasso is identified as Frank Bass. No addresses were available for any of those indicted.