Judge Refuses Call to Shut PinnFund, Names Investigator

By RALPH FRAMMOLINO, Times Staff Writer

     They kept investing their money even though some knew it sounded too good to be true.

     And Thursday, investors in the mortgage firm PinnFund USA--dazzled for years by reports showing 17% returns--had one more reason for that nagging feeling. A San Diego federal judge appointed a special master to determine whether the Carlsbad company is a major mortgage fraud scheme as alleged by federal securities regulators.

     Securities and Exchange Commission officials asked Chief U.S. District Judge Marilyn J. Huff to shut down PinnFund and its related entities, claiming that Michael J. Fanghella of Carlsbad and James L. Hillman of Oakland used the firms to bilk investors of at least $107 million.

     Instead, Huff allowed the men to continue to operate the company and named former U.S. Atty. Charles La Bella to investigate whether investor money was squandered. She also issued an injunction preventing PinnFund and its affiliates from transferring money overseas or destroying corporate documents.

     "An independent party that works for the court, not the SEC, is going to look at things and tell the court whether or not this [PinnFund] is real or whether this is smoke and mirrors," said Irving Einhorn, who is representing Fanghella and PinnFund in the civil action.

     SEC officials declined to comment pending Huff's written order, due today.

     SEC officials say that since the mid-'90s, the two men collected $267 million from at least 166 investors to write mortgages at higher-than-market interest rates for individuals with bad credit ratings. Although some of the money was used for legitimate business, regulators allege the men used phony auditing statements to cover up $95 million in losses and that $107 million was transferred to Fanghella, who enjoyed a luxurious lifestyle.

     According to the SEC, Fanghella, 49, diverted $10 million of the money to lavish gifts on his porn actress girlfriend, Kelley Cook, 35, who has appeared in several adult movies under the name Kelley Jaye. SEC officials allege Fanghella bought Cook a $5-million house in Laguna Niguel, gave her $2 million in cash, paid for New York shopping trips and presented her with a $75,000 piano.

     SEC court filings also allege he transferred at least $3.7 million of other investor funds to an offshore account in Barbados.

     News of the SEC charges left investors in Fanghella's mortgage business bewildered.

     "We are as shocked as anybody in this thing thing, and we have personal assets tied up in it and are a victim like anyone else," said Stan Sloman, whose Encino-based Sloman & Dor Accountancy Corp. sank an undisclosed amount of money into a PinnFund-related partnership. "We always thought it was a straightforward deal."

     Said Hank Krakover, a Los Angeles resident scrambling to find out what happened to his $25,000 investment in the same partnership: "You could clearly make the argument that everybody involved in it was smart enough to know better. But you have greed. . . . Why else would people go for double-digit returns?"

     Krakover said he and his parents, Stewart and Grace of Beverly Hills, were among the first to invest in PinnFund in the early 1990s based on their relationship with Hillman, an Oakland lawyer who solicited the mortgage seed money through Peregrine Funding Inc.

     The Krakovers invested in Grafton Partners, an Oakland-based limited partnership controlled by Peregrine Funding. Grafton raised $87.2 million from 43 investors, SEC court papers said.

     Over time, his family decided to "reduce its exposure," the younger Krakover said.

     Quarterly reports from Peregrine showed annualized returns to PinnFund investors of 17.5%--something the younger Krakover said seemed odd. Although PinnFund seemed to be booming, other high-risk lenders such as Sacramento-based Money Store and FirstPlus Financial Corp. were failing.

     "We knew it was too good to be true," said the younger Krakover. "What was too good to be true was the fact that [PinnFund] was showing tremendous growth when some of the publicly trading companies were folding."

     A woman answering the telephone Thursday at Hillman's office had no comment.

 Union-Tribune/San Diego

SEC officials say the fraud case is one of the largest ever in Southern California. Since 1993, PinnFund and others collected $276 million from at least 166 investors using unregistered securities and false information, the agency contends.

Investors were promised 17 percent returns on their money for funding PinnFund USA's business of sub-prime residential mortgage lending, which specializes in home loans to borrowers with poor credit. The loans are bundled and resold.

While some investor money went to capitalize PinnFund's mortgage lending, $107 million was diverted to "finance Fanghella's lavish lifestyle," according to the SEC.

That lifestyle, court documents say, included a $350,000 ring, a $75,000 piano and a $5 million home in Laguna Niguel for his ex-girlfriend, Kelly Cook, also known as Kelly Jaye. Kelly Jaye was featured in adult films in the mid-1990s produced by Vivid Video, according to Vivid's Web site.

Fanghella also spent $36,000 on a single dinner at a New York City restaurant called Daniel, according to SEC officials. A New York Post gossip columnist reported that Fanghella was a restaurant regular and in February was a winning bidder at a charity event there.

Fanghella also transferred at least $3.7 million to an account in his name in Barbados, the SEC complaint alleges.

Efforts to reach Fanghella and his lawyer were unsuccessful. Phone calls to PinnFund's offices in Carlsbad were not returned.

PinnFund has about 180 local employees, according to the Carlsbad Chamber of Commerce. It has more than 47 offices and 14 regional centers throughout the nation. The company is an occasional contributor to charity events, such as the MS Walk fund-raiser in Carlsbad and Seaport Village for Multiple Sclerosis.

The MS Walk is scheduled for March 31 and April 1. Organizers have already received PinnFund's contribution.

The SEC's complaint alleges several violations of securities laws. The central violation involves bogus financial statements and forged audit reports used to lure investors.

The financial statements claim PinnFund USA was profitable, making $2.2 million in 1999. But the SEC contends the company is insolvent, losing $32 million in 1999 and a total of $95 million since 1997.

"There is a lot of so-called sparkle in this case, but one of the main frauds here is they just rewrote their own financial statements, thereby hiding some $90 million in losses," said Tom Zaccaro, an SEC lawyer in Los Angeles.

Auditors who reviewed PinnFund's books, including two San Diego firms, learned that their audits had been changed for 1997-99, court records indicate. They informed the Department of Housing and Urban Development, which has jurisdiction over some of PinnFund's mortgages.

Besides Fanghella and PinnFund USA, others accused are James L. Hillman, an Oakland lawyer, and a company Hillman controls, Peregrine Funding Inc.

Through Peregrine-managed companies Allied Capital Partners, Grafton Partners and Six Sigma LLC -- all named in the litigation -- unregistered securities were offered to investors. Most securities must be registered with the SEC to ensure adequate disclosure to investors.

Hillman was not available at his office yesterday. A call to his lawyer was not returned.

Cook, Fanghella's former girlfriend, is not accused of any wrongdoing, said Lisa Gok, the SEC's assistant regional director in Los Angeles.

But the SEC is seeking that Cook and Reliance Holdings, which holds title to the Laguna Niguel house, "return proceeds of the fraudulent scheme to which they have no legitimate claim."

Cook's lawyer did not return a phone call.

Ironically, SEC investigators apparently learned much about the case from a lawsuit Fanghella filed against Cook this summer in Orange County. In it, Fanghella seeks the return of his $10 million in gifts, which he claims he gave because he thought the two were going to marry, according to court documents.

The SEC also probed records of Fanghella's ongoing divorce from his current wife. In a written declaration, Fanghella said PinnFund had "never made a profit" and was surviving on "borrowed funds."

"My wife knew at all times that we had no income from PinnFund and that we were living an inflated lifestyle funded by borrowed money," Fanghella's declaration read. "It was, and is, all smoke and mirrors."