Sonoma Valley Bank fraud trial gets underway
Federal prosecutors began making their case this week against two former Sonoma Valley Bank executives and a Santa Rosa attorney accused of fraud in making tens of millions of dollars in unsupported loans to a Marin County developer, causing the institution's collapse in 2010 and wiping out the investments of more than 1,000 shareholders.
The first of 75 potential witnesses took the stand Monday in U.S. District Court in San Francisco, testifying against the bank's former president and chief executive, Sean Cutting, 48, a former Sonoma resident; ex-vice president and chief loan officer Brian Melland, also 48 and from Santa Rosa; and attorney David Lonich, 63.
Lonich was chief counsel to Marin County developer Bijan Madjlessi, accused of using straw borrowers to obtain $55 million in loans for residential and commercial projects in Santa Rosa and Petaluma. Madjlessi, 58, also faced charges before he was killed in a car crash in 2014.
The criminal trial before Judge Susan Illston follows last year's $5.4 million civil settlement between Cutting, Melland and former CEO and director Mel Switzer with the Federal Deposit Insurance Corporation.
Now, the two executives and Lonich face millions more in fines and up to 30 years in prison if convicted of conspiracy to commit bank fraud and other charges. Cutting, Lonich and Melland pleaded not guilty and are free on bail.
“Real people lost everything they had,” said Ralph Hutchinson, a former federal banking regulator and consultant who is familiar with the case. “This is a good chance for them to see justice.”
The trial is expected to take four to six weeks. Among those expected to testify for the government are other former bank officials including board chairman Robert Nicholas, and directors Suzanne Brangham and Dale Downing, both members of the loan committee.
Mary Dieter Smith, the bank's chief financial officer, is also on the prosecution witness list, as are Madjlessi's alleged straw borrowers, including brother-in-law Farhad Hariri of Sausalito, who took the stand Thursday.
Michael Ledwich and Douglas Haigh, formerly bankers at Charter Oak Bank and Napa Community Bank, respectively, testified earlier in the week.
In pretrial briefs, Assistant U.S. Attorney Alex Tse accused the defendants of three separate fraud schemes involving funneling money to Madjlessi for the Petaluma Greenbriar apartments in excess of legal lending limits, lying to the FDIC about it and helping Madjlessi gain control of the 228-unit Park Lane Villas apartments in Santa Rosa through misrepresentation.
Madjlessi had already borrowed $6.1 million from Sonoma Valley Bank when he first sought additional funding in 2006, the prosecutor said.
At the time, the real estate market had begun to deteriorate, making it less likely that Madjlessi would pay back the money.
Cutting and Melland, however, allowed Madjlessi to take out new loans to build out his projects in an attempt to ensure the bank would get money back, the prosecutor said. The loans were made through other people and a consulting company, essentially throwing “good money after bad,” Tse said.
“While the loans on paper were made to those individuals and that entity, Madjlessi was the primary beneficiary of the loan funds and made the payments on the loans,” Tse wrote.
The pattern continued, with Cutting and Melland overseeing $23 million in loans to the developer - or three times the amount a bank its size could cover - by 2008. All the while, Cutting and Melland hid Madjlessi's identity from the bank's loan committee, prosecutors said. At one point, Melland, who had a side interest in his own energy drink business named Magnus, accepted a $175,000 investment from Madjlessi, who was later elected to the company's board, according to prosecutors.
In 2009, Madjlessi turned to Sonoma Valley Bank again when he was defaulting on a $30 million loan to IndyMac bank for Park Lane Villas apartments. This time, a Madjlessi business associate, James House, posed as a straw borrower, getting a loan to help Madjlessi pay off his debt and avoid bankruptcy, prosecutors said.
Lonich, Madjlessi's lawyer, prepared the paperwork, forming a company known as 101 Houseco. Through that entity, Madjlessi and Lonich were later able to gain control of the apartment complex and get refinancing from government lender Freddie Mac.
Lonich is accused of obstructing a subsequent criminal investigation by asking House to lie about his role in Houseco. The conversation was captured in a secret recording.
Prosecutors had House on their witness list. It is unclear whether House will testify.
The defendants have each denied wrongdoing. A lawyer for Melland suggested in legal papers the 2008 financial crisis was the cause of the bank's failure. Santa Rosa attorney George Boisseau said the loans made to Madjlessi and other borrowers were all subject to review by the bank's board of directors and loan committee.
The directors, who are personally responsible for lending limit violations, were never charged or the subject of civil action, Boisseau said.
“Bad banking is not a proper foundation for criminal violation,” Boisseau wrote.
Lonich's lawyers contend in part that he cannot be found guilty of fraud because of disclosures he made to Cutting and Melland.
Sonoma Valley Bank, which opened in 1988, was the only Sonoma County bank to fail in the meltdown that saw the collapse of 465 banks nationwide. Its holding company, Sonoma Valley Bancorp, was publicly traded with more than 1,000 shareholders. When the bank closed, it had $337 million in assets.
You can reach Staff Writer Paul Payne at 707-568-5312 or firstname.lastname@example.org. On Twitter @ppayne.