A federal grand jury in Santa Ana, Calif., on Wednesday indicted eight defendants in a complex real estate scheme, alleging they fraudulently converted Huntington Beach apartments to condominiums, then sold the properties for substantial profits.
In addition to the real estate scheme, the indictment charges four of the defendants, including former Huntington Beach Mayor Pamela Houchen, with corruption for allegedly concealing Houchen’s ownership of an apartment building in a redevelopment district where she was prohibited from owning property.
Fraud is a growing problem in the real estate industry, with more cases coming to the surface in recent years. Perpetrators often are professional real estate agents, mortgage brokers, title agents, appraisers and attorneys. The complex crimes can cost financial companies millions of dollars in losses and litigation expenses, and can leave consumers with destroyed credit.
The Huntington Beach case is part of an ongoing investigation conducted by the FBI and the Huntington Beach Police Department. None of the defendants have been convicted.
The FBI has ramped up its efforts to dismantle a variety of financial crimes, which include mortgage and loan fraud, insider fraud, financial institution failure investigations, identity theft, check fraud and check kiting. Since 2000, FBI financial fraud investigations have resulted in more than 11,466 indictments, 11,362 convictions and approximately $8.1 billion in restitution orders.
The 74-count indictment in California charges:
- Philip Benson, 72, the alleged architect of the scheme and a real estate broker at Pier Realty in Huntington Beach;
- Harvey Du Bose, 63, the supervising title officer at Stewart Title of California in Irvine;
- Pamela Houchen, 47, who was a member of the Huntington Beach City Council until September and who worked with Benson at Pier Realty;
- Michael McDonnell, 38, an investor who acted as a “straw buyer” for Houchen properties and converted several other properties;
- Thomas Bagshaw Jr., 55, a real estate agent and notary public who also worked with Benson at Pier Realty;
- Howard C. Richey, 78, an investor and client of Benson;
- Jeffrey Crandall, 44, an investor and client of Benson; and
- Michael Cherney, 57, a real estate agent and client of Benson.
The 41-page indictment alleges three distinct fraudulent schemes: a scheme to defraud the people of Huntington Beach out of the honest services of Houchen; a scheme to obtain money from the purchasers of condominiums through false statements; and a scheme to defraud Stewart Title out of its right to the honest services of Du Bose.
Benson and Du Bose are charged with allegedly converting at least 15 apartment buildings, including at least 45 apartments into condos. The conversion generated more than $11 million in sales, according to the U.S. Attorney’s office in the Central District of California.
In the first scheme, four defendants were charged with mail fraud and wire fraud. The indictment alleges that Houchen used McDonnell as a straw buyer to purchase property that was within a redevelopment zone in Huntington Beach. Pursuant to a written agreement between the two, McDonnell purchased the property on behalf of Houchen, who then renovated the property and sold apartment units as condominiums. Bagshaw later stepped in for McDonnell, signed McDonnell’s name on documents and notarized his own forgeries so the condominiums could be sold.
Houchen allegedly profited about $229,000 from the sale of four condominiums. During the time Houchen owned the properties, she failed to disclose her ownership to the people of Huntington Beach through the California Fair Political Practices Commission, and she continued to participate in the activities of the redevelopment agency that affected her secretly held property, according to the U.S. Attorney’s office in Central California.
Huntington Beach has an ordinance that prohibits the conversion of apartments to condominiums without first obtaining a permit from the city. In Huntington Beach there was an exception to this rule that allowed a building held as a stock-cooperative prior to 1980 to be converted to condos without a permit. As part of the scheme, defendant apartment owners Houchen, Cherney, Crandall, Richey and McDonnell allegedly fabricated backdated documents to take advantage of the exception for stock-cooperatives.
Working with Benson and Du Bose, they filed backdated documents with the Orange County Recorder that claimed their apartment buildings were held as condominiums from the 1980s. They paid Benson and Du Bose “conversion fees” of up to $25,000 to effect the fraudulent conversions from apartments to condos, and once the fraudulent conversions were completed, the apartment owners sold the condos. According to the allegations, Du Bose wrote title insurance on behalf of Stewart Title that falsely assured the buyer and lender that the transactions involved condominiums. Bagshaw assisted Benson in selling the fraudulently converted condominiums.
In the third scheme, all of the defendants except Cherney are charged with scheming to defraud Stewart Title out of its right to the honest services of Du Bose. Part of the conversion fee was directed to Du Bose to get him to write title insurance policies that Stewart Title would never have approved if it had known about the fraudulent nature of the apartment-to-condominium conversions, according to the indictment.
The indictment alleges:
- Houchen sold at least eight condos she knew were fraudulently converted, which grossed more than $1.7 million;
- Bagshaw sold at least nine condos he knew were fraudulently converted, for a profit of more than $2.3 million;
- McDonnell sold at least 19 condos he knew were fraudulently converted, which grossed more than $3.9 million;
- Richey sold eight condos he knew were fraudulently converted, generating more than $2.4 million in sales;
- Crandall sold seven condos he knew were fraudulently converted, generating more than $1.9 million in sales; and
- Cherney sold two condos he knew were fraudulently converted, grossing $874,000.
Each count in the indictment carries a maximum possible penalty of five years in federal prison.
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