Federal agents are conducting a criminal investigation of a Brea real estate investment firm that was accused earlier this month by securities regulators of raising $156 million in an alleged scheme to defraud the elderly, according to new documents filed in the case.
Documents in Santa Ana federal court indicate that IRS and FBI agents raided the Brea offices of TLC America Inc. and the Diamond Bar home of the firm's chief executive, E. Frank Cossey. Agents seized $225,000 in cash from Cossey's $1.2-million house, according to a report this week by a receiver previously appointed to take control of the firm.
The receiver, Robb Evans, said that after a preliminary review, he could not account for $24 million of his revised estimate of $159 million in TLC investor funds. Evans also said that $1 million of TLC funds had been spent on racing dogs and predicted that "massive hardship will be inflicted on investors."
Since 1998, TLC has raised funds from more than 2,000 investors nationwide, whose average age was 67, according to Evans. TLC continues to operate.
Cossey's lawyer, Dean Steward of Capistrano Beach, declined to comment directly on the criminal investigation. But he said Tuesday that TLC's stated business, investing in troubled real estate, was viable. He denied Evans' contention that $24 million is unaccounted for, although he said his client is hampered in demonstrating that because he has been denied access to company records.
"I don't know where [Evans] gets his figures," Steward said. "As far as we're concerned, there is nothing missing."
Evans said his report was based on a review of the company's databases and interviews with TLC employees. His report follows previous allegations in a Securities and Exchange Commission lawsuit that Cossey, 54, spent $4.5 million in investor funds on race horses and donated $1.55 million to a foundation that supports the high school attended by his son.
"In terms of the kinds of investors targeted, the egregious use of money and the amount raised, it's one of the worst cases we've seen in a long time," said Thomas Zaccaro, an SEC attorney assigned to the case.
The agency's suit also said Cossey lost millions in a separate, banking-related investment scheme that the SEC said also turned out to be a fraud. The case is pending.
Cossey has declined to comment on the specifics of the SEC lawsuit. But his lawyer, Steward, said Tuesday: "We'll have to save for court" a full discussion of those transactions. Steward suggested, however, that his client may contend he was authorized to make the transactions in question and that the "donation" to the school may actually have been a loan.
Lawyers for Cossey and a co-defendant, former TLC Chief Financial Officer Gary W. Williams, said their clients believe that TLC has assets worth at least $122 million and contend that investors would lose little, if any, money if the business is allowed to continue.
"I think if this company was left alone and we didn't spend tens of thousands of dollars to pay a receiver--that's money from investor funds--that the investors would come out well," said James Riddet of Santa Ana, Williams' attorney.
The SEC, in suing TLC, Cossey, Williams and a third defendant--Thomas G. Cloud of Atlanta--had persuaded U.S. District Judge David O. Carter to freeze the defendants' assets. Contending that losses will total in the tens of millions of dollars, the SEC is seeking to have the investors' funds repaid and additional fines imposed on the defendants.
A hearing had been scheduled in Santa Ana federal court Monday before Carter, but he postponed it until Oct. 30 to allow the defense to prepare its briefs. In the meantime, Carter froze the assets of the company, Cossey and Williams, and he appointed the receiver, Evans.
In his report, Evans said TLC owns 450 real estate parcels: homes, raw land, apartments, and commercial and office properties from Hawaii to Georgia, with concentrations in California, Texas and Alabama. Many are substandard properties in depressed neighborhoods, the report said.
A "significant portion" of TLC's investments apparently were "soundly purchased and managed properly," Evans' report said, but others were "purchased outside of normal professional bounds."
Evans said there was no sign that appraisals had been made to support the purchase or sale price of properties. The company commonly increased the market value of properties carried on its books, but without third-party affirmation, Evans said, he knows "of no accounting theory that would justify the practice as implemented."
The receiver's report also revealed the serving of search warrants last month on TLC's offices and Cossey's home. They were part of a criminal investigation by the U.S. attorney's office in San Diego. In a separate civil procedure, federal prosecutor are attempting to force Cossey to forfeit his home and the $225,000 found there, according to documents and interviews.