The scheme that brought down Sonoma Valley Bank
Two former executives of Sonoma Valley Bank have been convicted of making tens of millions of dollars in fake loans, a massive fraud scheme that lead to the bank’s 2010 collapse. Sean Clark Cutting, the former Chief Executive Officer, and Brian Scott Melland, the former Chief Loan Officer were found guilty this week of conspiracy, bank fraud, money laundering, falsifying bank records and other crimes. Some of the charges carry maximum prison sentences of 30 years and million-dollar fines.
In addition to wiping out the investments of some 1,00 shareholders, the bank failure caused more than $20 million in losses to taxpayers, approximately $11.47 million to the FDIC, and $8.65 million to TARP, the federal bank bail-out agency.
Co-defendant David John Lonich, an attorney for Marin and Sonoma County real estate developer Bijan Madjlessi (who had been indicted on these charges before his death on May 16, 2014) was also convicted of conspiracy, bank fraud, wire fraud, attempted obstruction of justice, and other offenses.
The schemes involved years of excessive and illegal lending to Madjlessi, often using “straw,” or fictional, borrowers for real estate projects in Santa Rosa and Petaluma.
“The defendants resorted to bank fraud, lies to bank regulators, and other crimes in a multi-year scheme to conceal millions of dollars in failed and failing loans,” said United States Attorney Brian Stretch.
Much of the evidence at trial related to Madjlessi’s real estate projects at the Park Lane Villas in Santa Rosa and Petaluma Greenbriar Apartments in Petaluma. According to the evidence admitted at trial, between 2004 and 2010, Sonoma Valley Bank loaned Madjlessi and the persons and entities he controlled in excess of $35 million — about $24.7 million more than the legal lending limit set by the bank’s regulators.
To conceal the abnormally high concentration of lending, Melland, the loan officer who worked most closely with Madjlessi, and Cutting recommended that the bank approve multi-million dollar loans to “straw” borrowers. The evidence at trial established that Melland and Cutting knew that millions in proceeds from loans to these other borrowers would go to Madjlessi and the companies he controlled.
The evidence at trial proved that Cutting and Melland schemed to give Madjlessi and his companies in excess of $8.6 million in proceeds from loans nominally made in the name of other borrowers.
Melland was also convicted of receiving a bribe from Madjlessi of approximately $50,000 in April 2008. According to the trial evidence, one day after he received the bribe, Melland recommended a set of loans for approximately $3.65 million to a “straw” borrower controlled by Madjlessi.
Cutting and Melland also were convicted of making false statements to Sonoma Valley Bank’s regulators, the FDIC, and DFI. The evidence established that during joint examinations in May 2008, and again in December 2009, Cutting and Melland provided false and misleading information to the regulators about the true nature and extent of the bank’s lending to Madjlessi and the persons and entities he controlled.
Yet another scheme involved a conspiracy whereby Lonich, Madjlessi’s lawyer, conspired with Cutting and Melland to mislead Sonoma Valley Bank into lending millions more to Madjlessi, again in the name of a ficticious borrower, so Madjlessi could illegally buy back a debt he owed to IndyMac Bank. IndyMac Bank had failed and been taken over by FDIC. In early 2009, the defendants conspired to lend the money to Madjlessi’s nominee so that Madjlessi could buy the approximately $27 million debt back for only approximately $4 million.
FDIC rules specifically prohibited delinquent borrowers, like Madjlessi, from purchasing their own notes at auction. Nonetheless, the defendants were convicted of an elaborate bank and wire fraud scheme to obtain the defaulted note by misleading Sonoma Valley Bank, the FDIC, and eventually other financial institutions about Madjlessi’s true role in the transactions.
“The defendants used their positions of power to take advantage of the banking system and ultimately the taxpayers,” said FHFA Special Agent in Charge Jay Johnson.
In late 2009 and early 2010, Cutting helped Lonich gain control of additional units at the Park Lane Villas by issuing letters on Sonoma Valley Bank letterhead. The letters falsely stated that potential nominee buyers had sufficient funds at Sonoma Valley Bank to purchase the units. The evidence at trial also demonstrated that Lonich attempted to obstruct justice by, among other things, instructing the nominee to make false statements to federal agents.
On May 6, 2014, approximately two months after he was indicted in this case, Madjlessi was found dead after a single-person car accident in a steep ravine in the Marin Headlands off Highway 1 in Marin County.
“Ultimately, this case was about senior bankers, and the persons with whom they conspired, putting their interests ahead of the federally-insured and federally-regulated bank they served,” Stretch said.
