Perched atop a flagpole at one time square sat the New Year’s Eve ball, ready for its traditional drop, for this drop, marking the end of the millennium, the famous orb had been sold to Waterford, legendary Irish glassmakers, and re-spangled. It was now the Waterford crystal ball. Such advertising was emblematic of the 1990s: from Tiger Woods’s hat to movie titles on NASA rockets, panoptic exposure seemed valuable at any price. Awaiting the Waterford’s fall, bodies had backfilled midtown Manhattan all day until, at 11:59, nearly one million gleeful voices began counting down the bail’s light-pulsing descent, synchronized to the (now-forgotten) “Anthem for the Millennium.” In that moment, most revelers believed the Y2K scare was bogus and the new year would arrive intact, granting not so much a new age but, what was truly hoped, continuity with the one passing, its incontinent dot-corn profits a testament to the prodigal investor. Everywhere people were betting that the American good life had another good act to go.

Earlier that day, ten blocks east of Times Square, San Diego mortgage lender Michael Joseph Fanghella was readying to part with a small portion of his 1990s easy money. In his executive suite at the Palace Hotel, Fanghella (his pro­nunciation stresses the second syllable — Fang-hell-a) was phoning an escort service, Nici’s Girls, for a New Year’s Eve date. Nici’s “Millionaire Club,” of which he was a member, promises girls “for an intimate evening, a romantic weekend, or maybe even a lifetime. The introduction rate  for these spectacular ladies begins at $10,000”. Fanghella used Nici’s often and liked, in particular the high-profile porn stars: As one of San Diego’s nouveau riche, the 48-year-o’d, with his wife Patrice and the company’s chief executive officer, Keith Grubba, owned a subprime mortgage lending business in

Carlsbad called PinnFund, USA, purportedly processing and profiting from $4 billion in home loans each year, Such bounty allowed Fanghella his pick of Nici’s petals as well as other women he met at his multi-city “party-centrals”, the Spearmint Rhino Adult Cabaret in Las Vegas or San Diego’s Deja Vu strip club, where he was known to spend $10,000 per week. He lavished on escorts, prostitutes, porn star, and their coterie whatever they desired, from jewelry to Las Vegas junkets from fine wines to limo rides. The massive amounts of monies Pinnfund was moving to fluid home mortgages would cover it all.

 

An hour later, ascending in the Palace elevator, came Kelly Jaye Cook. A former Atlanta Hawks cheerleader and one of Playboys ”Girls of the NBA” Cook had made adult movies for Sin City and Vivid Video where, as Kelly Jaye she starred in Blonde Angel and Bud Girls 4. After a dozen films, she quit hard-core for more lucrative Pursuits:

magazine spreads and a Playboy strippers pictorial; modeling in bathing suit and high heels at car shows; appearances on Saturdays at adult video stores, earning $2300 by signing “slicks” posters of her movie boxes(“She looked good on a box,” said one Vivid star); dancing (porn wages pale next to stripper’s tips); and being an escort, the pro­fessional date.

Cook herself was not unattached. For one, her divorce from Ken Cook was not yet settled. For another, she was, during the fall of 1999, living in an apartment on West 90th Street, which she and her boyfriend, Charles Spagnola, rented. Cook had been living in Laguna Niguel, a bedroom commu­nity above Laguna Beach, with Spagnola, a Garden Grove criminal defense lawyer. Then, after 18 months together, they had separated, apparently due to a fight and because Cook wanted to work in New York.Cook let Spagnola stay in her house on Westfield Drive in Laguna Niguel.

For his part, Fanghella had more than a few worries.

     According to his wife Patrice, his personal life had been on a “downhill spiral” for several years — and it was getting worse. After l6years of marriage, living since 1996 in Rancho Santa Fe, Patrice described the violence that led to their separation in late September 1999. She stated that her husband “has verbally, physically, and sexually assaulted me.’ at one point threatening to kill himself and her in front of their daughter. “He has,” she continued, “consistently shoved me, pushed me, slapped me, [and] spit on me.” (She also admits to her “down­fall” — being in love with him and thinking he’d change.) In July 1998, an intoxicated Fanghella wrecked his Jaguar and spent a night in jail. In 1999, arrested again for drunk driving, he landed in jail for four nights. His license revoked, from then on he traveled by limo. In September, Patrice initiated an “intervention” at PinnFund’s offices to force him into treatment for his drug and alcohol addictions; his response (though he finally agreed) was to trash his office. During his subsequent 24 days in rehab at Scripps McDonald Center in La Jolla, his conduct was so “volatile and belligerent” that he was “kicked out” of the program. His doctor at Scripps warned Patrice that her husband “posed a very real physi­cal threat and danger to [his] family” and she should “obtain police protection.” Finally Fanghella’s favorite pastime— the pursuit of sexual stimulation —had mushroomed to a third addiction. Patrice sepa­rated from him after this admission of his promis­cuity— that, while in New York, he was living with Lisa Spagnuola (no relation to Charles Spagnola); that he was seeing a woman named Denise Marohl; and that he was “cavorting” with “four regular prostitutes.”         -

Icing on the dysfunctional cake, PinnFund had grown so big, so fast that he was continually anx­ious about its finances and jettisoned the anxiety by indulging in female toys whenever he wanted.

