Appeals court upholds convictions in Sonoma Valley Bank fraud case, but vacates sentences
An attorney and two former officers of the defunct Sonoma Valley Bank who were convicted of fraud in 2017 could now be released from prison after a federal appeals court panel overturned a key portion of the case against them.
The decision, issued unanimously by a three-judge appellate panel Monday, is the latest chapter in a North Bay saga of greed and fraudulent banking practices that unfolded after Sonoma Valley Bank’s takeover and liquidation by federal and state authorities in the wake of the 2008 financial crisis.
The bank’s collapse wrecked the investments of the bank’s shareholders, costing some hundreds of thousands of dollars, and put taxpayers on the hook for as much as $20 million in federally insured deposits and bailouts.
In their ruling, however, the three U.S. Ninth Circuit Court of Appeals judges separated the bank collapse from the fraud.
While they upheld the convictions of Sean Cutting, Brian Melland and David Lonich, the judges found that federal Northern District of California Judge Susan Illston wrongly tied their sentencing to the damage wrought by the bank’s collapse.
If federal prosecutors aren’t able to produce new evidence tying the collapse to the fraud, the men’s prison sentences will be thrown out and the $20 million in restitution they were ordered to pay will be voided, according to the ruling.
The 70-page ruling rejects the sentencing while spending considerable time upholding the men’s convictions.
Cutting and Melland, former Sonoma Valley Bank employees, were convicted in 2017 after a monthlong jury trial that found they had carried out various fraud schemes over years as they pushed the bank to approve millions of dollars in questionable loans to real estate developer Bijan Madjlessi even after he defaulted on payments.
Melland had cultivated a cozy business relationship with Madjlessi, whose wife invested $50,000 in an energy-drink company Melland was trying to launch. That payment led to a bribery conviction against Melland.
Lonich, Madjlessi’s attorney, was convicted of fraud and obstruction of justice in the same trial. The jury found all three men guilty on conspiracy charges and a series of bank fraud, wire fraud and money laundering charges.
Judge Illston sentenced Melland and Cutting to more than eight years in prison and Lonich to six years and six months.
But those sentences were based too deeply on the societal and financial damage of Sonoma Valley Bank’s collapse, according to the appeals court.
The court ruled that prosecutors never proved beyond doubt that the convicted fraudsters indeed wrecked the bank, noting federal bank regulators had reported other flaws like poor management, liquidity issues and bad markets.
All in all, the bank lent $35 million to Madjlessi or his agents, according to a federal presentencing report, driving Sonoma Valley Bank $24.7 million over its federal lending limit by 2010. In 2009, federal regulators downgraded SVB’s rating, citing $27 million in loans to Madjlessi as 74% of the bank risk they found unacceptable. In 2010, authorities seized and liquidated the bank.
But broader economic forces also might have wrecked the bank, Judge Daniel Bress, who wrote the court decision, argued.
“It is not clear whether SVB’s collapse was caused by defendants’ conspiracy-related loans or by other ‘intervening’ and ‘independent’ factors, including outside economic forces,” Bress wrote.
Madjlessi was never tried. He died in a car crash a coroner ruled accidental four weeks after he was indicted and arrested in the spring of 2014. His body was found in his wrecked gold Mercedes 350 feet below Shoreline Highway. His toxicology report did not find intoxicants, and there was no evidence he had taken his own life, the Marin County coroner found.
The other three men remain in federal prison in Sacramento, according to inmate rosters, and their release dates are in November 2025. But the ruling may see them walk free if prosecutors cannot present convincing evidence tying the crimes to Sonoma Valley Bank’s collapse.
The appeals ruling vacated the sentences and sent the case back for a new sentencing.
“It may be that … the government will be able to justify its requested enhancements. But on this record, it has not done so,” Judge Bress wrote.
It’s not clear when that new sentencing would take place. Lawyers for the three defendants and a federal prosecutor did not respond to voicemails seeking comment on Wednesday.
The appeals panel called for any petitions for rehearing the case to be filed by Jan. 24. On Wednesday, attorneys for the defendants called for a 60-day extension and said prosecutors had agreed to that condition.
You can reach Staff Writer Andrew Graham at 707-526-8667 or email@example.com. On Twitter @AndrewGraham88.
Business enterprise and investigations, The Press Democrat
I dig into businesses, utility companies and nonprofits to learn how their actions, or inactions, impact the lives of North Bay residents. I’m looking to dive deep into public utilities, labor struggles and real estate deals. I try to approach my work with the journalism axioms of giving voice to the voiceless, comforting the afflicted and afflicting the comfortable in mind.