A Beverly Hills-based real estate consortium has been accused by state officials of "blatant and egregious" fraud in a complicated and extensive investment scheme that may have cost 400 victims millions of dollars throughout Southern California.
State regulators took the unusual step of having the companies, which include Pentagon Investment Group and Rodeo Hills Equities, and their top corporate officers placed in receivership which, in effect, bars them from conducting business or even occupying their Wilshire Boulevard offices.
The case is the "tip of the iceberg" in a rash of investment fraud that is worsening as hard times hit the California real estate market, said Alan Weinger, supervising counsel of the enforcement division of the state's Department of Corporations.
"Now that the real estate market is starting to flatten out, whatever promises are made to investors are starting to fall apart," Weinger said. "There's a greater risk now. The investing public has got to wise up."
Regulators have been investigating Pentagon Investment Group for more than a year and filed a complaint against it and 10 other associated firms and individuals on Wednesday.
Pentagon and its chief executive officer, Navtej Kohli of Malibu, were the subject of a Times article last fall that reported allegations of real estate fraud in which homeowners claimed they were cheated out of title to their houses by unscrupulous agents. Kohli denied wrong-doing.
In this week's legal action, Superior Court Judge David P. Yaffe granted the state's request that most of the defendants be placed in receivership, and he enjoined them from destroying records or cashing in assets.
According to the complaint, Pentagon Investment Group was operating an "investor buy-sell program" that was, in fact, little more than a scheme to defraud investors and lending institutions.
In it, Pentagon allegedly encouraged investors to take out loans to purchase properties from Pentagon, although, in many cases, Pentagon did not actually own the properties, the complaint said.
Further, the state alleges, Pentagon and its associates agreed to make the investors' down payments, plus all monthly payments on the loans, and to pay the investors a profit for the use of the investors' credit rating. As part of the agreement, Pentagon would sell the property within three to six months, leaving investors free and clear of title and any liens, taxes or encumbrances that might be levied on the property.
But Pentagon defaulted on many of the loans and often left the property in the investors' names, ruining their credit and sticking them with unpaid bills, state regulators said.
In another phase of the alleged scheme, Pentagon would purchase distressed properties in bulk and at a discount from savings and loan institutions, re-sell them at full market value to straw buyers and take out loans based on the higher--falsely inflated--home price, state investigators said.
Kohli, Pentagon's chief executive officer, could not be reached for comment.
The defendants in the state's suit are also accused of using extensive newspaper advertising to sell promissory notes that offered an unusually high rate of return. But often, unbeknown to the investor, what was being sold were only fractional interests in a single note, or notes that were unsecured. In either case, the investor's money was at risk and he or she stood little chance of receiving the rate of return that was promised.
"They were told it was a no-risk thing," said Mark Harman, staff attorney for the Department of Corporations. "That was so far from the truth it was not even funny."
Harman said many of the alleged victims, who live throughout Southern California, were unsophisticated in the world of real estate investment. He estimated that between 300 and 400 investors were "taken in" by the scheme to the tune of at least $6 million. It remains to be seen whether any amount of the money can be recovered, he said.
State regulators are also notifying banks where Pentagon and the others may have deposited investors' money in an effort to find and freeze the accounts. "We are taking action to try to protect the investors the best we can," Harman said.
Weinger said the case represented such "blatant and egregious" fraud that regulators sidestepped the normal procedure of giving a company 24 hours notice before going to court. No notice was given.
"If we gave notice, we were concerned records would be destroyed and money stolen," he said.
The case stood out, he said, because of the large number of alleged victims and the fact that one of the principals, Patrick W. Bartholomy of Huntington Beach, had previously been convicted of tax evasion. As a term of his parole, Bartholomy, identified as president of Pentagon, was supposed to notify clients of the conviction but had failed to do so, Weinger said.
Bartholomy was out of town and could not be reached for comment.
Along with Pentagon, Rodeo Hills, Kohli and Bartholomy, the other defendants named in the complaint are Argent Alliance Corp.; Insearch Fidelity Inc.; Cash Management Corp.; the Versailles Group Inc.; Pattern Real Estate Corp.; the Wellington Group Inc. and Robert L. Scaccianoce, identified as executive vice president of Argent Alliance.