5 From O.C. Accused of Massive Fraud

Federal authorities said Friday that 15 people around the country--including five Orange County and two Los Angeles area residents--have been indicted in what they described as a $25-million fraud and racketeering scheme against financial institutions in seven states.

The major figure behind much of the alleged fraud was Capistrano Beach resident Douglas P. Blankenship, who was taken into custody Thursday night by the FBI. He is being held in the Metropolitan Detention Center in Los Angeles County pending a bail hearing Tuesday.

Blankenship was described by prosecutors as a Gatsby-like character traveling the country collecting loans and property through the use of phony tax returns, false financial statements, corporate fronts and various aliases.

“He used those records to create the illusion he was a man of substantial wealth,” said Bob Westinghouse, assistant U.S. attorney.

The victims, who were told Blankenship had a net worth of as much as $99 million when he really had few assets, included some large financial institutions such as Great Western Bank in Beverly Hills and American Savings & Loan in Irvine and Stockton. The single largest victim was Puget Sound National Bank of Tacoma, which was allegedly defrauded of $4.5 million in a real estate deal.

Prosecutors said they hoped to recover about $17.5 million of the fraudulently obtained money.

A federal grand jury in Seattle on Wednesday issued the 300-page indictment alleging 33 separate acts of racketeering by the 15 individuals in two enterprises as defined under the Racketeering Influenced Corrupt Organization statutes. At least nine have been arrested.

The 15 are accused of obtaining loans by inflating net worth statements, creating shell corporations and bouncing titles and papers back and forth in an effort to skim off money from each transaction. The alleged schemes began about 1982 and occurred in California, Washington, Idaho, Texas, Florida, Ohio and Hawaii.

Blankenship was charged with one count of racketeering, five counts of bank fraud and one count each of mail fraud, wire fraud and inducing others to commit interstate fraud. If convicted, he could face as much as 65 years in jail.

James L. Waltz, Blankenship’s attorney, denied the charges.

“He absolutely denies any liability whatsoever for any of the allegations contained in the indictment,” said Waltz. “He will plead not guilty, and he looks forward to trial.”

Westinghouse described Blankenship’s San Clemente firms--Pacific Coast Development, Pacific Coast National Development Corp., Pacific Coast Plaza Inc., B.B. Steamers and Ortega Professional Plaza Inc.--as fronts for the allegedly fraudulent transactions.

Blankenship employed numerous aliases including John Perkins, Dwight Sanders, Randall Sanders and Kenneth Stall, the indictment said. The phony names were used to conceal real identities so Blankenship and his associates could “manipulate real estate titles, disguise conflict-of-interest transactions (and) obfuscate credit-worthiness investigations,” the indictment said.

The FBI conducted searches in connection with the alleged eight-year scheme around Southern California, including Beverly Hills, San Clemente, Capistrano Beach, San Juan Capistrano and Garden Grove.

Some 20 FBI agents raided Blankenship’s home and offices Thursday morning and seized enough material to nearly fill a 14-foot truck. Similar searches were concurrently conducted in Massachusetts, Michigan, Texas and Hawaii.

Besides Blankenship, the FBI around Southern California arrested his common-law wife, Stephanie; Larry Gene Frankhouser of San Juan Capistrano; Long Beach accountant Ewald Frank Neisch; Beverly Hills real estate agent Frank Anthony Pugliese, and Charles E. Hayes of Tustin. Richard Mansford Cauble of San Juan Capistrano was indicted, but an arrest warrant was not issued against him, according to the FBI.

Stephanie Blankenship was her husband’s secretary and bookkeeper, and Frankhouser is described in the indictment as his chief of staff. Frankhouser is being held at the same Los Angeles jail as Blankenship.

Others indicted were: Joseph P. Babinsky of San Antonio; Marvin Monty Gibbons of Meridien, Ida.; Michael Eugene Hilander of Houston; Henry Lee Schulle of Houston; Clfford William Hudson of Rockford, Ill.; Bradley Taylor Ray of Palm Beach, Fla.; Clayton David Sketoe Jr. of Honolulu, and Peter Thomas, address unknown.