 

Unaware of her date’s disorders, Kelly Cook entered Fanghella’s hotel room that New Year’s Eve afternoon: a passerby might have heard a Roy Orbison-like grrrrrrowl. What did Fanghella see? Waist belted tight. Hips like boards, that is, not much of them. Large, hard-jellied implants, anti-gravity floats. Wild mane, cornstalk yellow blond. A glistening. just-wet look. She was elevated four-inch heels were de rigueur. Perhaps she wore one of her favorite alluring outfits: python-print leather dress, audibly tight; python-print silk blouse, fingertip soft. Sexual enclosure, needing liberation. Would you mind walking in again, Miss Cook?

 

What did she see? An imperious man. Fanghella.

Probing brown eyes; luxuriant brown hair. Gap toothed, a tad pouty-mouthed. Natty, handsome, but more casual than rugged, one leg crossed over the other, torqued in anticipation like a man on the stand bearing testimony. An air of Napoleonic preoccupation, a trace of mistrust. So you are a mortgage lende,  Mister Fanghella?

They spent an hour together. Fanghella said, “talk­ing, unusually interested in each other right away— admittedly quick but nevertheless true?” (Fanghella’s words are taken, as are Cooks from transcribed and videotaped depositions. Almost everything about their relationship is in dispute except a mutual lust for the high life) Fanghella called Cook “thoughtful, sensitive?” While he had had dozens of oppor­tunities to develop relationships with other escorts, Cook surprised him. He liked her vulnerability but believed she sold herself short. “She didn’t feel” he said, “she had any other ability to gainfully make money if she didn’t go out as an escort or [be] in the porn industry?’ Cook said of that first meeting that because she and Spagnola had broken up, she was “available,” i.e, escort available. Cook said she wanted to accom­pany Fanghella that evening but had nothing appro­priate to wear. Then well shop, Fanghella replied. First, Luca Luca. A rabbit coat. Next. Bergdorf Good­man (where cook had her sizes on file), shoes, a choker, earrings, a bracelet.

Cook said that from “the first day I met him, I liked him. He was a fun guy to hang out with. But I wasn’t romantic with him” Did she and Fanghella have sex that first date? For the entire time she knew him. Cook said “We never had intercourse” Yes, she was nude with him, maybe four or five times.” And yes, they would kiss and caress with no clothes on But they never had sex. “And no, I didn’t have oral sex with him?’ (One lawyer, wary of Bill Clin­ton’s notorious evasion, had asked.) Fanghella’s  story? Sex, yes. “the next day” he said: that was the point of hiring an escort.

That evening Faughella, Cook, a retinue of “actors and their wives”,  and his “entourage” gour­mands and a wine buyer, went to Café Boulud, where, awaiting the triumphal hour, they ate, drank and danced. And, according to Cook, many went in pairs to a private bathroom where she saw piles of cocaine” set out for the Fanghella party.” Though Fanghella couldn’t recall if he had cocaine that night, he did remember that ”our dinner was approximately  $120,000. We had some significant wines. A Pétrus‘61, a 1900 Châteaux Margaux at the close.” The tip-Zagat, he noted, says one should leave 20 percent— was almost $30,000. As everyone knows, midnight clanged in zone by zone around the world, and nothing crashed. At 7:15 the next morning, Cook left the Palace and Fanghella slept. Later that day he flew back to Carlsbad. Cook called Fanghella on January 4 from New York saying she wanted to see him. He told her he       would fly her out to PinnFund headquarters and the Pair would then take a private jet to Las Vegas for a long weekend.          Cook agreed, but Fanghella insisted that their relationship would not be escort and date. He wanted to “date her regularly,” expressing remorse that he would be stifling Nici’s of one of their girls. Cook agreed—no more star-for- hire once she arrived. It was at this time, Cook said,

 

that she told Fanghella about Charles Spagnola he was the man she had lived with for almost two years. But, for now, they were not together. Fanghella recol­lected that she told him she—and Spagnola were finished. Spagnola—a delicate, muted man, whose cheeks dimple and whose layered locks nestle thickly onto the collar of his Armani dress shirt — has admitted to being, all along, Cook’s boyfriend and attorney. He said that Fanghella visited their Laguna Niguel house and was shown the room, decorated in Bar­bie motifs, where Spagolas daughter stayed on week- Everywhere were pic­tures of Cook, Spagnola, and the daughter. “You’d have to be blind:’ not to have seen it, Spagnola said. In mid-January Cook and Fanghella went to Las Vegas again, where Cook was shocked to see a “vioent fight” between him and an ex-girlfriend, Lee Ann. But still Cook and he and others partied, four days’ worth, in a suite at the Bel­lagio hotel. Next the pair went to Santa Fe. New Mexico where fanghella bought her two shearling coats, a pair of Ugg boots, an emerald ring, a tanzanite righ, an several drawings by­

