A federal grand jury has indicted six people for an elaborate real estate scheme that cost banks and other lenders more than $11 million in fraudulent loans on property from San Clemente to the South Bay, authorities said Thursday.
The 54-count indictments, handed down Wednesday, follow a two-year investigation by the FBI and Internal Revenue Service into what Assistant U.S. Atty. Jeffrey B. Issacs described as one of the largest Southern California real estate fraud cases uncovered in recent years.
The alleged mastermind of the scam, Steven D. Jones, 45, was arrested by federal agents Thursday morning at his Rolling Hills Estates home. The indictments charge that Jones, posing as a wealthy real estate investor, assembled a network of corrupt real estate agents, appraisers, escrow officers and loan brokers to acquire expensive homes in Rolling Hills Estates, San Pedro and San Clemente.
Federal authorities, whose investigation is continuing, are examining other real estate transactions on the Palos Verdes Peninsula and in Redondo Beach, San Pedro, Long Beach and San Clemente.
Also charged were Jones' wife, Denise, 35; real estate agent Zoltan Katinszky, 38, of Rolling Hills Estates; appraiser Dennis S. Walsh, 29, of North Hollywood; loan broker Arthur J. Madison, 50, of Los Angeles, and a business associate of Jones, William M. Burke, 66, of Los Angeles.
Authorities allege that Jones and the others diverted more than $2.7 million from fraudulently obtained loans to unauthorized uses over the past four years. The funds were obtained, the indictments say, from at least nine lending institutions, including Imperial Bank of Newport Beach, Pomona First Federal Savings and Loan Assn., Franklin Mortgage Capital Corp. of Tustin, and American Residential Mortgage Corp. of La Jolla.
The indictments say Jones and the others received loans to purchase high-priced homes through a variety of illegal methods, including the use of phony buyers, bogus certificates of deposit for down payments, the creation of sham businesses and financial institutions to falsify credit histories, and the payment of large fees and kickbacks to loan brokers to submit falsified loan packages to legitimate lenders.
In one case, the indictments claim, Jones recruited a phony buyer in September, 1988, to purchase a Rolling Hills home on Buckboard Trail for $850,000, then "created a sham sale" of the property to himself for the price of nearly $1.6 million. The indictments allege that Jones then used a phony loan package to borrow $950,000, purchased the home and diverted $60,000 for his own use and other "unauthorized" purposes.
About six months after that transaction, the indictments add, Jones obtained a new $1.15-million loan from another lender to refinance the property, falsely representing that he had paid $1.6 million for its purchase. When the new loan was approved, the indictments say, Jones paid off the original mortgage and then illegally kept another $135,000.
One year later, the indictments say, Jones again falsely represented the property's value to obtain another loan on the home, diverting $380,000 to himself and other uses.
"It was a very sophisticated scheme," said federal prosecutor Issacs. "It involved a number of different people who held different positions in the real estate industry. And it involved a number of sham businesses and financial institutions located not just in California but clear across the country."
The alleged real estate fraud, Issacs added, was launched during the heady days of Southern California real estate, when property values were appreciating each year by double-digit percentages. But when the economy slid into recession and property values leveled off and dropped, Issacs said, "the scheme unraveled" because real estate was either not selling or sold for reduced prices.
FBI Agent Dan Dzwilewski, who directs the South Bay office, said such fraud cases have grown greatly in number since the economy turned sour.
"It's just been a boom time in this area for white-collar crime," Dzwilewski said. "In the last two years, I've seen about a 150% increase in the South Bay area in referrals from other agencies of bank fraud cases."
Now, he added, the FBI's South Bay office has more than 30 pending cases of alleged fraud from financial institutions claiming losses of more than $30 million. "We are in recessionary times," he said, "and fast-buck operators prey on these kinds of things."
The indictment charges Jones with one count of racketeering, one count of racketeering conspiracy, 27 counts of mail fraud, six counts of making false statements to a federally insured financial institution, 11 counts of money laundering and two counts of tax fraud. He faces 521 years in prison and a fine of $16.5 million.
Jones' alleged accomplices face a variety of charges that could result in prison terms of at least 30 years and individual fines of no less than $2.2 million.
The indictments also seek nearly $15 million in forfeitures from Jones and Katinszky.
Four others associated with the alleged scam are cooperating with the government's prosecution after pleading guilty to other charges, authorities said. They are loan brokers Michael Priest, 42, formerly of Dana Point, and Thomas B. Veatch, 41, of Anaheim; optometrist and real estate speculator Herbert A. Solomon, 60, of West Los Angeles, and New Jersey resident Lawrence S. Burke, 47, identified in the indictment as a business associate of Jones.
In 1976, Jones was indicted by a federal grand jury on charges of conspiring to loot $10 million from the vault of a downtown building. He was sentenced to six months in prison after pleading guilty to one count of conspiring to loot the safe deposit boxes in the vault.