Federal Inquiry Targets Brea Investment Firm
Federal agents are conducting a criminal investigation of a Brea real estate investment firm that was accused earlier this month by securities regulators of raising $156 million in an alleged scheme to defraud the elderly, according to new documents filed in the case.
Documents in federal court in Santa Ana indicate that agents from the Internal Revenue Service and FBI raided the Brea offices of TLC America Inc. and the Diamond Bar home of the firm’s chief executive, E. Frank Cossey. Agents seized $225,000 in cash from Cossey’s $1.2-million house, according to a report this week by a receiver previously appointed to take control of the firm.
The receiver, Robb Evans, said that after a preliminary review, he could not account for $24 million of his revised estimate of $159 million in investor funds. Evans also said $1 million of TLC funds had been spent on racing dogs and predicted “massive hardship will be inflicted on investors.”
Since 1998, TLC has raised funds from more than 2,000 investors nationwide, whose average age was 67, according to Evans. TLC continues to operate.
Cossey’s lawyer, Dean Steward of Capistrano Beach, declined to comment directly on the criminal investigation. But he said Tuesday that TLC’s stated business, investing in troubled real estate, was viable. He denied Evans’ contention that $24 million is unaccounted for, although he said his client is hampered in demonstrating that because he’s been denied access to company records.
“I don’t know where he [Evans] gets his figures,” Steward said. “As far as we’re concerned, there is nothing missing.”
Evans said his report was based on a review of the company’s databases and interviews with TLC employees. His report follows previous allegations in a Securities and Exchange Commission lawsuit that Cossey, 54, spent $4.5 million in investor funds on racehorses and donated $1.55 million to a foundation that supports the high school attended by his son.
“In terms of the kinds of investors targeted, the egregious use of money and the amount raised, it’s one of the worst cases we’ve seen in a long time,” said Thomas Zaccaro, an SEC attorney assigned to the case.
Cossey has declined to comment on the specifics of the SEC lawsuit. But his lawyer, Steward, said Tuesday: “We’ll have to save for court” a full discussion of those transactions. Steward suggested, however, that his client may contend he was authorized to make the transactions in question and that the “donation” to the school may actually have been a loan.
Lawyers for Cossey and a co-defendant, former TLC chief financial officer Gary W. Williams, said their clients believe TLC has assets worth at least $122 million and contend investors would lose little if any money if the business is allowed to continue.
“I think if this company was left alone and we didn’t spend tens of thousands of dollars to pay a receiver--that’s money from investor funds--that the investors would come out well,” said James Riddet of Santa Ana, Williams’ defense attorney.
The SEC, in suing TLC, Cossey, Williams and a third defendant--Thomas G. Cloud of Atlanta--had persuaded U.S. District Judge David O. Carter to freeze the defendants’ assets. Contending that losses will total in the tens of millions of dollars, the SEC is seeking to have the investors’ funds repaid and additional fines imposed on the defendants.
A hearing had been scheduled Monday in federal court in Santa Ana before Carter, but he postponed it until Oct. 30 to allow the defense to prepare its briefs. In the meantime, Carter froze the assets of the company, Cossey and Williams, and appointed the receiver, Evans.
In his report, Evans said TLC owns 450 real estate parcels: homes, raw land, apartments and commercial and office properties from Hawaii to Georgia, with concentrations in California, Texas and Alabama. Many were substandard properties in depressed neighborhoods, the report said.
The receiver’s report also revealed the serving of search warrants last month on TLC’s offices and Cossey’s home. They were part of a criminal investigation by the U.S. attorney’s office in San Diego. In a separate civil procedure, federal prosecutors are attempting to force Cossey to forfeit his home and the $225,000, according to documents and interviews.
No criminal charges have been returned, though TLC already has paid $530,000 to criminal defense lawyers and into defense trust funds.
Zaccaro, the SEC attorney assigned to the case, said the agency will file papers in federal court today seeking to have the $530,000 frozen as well and ultimately returned to investors.
