Sonoma Valley Bank trial draws to a close
SAN FRANCISCO - Did two Sonoma Valley Bank executives and an attorney for one of its biggest borrowers rip off the struggling bank or try to save it?
Jurors will be asked to answer that core question following closing arguments today in a complex, seven-week criminal trial focusing on a series of real estate loans that ultimately led to the bank’s implosion in 2010.
An attorney for the bank’s former president and chief executive officer, Sean Cutting, told jurors Tuesday his client didn’t conspire to defraud the institution when he signed off on millions of dollars in loans to a Marin County developer with a track record of not paying his debts.
Rather, Cutting was pursuing a “workout strategy” for the developer, Bijan Madjlessi, who had projects in Petaluma and Santa Rosa around the time of the 2008 economic meltdown, attorney Neal Stephens said in closing arguments in U.S. District Court in San Francisco.
The bank’s loan committee approved of giving Madjlessi more money to try to keep him from defaulting on previous obligations and help him turn his troubled ventures around, Stephens said.
It was the kind of approach that was encouraged by banking regulators and government officials to deal with the worst financial crisis in at least 30 years, Stephens said.
“Bankers had to think outside the box,” Cutting’s lawyer told jurors. “They had to think up new solutions to their problems.”
The defense emerged at the end of the trial for Cutting, 48, formerly of Sonoma; ex-vice president and chief loan officer Brian Melland, 48, of Santa Rosa; and attorney David Lonich, 63, of Santa Rosa. The three men were indicted in 2014 for their alleged roles in the collapse of the only bank to fail in Sonoma County during the Great Recession.
Lawyers for Melland and Lonich are expected to make their final arguments today.
Lonich was chief counsel to Madjlessi, who was accused of using straw borrowers to obtain $35 million in loans for residential and commercial projects. Madjlessi, 58, was killed in a 2014 car crash.
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, Cutting, Melland and Lonich face millions more in fines and prison time if convicted of conspiracy to commit bank fraud, money laundering and other charges.
Federal prosecutors recapped the evidence against the three men in a closing argument that encouraged jurors to use common sense and follow the money.
Adam Reeves, assistant U.S. attorney, accused the three of participating in a multimillion-dollar fraud, each for his own reasons. He said Cutting hoped to conceal bad business decisions and protect his reputation as the leader of a cherished local institution while Melland and Lonich sought personal financial gain.
“The defendants may have had different motives but they all fed schemes to defraud,” Reeves said.
Financing dating back to 2005 centered on two Madjlessi projects - the Petaluma Greenbriar apartments and the 228-unit Park Lane Villas apartments in Santa Rosa.
When Madjlessi was unable to make loan payments, he turned to Cutting and Melland, who authorized more money, eventually exceeding legal lending limits, he said.
To conceal the problem, the defendants allowed Madjlessi to take out loans using other people’s names.
“It was a constant strain to keep these loans performing and that’s how this scheme arose,” Reeves said.
The pattern continued in 2009 when Madjlessi was defaulting on a $30 million loan to IndyMac bank for Park Lane Villas apartments. He turned to a business associate, James House, who posed as a straw borrower, getting a loan from Sonoma Valley Bank 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 was to receive rent from the apartments totaling about $200,000 a year. He 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 played to jurors.
Melland is accused separately of receiving an illegal $150,000 gift from Madjlessi to fund a private energy drink business called Magnus.
“Money loaned by Sonoma Valley Bank went back to Sonoma Valley Bank,” Reeves said. “And that tells you a lot about the people in this case.”
But Cutting’s lawyer said his client acted in good faith. He questioned the idea that Cutting set up straw borrowers, calling them qualified investors backed by millions in personal assets. About $22 million in loans was backed by $74 million in collateral, Stephens said.
And Madjlessi’s role was never a secret, he said. Before the bank board authorized the Houseco loan, Madjlessi met with the loan committee members, including Switzer, discussing for 45 minutes his plans to save the project, Stephens said.
The committee ultimately signed off on the loan. Stephens asked jurors to acquit Cutting.
“What do we know from the evidence?” Stephens asked. “Sean worked in the best interest of the bank. He benefited in no way from the Madjlessi loans.”
You can reach Staff Writer Paul Payne at 707-521-5250 or firstname.lastname@example.org. On Twitter?@ppayne.