Secret informant helped Sonoma Valley Bank probe
Published: Wednesday, May 7, 2014 at 4:26 p.m.
Last Modified: Wednesday, May 7, 2014 at 4:26 p.m.
A secret informant wearing an electronic wire helped federal agents build their case against two former Sonoma Valley Bank executives and two borrowers accused of defrauding the bank before it collapsed in 2010, according to an affidavit unsealed in U.S. District Court.
The document provides the most detailed account made public so far of the conspiracy alleged in a grand jury indictment against Marin County developer Bijan Madjlessi, Santa Rosa lawyer David Lonich, and former bank executives Sean Cutting and Brian Melland.
Madjlessi was killed in a car wreck discovered Tuesday off a steep Marin hillside. The three remaining defendants are scheduled to appear in court Friday.
The informant, an unnamed construction contractor who borrowed money from Sonoma Valley Bank, recorded conversations with Madjlessi and Lonich in 2011 as they tried to calm his fears about testifying before the federal grand jury, according to the document.
The degree of detail imparted by Madjlessi and Lonich is evidence of their participation in the alleged scheme, as well as their apparent effort to coach the informant about his testimony, according to the affidavit filed by a federal agent investigating the case.
The indictment, unsealed April 9, accuses the four defendants of bank and wire fraud, money laundering and conspiracy. Thirteen of the 29 charges carry maximum penalties of 30 years in prison and $1 million fines, according to the U.S. Attorney's Office. The defendants, if convicted, also could be subject to asset seizures.
All four men entered not guilty pleas in the case and were freed on $250,000 bonds. None agreed to be interviewed after a brief appearance April 18 before District Court Judge Susan Ilston in San Francisco.
Attorney Steven M. Bauer, who appeared with Madjlessi, questioned the charges. “How fair is it for the government to try to blame four gentlemen for the Marin real estate crash?” Bauer said outside court last month.
On Tuesday, Bauer said Madjlessi “firmly believed he would defeat his accusers.”
The case centers on two loans totaling $9.4 million made by now-defunct Sonoma Valley Bank to a corporation called 101 Houseco in 2009, shortly after the bank obtained an $8.65 million bailout from the federal government's Troubled Asset Relief Program.
The confidential informant, who started cooperating with federal investigators in April 2011, played a key role in the government's case by detailing his role in a complex series of financial transactions surrounding the 2009 loans to 101 Houseco.
Lonich filed papers to create 101 Houseco in March 2009, two weeks before it borrowed money from Sonoma Valley Bank. The government informant was made the nominal owner, but Madjlessi and Lonich “fully controlled” the company, according to the affidavit.
101 Houseco was registered to James House, a business associate of Madjlessi, according to documents obtained by The Press Democrat in the wake of the bank's collapse. Calls to House, an Orange County resident, were returned by his attorney, Carl Faller, who said he could not comment on any aspect of the investigation.
Prosecutors contend that Madjlessi and Lonich created 101 Houseco to reacquire the rights to Park Lane Villas East, a southwest Santa Rosa mixed-use project that Madjlessi built in 2006 with a $31.9 million construction loan from IndyMac Federal Bank. Madjlessi lost the project in 2008 when he defaulted on the IndyMac loan. He was prohibited from bidding on it when the Federal Deposit Insurance Corp. placed the IndyMac loan up for auction the following year.
101 Houseco acquired the loan — and the rights to foreclose on the all-but completed project — at auction in March 2009 for $4.2 million, a fraction of the amount Madjlessi still owed on the IndyMac loan.
Melland and Cutting allegedly worked with Madjlessi and Lonich to assemble a loan package for the government informant that allowed 101 Houseco to submit the winning bid, according to the indictment.
The informant told investigators that he agreed to participate in the deal because Madjlessi owed him money from previous construction jobs — about $200,000, according to one of the informant's associates cited in the affidavit. The informant said he knew little about the transactions to which he gave his name and signature.
The informant said Madjlessi directed him to transfer the Sonoma Valley Bank money from 101 Houseco to Masma Construction, which was controlled by Madjlessi, according to the affidavit.
The informant began cooperating with investigators in April 2011, according to the affidavit. He was removed as manager of 101 Houseco in June 2011 for his refusal to sign documents.
Overall, the affidavit reveals a painstaking effort by federal authorities to collect emails, financial documents, records of undercover meetings and witness statements, as well as tracking payments to bolster their case.
It was filed as part of a 73-page application seeking permission to search Madjlessi's gated home near Tiburon, the offices he shared with Lonich at the Park Lane Villas off Sebastopol Road, and the attorney's home several blocks away in the same southwest Santa Rosa subdivision.
The affidavit lays out the government's case that Madjlessi, not House, was in control of 101 Houseco.
Madjlessi's daughter made the $100,000 deposit required for 101 Houseco to bid on the IndyMac note, according to the affidavit. The payment was characterized as a loan to 101 Houseco in exchange for what amounted to ownership rights to 99 percent of the company.
When Sonoma Valley Bank distributed funds from the loan, it was Madjlessi who repeatedly called to check on wire transfers of the funds, even though the loan was not in his name, according to the affidavit.
The document details a host of digital devices targeted in the searches, ranging from computers and cellphones to printers, scanners, modems and memory cards. Investigators sought the devices so even “deleted” content could be potentially duplicated, decrypted and analyzed by an electronic forensics team.
It also sought information about any companies incorporated in Panama. Lonich allegedly engaged a Los Angeles law firm in 2010 to form a Private Interest Foundation in Panama — a financial instrument that permits funds to be transferred and protected anonymously and tax-free. The Panama foundation was to have a membership interest in the company that owned 99 percent of 101 Houseco, according to the affidavit.
Because Lonich is an attorney who represented Madjlessi, investigators set up an elaborate system to sort through documents and other information seized during the execution of the search warrants to avoid violating the confidentiality of attorney-client communication. A separate team, including an assistant U.S. attorney and computer forensic search agents that were not part of the prosecution team, was assigned to review and set aside documents protected by attorney-client privilege.
The affidavit was signed by Special Agent Terry M. Neeley, an investigator with the U.S. Treasury Department's Special Inspector General for the Troubled Asset Relief Program. The agency led the investigation because Sonoma Valley Bank had received $8.65 million in federal TARP funds shortly before the 101 Houseco loan was approved.
Sonoma Valley Bank never repaid the TARP funds, which were lost when the bank collapsed and was seized by federal regulators in August 2010, the indictment states.
Cutting and Melland have since been banned by the FDIC from working in the banking industry.
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