Mervyn A. Phelan, Sr., 74, Newport Beach, California, was sentenced by U.S. District Judge J. Frederick Motz to five years in prison, followed by three years of supervised release, for a wire fraud conspiracy, wire fraud and obstruction of justice from a $17.4 million investment fraud scheme.
Judge Motz ordered Phelan to forfeit and pay restitution of $17,414,000.
According to his plea agreement and court documents, Phelan and others were part of a fraudulent scheme carried out by Brian McCloskey and Patrick Belzner. McCloskey owned a real estate development business known as the McCloskey Group, LLC. Belzner, a home builder, began working with McCloskey in late 2008 or early 2009. Mervyn Phelan operated IAG Underwriters (IAGU) which 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. Phelan employed Gregory Grantham, an attorney who held the position of IAGU’s general counsel; and Sean Krondak who was the Vice President – Loan Officer & Underwriting. IAGU began working with the McCloskey Group to locate sources of financing for its projects in about 2009.
Beginning in 2009 and continuing through June 2011, McCloskey and Belzner persuaded a number of private lenders to loan funds to the McCloskey Group to establish that it had cash reserves or “liquidity” in connection with its efforts to secure funding for real estate development projects through IAGU. McCloskey and Belzner falsely represented that the funds would be maintained in an escrow account under the control of Kevin Sniffen, an 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, McCloskey and Belzner promised to pay substantial rates of interest.
Beginning in 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 lenders to make loans to the McCloskey Group in order to establish “liquidity”; (2) telling the lenders that the funds had to be placed in an escrow account controlled by Sniffen; and by (3) 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 escrow account lenders that funding for a particular project was imminent when they knew this was not the case, and in one case falsely represented that they were holding millions of dollars in escrow funds tendered by one group of lenders. Krondak sent emails and other communications that he knew contained false information to victim lenders directly, or to Belzner, McCloskey and Sniffen to use in their contacts with the victim lenders.
Once the lenders transferred their funds into the escrow accounts, Belzner directed McCloskey, Sniffen, and other conspirators to remove those funds from the escrow accounts without the knowledge of the lenders. Belzner and McCloskey then used the stolen funds to repay earlier loans to the McCloskey Group and to Belzner personally; to meet ongoing business expenses of the McCloskey Group; and to support Belzner’s life-style. The total losses resulting from the scheme were approximately $20 million.
Phelan and Grantham also obstructed grand jury proceedings from September to December, 2012, while a grand jury in Maryland was continuing the investigation of the fraud scheme. On September 26, 2012, FBI agents served Phelan and Grantham with grand jury subpoenas requiring the production of documents relating to the scheme. By this time, it was publicly known that Belzner had been indicted for conspiracy to commit wire fraud.
Phelan and Grantham agreed that they would not produce certain emails in their possession, because those emails would reveal their cooperation with Belzner and McCloskey in the scheme. The emails that Phelan and Grantham were willing to produce were provided to the FBI on November 19, 2012; incriminating emails were not produced or were deleted from their computers and compact discs.
Patrick J. Belzner, a/k/a Patrick McCloskey, 45, Selbyville, Delaware, was sentenced to 15 years in prison for wire fraud conspiracy, wire fraud and tax evasion, and was ordered to pay $19.805 million in restitution. Gregory E. Grantham, age 57, of Oceanside, California, was sentenced to five years in prison and ordered to forfeit and pay restitution of $17.4 million. Brian McCloskey, 42, Baltimore, and Kevin Sniffen, 53, Phoenix, Maryland, were sentenced to 41 months in prison and three years in prison, respectively, and both ordered to pay restitution of $15.850 million.
The sentence was 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 thanked the FBI and IRS – Criminal Investigation for their work in the investigation. Mr. Rosenstein praised Assistant U.S. Attorneys Jefferson M. Gray and Kathleen Gavin, who prosecuted the case.