The co-owner of a now-defunct Southland real estate firm was convicted Friday of a Ponzi scheme that involved flipping distressed apartment buildings during the Great Recession’s housing collapse, costing hundreds of investors up to $169 million.
Michael J. Stewart, 68, who had been free on bail, was taken into custody after jurors found him guilty of 11 counts of mail fraud.
U.S. District Judge Cormac Carney granted a motion by federal prosecutors to dismiss charges related to bank and bankruptcy fraud.
Before the trial, prosecutors estimated the company’s 647 investors lost $91.6 million, but trial testimony indicated that the losses were actually $169 million, according to Assistant U.S. Attorney Joshua Robbins.
When Stewart’s company declared bankruptcy in June 2009, the banks were owed about $96 million in outstanding principal, according to the prosecutor.
Jurors took about five hours to reach their verdicts.
“We’re pleased to see justice done,” Robbins said. “I’m happy for the many victim investors. Even though they won’t see returns on their investments, they’ll at least some measure of justice and someone held accountable.”
Stewart’s attorney, Ken Miller, said, “We’re terribly disappointed in the verdicts.”
Stewart faces a maximum sentence of 220 years, but prosecutors expect the defendant will receive much less time behind bars. The fine could be $7 to $9 million.
Miller asked Carney to let his client stay out of custody until sentencing, but the judge said he found the defendant a flight risk due to his age and the length of time he faces behind bars.
Co-defendant John Packard, who co-owned Pacific Property Assets, which had offices in Irvine and Long Beach, pleaded guilty in November. He is awaiting sentencing.
Assistant U.S. Attorney Brett Sagel told jurors that when the business began failing due to the economic downturn, Stewart tried to use the nature of the financial slump to his benefit.
Stewart recruited investors with plans to acquire distressed apartment buildings that could be flipped for a profit, Ssagel said.
The plan he sold to new investors was to snatch up apartment buildings at “rock-bottom prices” and refurbish them to fill the void in housing when evicted homeowners look for a place to live, Sagel said.
“This investment was so great, he called this the ‘Opportunity Fund,”‘ the prosecutor said.
Investors were told they could reap 15 percent to 30 percent interest a month, Sagel said. Stewart failed, however, to tell investors that the company was floundering, he said.
Stewart’s and Packard’s business plan worked when they founded their company in 1999, Sagel said. They would borrow money from banks and individual investors while acquiring apartment buildings and renting out units and selling or refinancing the properties.
The rental income was never enough to pay the bills, but as long as property values continued to thrive, the model worked as they sold off and refinanced the buildings, Sagel said.
Packard’s job was to acquire property, deal with the banks, get loans and manage the apartments. Stewart, an attorney and real estate broker, was in charge of recruiting investors.
At one point they put $2 million in the bank so they could show investors a balance sheet with the money in the account, then almost immediately pulled it back out, Sagel said.
The money from new investors to the Opportunity Fund was supposed to be spent on acquiring apartment buildings, but it instead went to pay off old debts, amounting to a Ponzi scheme, Sagel said.
Miller said his client could not have anticipated that the collapse of the housing industry would spread to apartments, as well.
Stewart and Packard’s company had a solid track record and had earned praise for its business model before the economy cratered, Miller said.
Packard was the “hammer” who had “always come through” but had failed to win the financing to make the Opportunity Fund work, Miller said.
Investors were warned in memos of the high risks, he said.
— City News Service