Orange County CEO Gets 14 Years for $169 Million Fraud

The owner of an Orange County real estate investment firm in Irvine was sentenced today to 168 months in prison for perpetrating a scheme that ended with the firm's bankruptcy and hundreds of investors losing a total of $169 million.

Michael J. Stewart, 68, of San Clemente, was also ordered by U.S. District Judge Cormac J. Carney to pay $9,234,914 restitution to 120 victims in connection with his conviction on 11 counts of mail fraud in August.

Stewart owned and was the chief executive of Pacific Property Assets which had offices in Long Beach and Irvine.

Although the rental operations were not profitable, the company raised cash through refinancing and selling properties, according to U.S. Attorney Eileen M. Decker.

As real restate values increased until 2007, the properties were financed at higher values but when the real estate market collapsed, Stewart and co-partner John Packard started using fraud to keep the failing company operating, Decker said.

"While all investments carry some risks, victims who were lured into this scheme in 2008 and 2009 faced a guaranteed loss of their funds," Decker said.

Some $34 million was raised from new investors, many of them retired. One investor, a 74-year-old woman, invested most of her money with the firm after her husband died, Decker said.

Stewart and co-defendant John Packard used new funds to pay earlier investors in what Decker described as a Ponzi scheme that ultimately collapsed.

Packard pleaded guilty to one count of mail fraud in November 2014 and cooperated with prosecutors. He is scheduled to be sentenced on March 28.

During trial, Assistant U.S. Attorney Brett Sagel told jurors that when the business began failing due to the economic downturn, Stewart tried to use the nature of the financial slump to his benefit.

Stewart recruited investors with plans to acquire distressed apartment buildings that could be flipped for a profit, Ssagel said. The plan he sold to new investors was to snatch up apartment buildings at “rock-bottom prices” and refurbish them to fill the void in housing when evicted homeowners look for a place to live, Sagel said.

“This investment was so great, he called this the ‘Opportunity Fund,”’ the prosecutor said.

Investors were told they could reap 15 to 30 percent interest a month, Sagel said. Stewart failed, however, to tell investors that the company was floundering, he said.

Stewart’s and Packard’s business plan worked when they founded their company in 1999, Sagel said. They would borrow money from banks and individual investors while acquiring apartment buildings and renting out units and selling or refinancing the properties.

The rental income was never enough to pay the bills, but as long as property values continued to thrive, the model worked as they sold off and refinanced the buildings, Sagel said.

Packard’s job was to acquire property, deal with the banks, get loans and manage the apartments. Stewart, an attorney and real estate broker, was in charge of recruiting investors.

At one point they put $2 million in the bank so they could show investors a balance sheet with the money in the account, then almost immediately pulled it back out, Sagel said.

The money from new investors to the Opportunity Fund was supposed to be spent on acquiring apartment buildings, but it instead went to pay off old debts, amounting to a Ponzi scheme, Sagel said.

Miller said his client could not have anticipated that the collapse of the housing industry would spread to apartments, as well.

Stewart and Packard’s company had a solid track record and had earned praise for its business model before the economy cratered, Miller said.

Packard was the “hammer” who had “always come through” but had failed to win the financing to make the Opportunity Fund work, Miller said.

Investors were warned in memos of the high risks, he said.

City News Service