SEC Says Fraud Case Topped $100 Million
Calling it one of the biggest mortgage fraud cases in years, federal officials alleged Wednesday that two California men bilked investors of more than $100 million--and some of the funds were spent lavishly to woo a porn actress.
Securities and Exchange Commission officials, seeking an injunction, asked San Diego Federal Judge Marilyn J. Huff to prevent Michael J. Fanghella of Carlsbad and James L. Hillman of Oakland from soliciting investors for PinnFund USA Inc., a Carlsbad mortgage lender. Huff froze the firm’s assets Wednesday, ordered it not to destroy documents and set a hearing on the full request for today, SEC officials said.
PinnFund USA, through various funding entities, has raised $276 million from at least 166 investors in California, Chicago and other parts of the country since the mid-’90s, SEC officials said. Some of the money was used legitimately to write mortgages at higher-than-market interest rates for individuals with bad credit ratings, they said.
But at least $107 million was transferred to Fanghella, who used it to underwrite a “lavish lifestyle” that included trips to Switzerland, Hawaii, New York and at least one meal that cost $36,000, said Lisa Gok, assistant regional director for the SEC’s Los Angeles office.
“This is one of the biggest [securities] frauds I’ve seen,” Gok said.
She said Fanghella, 49, allegedly spent about $10 million of the investor funds on Kelly Cook, 35, a onetime girlfriend and porn star known as Kelly Jaye. A spokesman for Van Nuys-based Vivid Pictures, a prominent adult movie production house, confirmed Wednesday that Jaye had appeared in at least six movies, such as “Sexual Healing” and “Blonde Angel.”
The two met in December 1999 while both were finalizing divorces, according to SEC court filings. Believing the two would marry, Fanghella bought Cook a $5-million house in Laguna Niguel, gave her $2 million in cash, a $75,000 piano, New York shopping trips and sumptuous meals.
In addition, he transferred at least $3.7 million of other investor funds to an offshore account at Barclay’s Bank in Barbados, the SEC court filings say.
Cook is not accused of wrongdoing, the SEC said, but the agency wants to recover investor funds allegedly given to her as gifts.
SEC officials said Fanghella and Hillman raised money by offering bogus partnerships through funding companies controlled by Hillman, including Peregrine Funding Inc. Peregrine then turned the money over to PinnFund USA, court filings say.
To trick investors, the SEC said, Peregrine circulated fraudulent PinnFund financial reports, along with forged documents from an independent auditor, to falsely present PinnFund as a profitable firm. The company has lost more than $95 million since 1997, the SEC said.
The men also gave phony audit reports to Department of Housing and Urban Development officials for approval to sell mortgages in 46 states, the SEC alleged.
But when the auditor, the Arias accounting firm, learned of the falsified 1999 financial statements, the company resigned, informed HUD and asked PinnFund to inform future prospective investors that it hadn’t audited the books.
Instead, the SEC said, PinnFund sent letters signed by Fanghella to third parties, assuring them of the financial statements’ accuracy.
Court records also show that Fanghella filed suit against Cook in August for $9 million in damages and return of his gifts. He alleged that months before Cook had secretly altered the escrow instructions tied to the home purchase so ownership would be transferred to Reliance Holdings, a company she controls. She then broke off the relationship and barred him from the house, court documents say.
Cook’s attorney, Jeff Walsworth, said the suit was settled out of court in his client’s favor.
Fanghella couldn’t be reached for comment late Wednesday and his Los Angeles attorney, Irving Einhorn, wouldn’t comment on the allegations. Neither Hillman nor his attorney could be reached.