Hernandez’s Lifestyle Frustrates Prosecutors : Justice: Awaiting sentencing for misappropriating $7.85 million from precious-metals firm, he continues to enjoy luxury while officials try in vain to recoup money he says he doesn’t have.

The federal government left no cuff link or bracelet unturned in its February search of Danny and Susie Hernandez’s luxury home, scooping up $315,000 worth of her jewelry, $79,000 in cash, a $58,000 refund check for unfinished marble work on the couple’s second home, and $21,000 in savings bonds bought for the Hernandez children.

Investigators even confiscated a $2 bill.

Two months later, Susie Hernandez was pleading poverty to a federal judge, asking for a public defender, which she got. The couple was deeply in debt, she said, and couldn’t afford to hire an attorney to defend her against federal charges of income tax evasion and mail fraud stemming from her husband’s misappropriation of nearly $8 million from his place of work.

She listed payments of $4,700 a month for their home mortgage, and $2,800 a month for two leased Mercedes-Benzes.

That same month, however, Danny Hernandez embarked on a pleasure trip to see the Final Four college basketball tournament in New Orleans. When his commercial flight arrived late in Denver, and Topeka-born Danny began worrying that he might be late for the University of Kansas game, he chartered a jet for the final leg of his journey, paying $5,000 in cash and charging the remaining $2,800 on a credit card.

He made yet another trip that same month, this time to the Mirage Hotel in Las Vegas, paying $880 for his room and expenses, according to a credit card receipt forwarded to the U.S. District Court’s pretrial services office in Santa Ana.

After a brief separation from his wife, Danny Hernandez even planned a $3,000 reconciliation weekend in June at the Mondavi Cottage in Napa Valley. Hernandez says he bought a voucher for the trip at a charity auction in 1991.

He arrived in a Mercedes-Benz last week for a court session in which it was established that the couple owned property in the Cabo San Lucas area of Baja California. The Hernandezes’ two children still attend a private school, Hernandez said.

Because the trips outside Southern California violated the conditions under which he has been free on bail since his mail-fraud and tax-evasion convictions, a federal judge ordered that Danny Hernandez be effectively placed under house arrest, wearing an electronic ankle bracelet that alerts federal agents whenever he leaves his $700,000 home.

Bemoaning his situation, Hernandez said in an interview last week that he was betrayed by a scorned ex-girlfriend, and that the trips and property do not prove that he is living well.

He said he has been living on borrowed money and money earned honestly since his arrest, including an advance given him by a TV production company that is interested in the rights to his story. Since he had contributed heavily to his children’s school, the tuition has been forgiven for now, he said.

The two Mercedes-Benzes were leased long before his arrest, he said, and probably would have been confiscated along with his Ferrari Testarossa, Rolls-Royce Silver Spur and Mercedes 500 SL if he had built up any equity in the leases. Besides, he said, “status-wise, a Mercedes is not that big a deal.”

The hotel room in Las Vegas was complimentary, Hernandez said, from the days when he was a big-time gambler at the Mirage. And the cost of the chartered jet trip to New Orleans was divided among the four passengers.

“The money I have is all legitimate,” he said. “What do people want? Do they want me to live in a tent and go on welfare? What about my children? Don’t they have a right to live in a home?”

Facing a likely 5-to-10-year prison sentence, Hernandez is under orders to forfeit to the government $7.85 million in ill-gotten gains he says he no longer has. He also faces orders to pay $1.5 million to $2.5 million in back taxes and $750,000 in fines.

Government investigators admit to a growing frustration over watching Hernandez continue to flaunt his lavish lifestyle. Nor are they exactly sure what he’s worth. Although the government is due more than $10 million, less than $1 million has been found so far.

“If he’s got money buried in a hole in the back yard, there’s not a thing we can do,” Assistant U.S. Atty. Stephen G. Wolfe said.

