The owners of a Southern California real estate investment firm that “effectively became a Ponzi scheme” when the real estate market went into decline and lost $110 million in investor’s money when it went bankrupt in 2009 have been indicted on charges of mail fraud, bank fraud and bankruptcy fraud.

Michael Stewart, 66, of Phoenix, and John Packard, 63, of Long Beach, Calif., were arrested by the FBI this morning, prosecutors with U.S. Attorney’s Office for the Central District of California said.

Stewart and Packard owned Pacific Property Assets, which they launched in 1999 to purchase, renovate, operate, and resell or refinance apartment complexes in Southern California and Arizona. The company typically financed property acquisitions through mortgages, and raised money from private investors to pay for renovations to the properties.

By the end of 2007, PPA could no longer raise money by refinancing its properties with increasingly large mortgages, according to allegations in a 16-count indictment returned last month by a federal grand jury. To keep the company afloat, Stewart and Packard allegedly continued to raise tens of millions of dollars from new investors, using these funds to pay earlier investors, mortgage lenders and themselves, prosecutors said.

When the company filed for bankruptcy in June 2009, PPA owed banks $100 million, and 647 private investors more than $91 million. Private investors received nothing in the bankruptcy proceeding, while banks lost an estimated $24 million. Source: justice.gov.

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