Judge Refuses Call to Shut PinnFund, Names Investigator
They kept investing their money even though some knew it sounded too good to be true.
And Thursday, investors in the mortgage firm PinnFund USA--dazzled for years by reports showing 17% returns--had one more reason for that nagging feeling. A San Diego federal judge appointed a special master to determine whether the Carlsbad company is a major mortgage fraud scheme as alleged by federal securities regulators.
Securities and Exchange Commission officials asked Chief U.S. District Judge Marilyn J. Huff to shut down PinnFund and its related entities, claiming that Michael J. Fanghella of Carlsbad and James L. Hillman of Oakland used the firms to bilk investors of at least $107 million.
Instead, Huff allowed the men to continue to operate the company and named former U.S. Atty. Charles La Bella to investigate whether investor money was squandered. She also issued an injunction preventing PinnFund and its affiliates from transferring money overseas or destroying corporate documents.
“An independent party that works for the court, not the SEC, is going to look at things and tell the court whether or not this [PinnFund] is real or whether this is smoke and mirrors,” said Irving Einhorn, who is representing Fanghella and PinnFund in the civil action.
SEC officials declined to comment pending Huff’s written order, due today.
SEC officials say that since the mid-’90s, the two men collected $267 million from at least 166 investors to write mortgages at higher-than-market interest rates for individuals with bad credit ratings. Although some of the money was used for legitimate business, regulators allege the men used phony auditing statements to cover up $95 million in losses and that $107 million was transferred to Fanghella, who enjoyed a luxurious lifestyle.
According to the SEC, Fanghella, 49, diverted $10 million of the money to lavish gifts on his porn actress girlfriend, Kelley Cook, 35, who has appeared in several adult movies under the name Kelley Jaye. SEC officials allege Fanghella bought Cook a $5-million house in Laguna Niguel, gave her $2 million in cash, paid for New York shopping trips and presented her with a $75,000 piano.
SEC court filings also allege he transferred at least $3.7 million of other investor funds to an offshore account in Barbados.
News of the SEC charges left investors in Fanghella’s mortgage business bewildered.
“We are as shocked as anybody in this thing thing, and we have personal assets tied up in it and are a victim like anyone else,” said Stan Sloman, whose Encino-based Sloman & Dor Accountancy Corp. sank an undisclosed amount of money into a PinnFund-related partnership. “We always thought it was a straightforward deal.”
Said Hank Krakover, a Los Angeles resident scrambling to find out what happened to his $25,000 investment in the same partnership: “You could clearly make the argument that everybody involved in it was smart enough to know better. But you have greed. . . . Why else would people go for double-digit returns?”
Krakover said he and his parents, Stewart and Grace of Beverly Hills, were among the first to invest in PinnFund in the early 1990s based on their relationship with Hillman, an Oakland lawyer who solicited the mortgage seed money through Peregrine Funding Inc.
The Krakovers invested in Grafton Partners, an Oakland-based limited partnership controlled by Peregrine Funding. Grafton raised $87.2 million from 43 investors, SEC court papers said.
Over time, his family decided to “reduce its exposure,” the younger Krakover said.
Quarterly reports from Peregrine showed annualized returns to PinnFund investors of 17.5%--something the younger Krakover said seemed odd. Although PinnFund seemed to be booming, other high-risk lenders such as Sacramento-based Money Store and FirstPlus Financial Corp. were failing.
“We knew it was too good to be true,” said the younger Krakover. “What was too good to be true was the fact that [PinnFund] was showing tremendous growth when some of the publicly trading companies were folding.”
A woman answering the telephone Thursday at Hillman’s office had no comment.