“What annoys me most about his behavior, apart from his contempt for the criminal justice system, is that it causes us to wonder whether we should add resources to stick it to Danny or to use our people for the next stage of investigation,” Wolfe said. “We’d need 24-hour surveillance . . . (to) nail down every hidden asset.”

Wolfe said that revelations about Hernandez’s travels and spending habits send the message that “we can’t punish crooks.”

Those same revelations, however, produce fresh batches of anonymous tips about where he has been spotted and how much money he has spent. Unhappy over the Mercedes-Benzes in his garage, one neighbor sent a photo and a letter to The Times. “What’s wrong with this picture?” the neighbor wrote, requesting anonymity. “I think the story needs an update as a study of the justice (or lack of it) system.”

Not that the government hasn’t been trying to find and seize more from the Hernandezes. An IRS agent recently called a former friend, Jolene Engel, and asked if she had bought any jewelry from Susie Hernandez. Other friends, including Danny’s ex-girlfriend, have been contacted about what they know of his spending.

Engel said she and her husband stopped seeing the Hernandezes after the scandal broke, and can’t understand how the couple can continue to live so extravagantly.

“We’re all mystified by it,” she said. “I guess it’s OK to break the law and you can still ride around on your Lear jets and buy stuff at department stores.”

The arrest of Danny and Susie Hernandez in February in connection with the disappearance of nearly $8 million from a Santa Fe Springs precious metals firm where Danny worked shook the roots of high society in Newport Beach, where the Hernandezes were highly visible members of the social circuit.

After initially protesting their innocence, both entered guilty pleas to reduced charges, and agreed to assist the government in its investigation of PGP Industries, the Santa Fe Springs company.

Danny Hernandez has admitted stealing from the company’s customers, but said such skimming was routinely done by almost everyone in the firm and encouraged by top management. Company officials adamantly deny Hernandez’s allegations, and say he acted without their knowledge.

With money they laundered through bank accounts that Susie Hernandez opened in Dallas and elsewhere, the couple led an opulent life, indulging themselves with at least 15 luxury cars, including Mercedes-Benzes, Rolls-Royces, Ferraris, a Jaguar, an Aston Martin and a Porsche--worth a total of $1.65 million. They also gave freely to charities and were often mentioned in local society columns.

The couple’s 1990 tax returns indicated that they earned $145,137 and paid income taxes of $12,569, when they actually netted about $1.7 million and were obliged to pay $495,478 in taxes. The year before, they said they had income of $104,350 and a tax liability of $7,618 when their actual income was $869,603, on which they should have paid $246,680 in taxes.

Susie Hernandez, 42, who pleaded guilty to income tax evasion, faces up to three years in jail. But because the couple has a daughter, 7, and a son, 5, it is believed she may be spared imprisonment. Sentencing for both was scheduled for Monday, but has been postponed until Jan. 24 at the government’s request.

The Internal Revenue Service has placed a lien on the couple’s $700,000 Mission Viejo home, but the net proceeds will fall far short of that if the government seizes it for auction. There is a $500,000 mortgage against the property.

Likewise, the couple’s $1-million home in Laguna Hills is now worth only about $500,000, and the $100,000 equity stake the Hernandezes had in their down payment has long ago evaporated as the property’s value dropped. The vacant lot in Mexico is worth about $35,000, but is not worth the trouble of trying to confiscate, officials say.

One thing that is safe from the government: Hernandez’s immense wardrobe, much of it from Armani, which won’t be touched.

Hernandez admits he made a mistake by leaving the area without notifying the court. Now his travel is limited to meetings with his attorney or government investigators, doctor visits, church services and efforts to find work.

He still maintains that the money he brought home came from a “dishonest” company and there was essentially nothing wrong with what he did.

“If you saw $10,000 on the front seat of a drug dealer’s car and you took it, would you feel bad?” he asked, conceding that “even though . . . it was tainted money, it wasn’t easy to give away.”