Special Inspector Christy Goldsmith Romero said the schemes “were designed to conceal bad loan after bad loan to a single customer, which ultimately cost the bank millions.”
One aspect of the scheme started weeks after the bank received an $8.65 million bailout from TARP, all of which was lost, said Romero said. “An important source of lending to the Sonoma community was extinguished when this bank failed a little more than a year later.”
A December 2013 ruling by the FDIC found that Cutting and Melland had engaged in reckless and unsafe banking practices. Such violations “were part of a pattern of misconduct… that demonstrated a willful disregard for the soundness of the bank.” The ruling banned the two from ever taking another job in the banking industry.
After FDIC warnings about an unsafe concentration of loans, Sonoma Valley Bank was taken over by regulators in August 2010. It’s stock, once trading at over $30 per share, was virtually worthless – approximately a $70 million loss.
Cutting and Melland were this week convicted of multiple charges, with various maximum penalties. Misapplication of Bank Funds, Wire Fraud, and lying to the FDIC, for example, are each possible 30-year jail terms. A sentencing hearing is set for April of 2018.
A partial list of charges and maximum penalties:
Cutting and Melland
- Conspiracy to Commit Bank Fraud, in violation of 18 U.S.C. § 371, with up to 5 years of imprisonment, 3 years of supervised release, and a fine of $250,000.
- Bank Fraud, in violation of 18 U.S.C. § 1344, with up to 30 years of imprisonment, 5 years of supervised release, and a fine of $1,000,000.
- Conspiracy to Make False Statements to the FDIC, in violation of 18 U.S.C. § 371, with up to 5 years of imprisonment, 3 years of supervised release, and a fine of $250,000.
- Misapplication of Bank Funds, in violation of 18 U.S.C. § 656, with up to 30 years of imprisonment, 5 years of supervised release, and a fine of $1,000,000.
- False Statements to the FDIC, in violation of 18 U.S.C. § 1007, with up to 30 years of imprisonment, 5 years of supervised release, and a fine of $1,000,000.
- Conspiracy to Commit Wire Fraud, in violation of 18 U.S.C. § 1349, with up to 30 years of imprisonment, 5 years of supervised release, and a fine of $1,000,000.
Cutting (six counts), Melland (eight counts)
- False Bank Entries and Reports, in violation of 18 U.S.C. § 1005, each with up to 30 years of imprisonment, 5 years of supervised release, and a fine of $1,000,000.
Cutting, Melland, and Lonich (five counts each)
- Wire Fraud, in violation of 18 U.S.C. § 1343, each with up to 30 years of imprisonment, 5 years of supervised release, and a fine of $1,000,000.
Cutting, Melland, and Lonich (twelve counts each)
- Money Laundering, in violation of 18 U.S.C. § 1957, each with up to 10 years of imprisonment, 3 years of supervised release, and a fine of $250,000.
One thought on “The scheme that brought down Sonoma Valley Bank”
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These major criminals got off very light because the judge overrode the conviction requirements of decades in prison. Instead proffered up the theory that by these criminals being in jail it would serve no benefit to the public.
Since when have criminal sentences been based on the public good over the crimes intent.
Especially for Mr. Lonich, whom as the ringleaders attorney that facilitated the loans and transfers of millions and millions of dollars and then bribed and threatened witnesses.
Mr. Lonich then arranged for the remaining properties to be transferred into Beganhe Madjlessi’s holdings to continue to reap the benefits of the ill gotten gains. These properties moved through Lonich into Beganeh’s hands allowing her to buy a $2 Million dollar home in Belvedere.
This while the investors were denied the ability to recoup their losses, many of which went bankrupt and others lost their life savings in the bank & property scandals.
The paltry 6 1/2 year sentence for Lonich is a disgusting travesty of justice or lack thereof.
Lonich spent over a decade facilitating illicit loans through a corrupt developer while destroying countless lives. Hundreds and hundreds of victims that will not ever recoup their losses and the destruction of their life’s work and somehow Lonich being locked up is not in the interest of the public.
Mr Lonich was the worst of the criminals on trial and was given the most consideration by the judge.
Why?? Because the judge decided that him being sentenced to the proper prison time would not help the victims or the public.
This is a presidense setting if their ever was one.
Now for future criminals their lawyers can use this to argue that their prison sentences need to be shortened based on the public good that could not be helped by them being in prison for the crimes they were duly convicted of.
Hog wash.