Westinghouse said Blankenship was a professional raconteur with “real persuasive abilities” capable of conning even large institutions with convincing but fake papers.

For instance, Blankenship had prepared a 1987 financial statement that indicated he had a net worth of $99.2 million. The indictment claimed the figure was “substantially overstated.” In another instance, Pacific Coast National Development Corp. submitted a balance sheet to lenders saying it had total assets of nearly $111 million, a figure that prosecutors said was vastly inflated.

And Blankenship offered financial institutions a 1984 tax return, which was never filed, that showed his adjusted gross income was $1.2 million, although authorities say he had no income that year and amassed debts in excess of $1 million.

Blankenship, 45, briefly appeared Friday in U.S. District Court in Santa Ana wearing a gray suit and handcuffs, his thinning hair tousled. He spoke with a slight Southern accent, betraying his Kentucky birth.

Federal Judge Ronald W. Rose honored his request to continue a bail hearing until Tuesday so he can find an attorney of his choosing.

“This is one of the largest (cases) in the Western District of Washington easily and a significant case in any district,” Westinghouse said.

The case was headed by the U.S. attorney’s office in Seattle because Puget Sound National is headquartered there.

The indictment said the bank made a loan of $4.5 million on the purchase of a San Clemente medical building that Blankenship had represented as being worth $6.5 million. The building’s actual price was $3 million. The loan closed in June, 1986, and Blankenship received $861,000 cash, according to the indictment.

The indictment said that payments to Puget Sound National eventually stopped and that the defendants used a variety of tactics, including bankruptcy, to delay proceedings. Some of the defendants even put together a bogus company called Texacal under the pretense of buying the San Clemente building, prosecutors claim. The bank has recovered all but $1 million of the original loan.

Blankenship persuaded several accountants to provide “accounting services, including the preparation of false and fraudulent statements and tax returns, for the enterprise” according to the indictment.

What’s more, the indictment claims, Blankenship and others were “altering financial statements and tax returns that had previously been prepared by accountants and bookkeepers by forging and copying the accountants’ and bookkeepers’ names.”

By the late 1980s, some of Blankenship’s associates thought he had such a good thing going--according to the indictment--that they severed ties with him and set up a similar organization, some of it based in Orange County as well.

INDICTMENT LINEUP

A federal grand jury in Seattle this week indicted 15 people on charges of fraud relating to an alleged $25-million racketeering scheme against several banks nationwide. The Southern California residents indicted are listed below. Douglas P. Blankenship Aliases: John Perkins, Dwight Sanders, Randall Sanders, Kenneth Stall Residence: Capistrano Beach Charges: One count of racketeering, five counts of bank fraud, one count each of mail fraud, wire fraud and fraudulent transportation Maximum sentence: 65 years Stephanie Ann Blankenship Aliases: Stephanie Ann Thomas; Stevie Blankenship. Stevie Thomas Residence: Capistrano Beach Charges: One count of racketeering and four counts of bank fraud Maximum sentence: 40 years Larry Gene Frankhouser Aliases: Larry Gene Frankhauser, Larry Frankenhouser Residence: San Juan Capistrano Charges: One count of racketeering, five counts of bank fraud, and one count each of mail fraud, wire fraud and fraudulent transportation. Maximum sentence: 65 years Charles E. Hayes Residence: Tustin Charges: one count of racketeering and a count each of mail fraud and wire fraud Maximum sentence: 30 years Richard Mansford Cauble Residence: San Juan Capistrano Charges: Two counts of racketeering, two counts of bank fraud and one count of interstate transportation of property obtain by fraud. Maximum sentence: 60 years Frank Anthony Pugliese Aliases: Patrick Pugliese, Pat Pugliese Residence: Beverly Hills Charges: Two counts of racketeering and one count each of bank fraud, mail fraud, wire fraud and obstruction of justice Maximum sentence: 60 years Ewald Frank Neisch Residence: Long Beach Charges: one count of racketeering and a count each of bank fraud and mail fraud Maximum sentence: 30 years Source: U.S. attorney’s office