Criminal charges filed in Marin County real estate Ponzi case involving 1,300 investors
Criminal and civil charges have been filed against a businessman in charge of the late Kenneth Casey’s Novato real estate investment company, alleging embezzlement in connection with a $26 million Ponzi scheme, federal prosecutors confirmed this week.
The Sept. 29 complaints submitted to U.S. District Court in San Francisco charge that Lewis Wallach, CEO of Professional Financial Investors, ran a conspiracy with Casey, who founded and owned the company, to defraud 1,300 investors by using more than $330 million raised to pay existing obligations and support a lavish lifestyle that included the 2018 purchase of Judy Garland’s landmark Malibu beach house for $3.54 million, luxury vehicles and coin collections.
The misappropriation was also tied to a large land development project in Texas, the Department of Justice noted. He allegedly concealed the scheme by even “directly converting investor funds for personal use, paying for personal income tax liability, purchasing real estate held in his name and by using company employees and resources for repairs and renovations on a personal residence at company expense,” the document reads.
The U.S. Attorney’s Office, which has accused Wallach, 64, of Encino, of conspiracy and wire fraud, announced this result of the investigation that has run parallel to the U.S. Securities and Exchange Commission’s. In the SEC’s complaint, Wallach — who started out as a bookkeeper in 1990 before becoming president and CEO eight years later — falsely assured investors that the finances for the company were sound, even when concerns came up “regarding the effects of the COVID-19 pandemic,” but to no avail.
“We allege that PFI became a classic Ponzi scheme,” U.S. Attorney David Anderson said in a statement.“Money taken from new investors was allegedly used to pay existing investors, while losses mounted behind the scenes.”
Anderson insisted Wallach conspired with PFI’s founder “to fool investors.”
Wallach faces a maximum sentence of 20 years in prison on each count, along with a $250,000 fine.
Casey died of a heart attack in May, setting off a dual probe by the SEC and by attorneys involved in the transfer of his estate. Consequently, this extensive audit of sorts called into question his accounting and financial practices related to PFI and its subsidiary, Professional Investors Security Fund. The two real estate investment firms occupy eight of nine suites at an office building at 350 Ignacio Blvd.
According to the SEC complaint, from September 2015 through May 2020, Wallach and Casey raised the $330 million-plus by “falsely telling investors that their money would be used primarily to invest in multi-unit residential and commercial real estate managed by PFI.” The companies entered into bankruptcy on July 27.
“Many of the defrauded investors were elderly, retired and relying on their investment income for daily living expenses,” the SEC reported in its findings, adding: “Wallach knew that a significant portion of investor funds was being used in a Ponzi-like fashion to pay existing investors.”
Ponzi schemes follow a “rob-Peter-to-pay-Paul” process that often leads to a collapse that resembles a house of cards, as new investors must be obtained to keep payments going to other investors, a June 28 letter from the law firm brought in to handle the probe into the estate detailed. Ragghianti Freitas of San Rafael handled the legal aspect, and Armanino LLP of San Ramon covered the accounting portion of the audit. The law firm was brought on board early on by Casey’s widow, Charlene Albanese, who once earned $11,000 every two weeks as executive director.
“The government’s actions are a good first step toward finding justice for the victims of this terrible fraud,” Ragghianti Freitas attorney Eric Sternberger said on behalf of the companies.
Repeated phone calls from the Business Journal to Wallach and his law firm, Swanson & McNamara of San Francisco, went unreturned.
The criminal complaint cites Wallach’s authorization of monthly interest payments to real estate notes and quarterly distributions to existing investment members “that were routinely paid from new investor money.”
“Our clients would like to get any help in that regard,” said Bijan Amini, representing Lisa de Mondesir, an unsecured creditor. Amini added his client has been “through a lot” and is too distraught to speak to the matter.
Casey’s properties spanning 600,000 square feet of commercial space and nearly 900 apartment units have been valued at $555 million, it was revealed during investigation proceedings.
“My concern is whatever they do in the settlement (of the properties) that they don’t disrupt the property in getting things done,” said Gary Rifkind, who maintains the Ignacio Hills development on Francisco Boulevard.
The boards of the firms have since dissolved, and company executives in the upper echelons of management, including Wallach, have left.
PFI started operations in 1998 and grew over time to at one point including 41 employees.