Mervyn A. Phelan, Sr., 74, Newport Beach, California, and Gregory E. Grantham, 56, Oceanside, California, pleaded guilty to conspiracy, wire fraud and obstruction of justice for their roles in a real estate fraud scheme whereby private money lenders and investors were persuaded to deposit funds into escrow accounts, which were later pillaged by the conspirators.
Phelan operated a small company called IAG Underwriters, LLC that maintained an office in Newport Beach, California. IAGU was in the business of underwriting loan applications submitted by real estate developers and then locating project financing from banks and other financial entities. Grantham, an attorney, held the position of IAGU’s general counsel on a part-time basis as a contract employee.
According to their plea agreements (Phelan Plea, Grantham Plea) and court documents, between mid-2010 and August 2011, Phelan and Grantham became involved in a fraudulent scheme carried out by Patrick J Belzner, a/k/a Patrick McCloskey, 45, Glen Arm, Maryland, and Brian McCloskey, 42, Baltimore, Maryland. McCloskey owned a real estate development business known as the McCloskey Group, LLC, while Belzner, a home builder, began working with McCloskey in late 2008 or early 2009. Phelan and IAGU began working with the McCloskey Group trying to locate sources of financing for its projects in about 2009.
Beginning in 2009 and continuing through June 2011, Belzner and McCloskey persuaded a series of private money lenders to loan them funds to establish that the McCloskey Group had additional reserves of liquidity that would supposedly help it obtain loans it was seeking in connection with real estate development projects through IAGU. Belzner and McCloskey falsely represented that the funds would be maintained in an escrow account under the control of Kevin Sniffen, 52, Phoenix, Maryland, a licensed attorney and escrow agent in Baltimore County; that the funds would not be used for any other purpose; and that the money would be returned to the lender, either upon the funding of the loan or after a specified period of time.
In return for this temporary use of the lender ‘s funds, Belzner and McCloskey promised to pay substantial fees or interest. In fact, once the lenders transferred their funds into the escrow accounts, Belzner directed McCloskey to remove those funds from the escrow accounts without the knowledge or permission of the lenders. Belzner and McCloskey then used the majority of the stolen funds to pay for their personal and business expenses. The total losses resulting from the scheme were approximately $20 million. Belzner, McCloskey, and Sniffen have all previously entered guilty pleas in connection with their role in the scheme.
Beginning in about the late summer of 2010, Phelan and Grantham cooperated with Belzner and McCloskey in their scheme to defraud by (1) making false representations to help persuade private lenders and investment partnerships to loan sums of money to the McCloskey Group for the purposes of meeting “liquidity” requirements imposed by IAGU or various prospective lenders and to place these funds in an escrow account controlled by Kevin Sniffen; and by (2) making false representations to dissuade previous escrow account lenders from demanding the return of their funds when the original time period established for the loan expired without the McCloskey Group obtaining financing for the project in question.
In particular, Phelan and Grantham repeatedly advised various escrow account lenders that funding on a particular project was imminent when they knew this was not the case, and in one case represented that they were now holding millions of dollars in escrow funds tendered by one group of lenders when this was not true.
While Phelan and Grantham admitted that they made false statements to escrow account lenders during the scheme at Belzner’s and McCloskey’s behest, they asserted that for most of the time period in question, they did not know that Belzner and McCloskey had previously stolen the escrow account funds. Under his plea agreement, however, Grantham admitted that he was criminally responsible for the loss of $1.2 million funds suffered by an investment entity named Murcielago, LLC in June 2011.
As part of his plea agreement, Phelan admitted that he was criminally responsible for the loss of more than $2.5 million in escrow funds and pled guilty to a count charging him with making false representations about the control of $4.350 million in escrow funds to an escrow account lender in November 2011. The government continues to maintain that Phelan and Grantham shared criminal responsibility for the loss of over $20 million in escrow funds. The Court will consider evidence and make a finding on this issue at the defendants’ respective sentencings.
Phelan and Grantham also pleaded guilty to obstructing grand jury proceedings from September to December, 2012. During the summer and fall of 2012, a grand jury sitting in the District of Maryland was continuing the investigation of the fraud scheme. By this time, Belzner had already been indicted for conspiracy to commit wire fraud and this fact was publicly known. On September 26, 2012, FBI agents served Grantham and Phelan with grand jury subpoenas which called for the production of documents relating to the scheme.
Thereafter, Phelan and Grantham agreed that they would not produce certain responsive records that were then on their computers or in their possession, because those particular records would reveal their cooperation with and assistance to Belzner and McCloskey in providing false information to the escrow account lenders and their counsel. The records that Phelan and Grantham were willing to produce were provided to the FBI on November 19, 2012; incriminating records were not produced or were deleted from their computers and compact discs.
Phelan and Grantham face a maximum sentence of 20 years in prison each on each charge of conspiracy and wire fraud, as well as a maximum sentence of five years in prison for obstruction of justice. U.S. District Judge James K. Bredar has scheduled sentencing for Phelan and Grantham on September 8 and 15, 2014, respectively.
Patrick J. Belzner, Brian McCloskey and Kevin Sniffen have each pleaded guilty to their roles in the conspiracy and are awaiting sentencing.
The guilty pleas were announced by United States Attorney for the District of Maryland Rod J. Rosenstein; Special Agent in Charge Stephen E. Vogt of the Federal Bureau of Investigation; and Special Agent in Charge Thomas J. Kelly of the Internal Revenue Service – Criminal Investigation, Washington, D.C. Field Office.
United States Attorney Rod J. Rosenstein praised the FBI and IRS – Criminal Investigation Division for their work in the investigation. Mr. Rosenstein thanked Assistant United States Attorneys Jefferson M. Gray and Kathleen O. Gavin, who are prosecuting the case.