 

that she told Fanghella about Charles Spagnola he was the man she had lived with for almost two years. But, for now, they were not together. Fanghella recol­lected that she told him she—and Spagnola were finished. Spagnola—a delicate, muted man, whose cheeks dimple and whose layered locks nestle thickly onto the collar of his Armani dress shirt — has admitted to being, all along, Cook’s boyfriend and attorney. He said that Fanghella visited their Laguna Niguel house and was shown the room, decorated in Bar­bie motifs, where Spagolas daughter stayed on week- Everywhere were pic­tures of Cook, Spagnola, and the daughter. “You’d have to be blind:’ not to have seen it, Spagnola said. In mid-January Cook and Fanghella went to Las Vegas again, where Cook was shocked to see a “vioent fight” between him and an ex-girlfriend, Lee Ann. But still Cook and he and others partied, four days’ worth, in a suite at the Bel­lagio hotel. Next the pair went to Santa Fe. New Mexico where fanghella bought her two shearling coats, a pair of Ugg boots, an emerald ring, a tanzanite ring, and several drawings by­

John Lennon. Then came ski trips to Beaver Creek, Colorado, ski outfits, four fur coats, a gold rope chain, a portable DVD player. Returning to Southern California, Cook parked in her driveway a 1997 Jaguar XK8, the first of six cars fanghella would give her over the next six months. (Later he’d present her with a new driveway in which to park those six cars.)

 

Perhaps embarrassed by the bounty, cook told him, “You don’t have to do this to have me hang around you.” But it thrilled him, she said, to flash the AmEx card whether she wanted the stuff or not. More than once he told her, “Kelly, I have more money than we could possibly spend in our lifetimes.”

The way Fanghella spent money seemed not Cook’s to question. Instead she encouraged him: on a cute Care Bear card she wrote, “I love being around you. I think I may be a little boring for your full-time life but I would love to see what happens. The ball’s in your court, sweetie.” Cook, though, had little idea how many courts, let alone balls, Fanghella was juggling. Two problems were gnawing at him. The first, Patrice had discovered her husband’s fling with Cook and, fed up, filed for divorce. She wanted a large portion of the $182,000 a month that she, her husband, and their children had lived on in Rancho Santa Fe. To ensure alimony and her on-third share of PinnFund’s value, Patrice had a forensic accountant catalog her husband’s spending. One discovery was that fanghella had not paid any income tax since 1995; in fact, his 1040 listed the self-described millionaire’s 1999 income as $36,000. Patrice also learned that the IRS had been investigating her husband since 1997, so she hired a tax attorney to defend herself.

The other problem, Fanghella believed, was less serious. He had heard that someone was sending anonymous letters to several of the big mortgage warehouses from which PinnFund borrowed money to fund home loans. These letters said that two different sets of PinnFund’s financial statements for the years 1997 and 1998, prepared by the San Diego accounting firm Levitz, Zacks and Ciceric, were being disseminated. One set was false, the other set true. Fanghella thought questions about these “competing sets” had been put to rest the previous summer when Levitz, Zacks had discovered its 1997-98 report was falsified and the firm had resigned. But Fanghella’s chief financial officer, John Garitta, expressed concern. Who in PinnFund was circulating these letters and the phony report? Worse, who was falsifying it? Fanghella told Garitta the problem had been taken care of: the phony report and the letters were the work of a “rogue investor” in the company, and he or she had been terminated”, that is fired. Garitta should let it alone. Besides, Fanghella assured him, most warehouses had received the true set: that set showed PinnFund had made a healthy after-tax profit of $10 million in 1998 and not lost more than $27 million, which the false one claimed.

 

Super-Qualified Investors

 

Long before Michael met Kelly, the mortgage-lending firm PinnFund, USA, was the brainchild of Fanghella and Oakland real estate attorney James Lester Hillman. Today Hillman is a silver-haired 63. He has lived since 1965 with his wife and children in Oakland, where he sold securities in real estate partnerships. Fanghella, though not a lawyer, earned a B.A. degree in business administration from Thiel College in 1973. (He has claimed a “graduate degree in Finance” from Monmouth University, but records show he attended only one semester.) since 1978, Fanghella had sold securities in real estate projects in Illinois and California. He an Hillman met in 1983 and partnered to syndicate real estate. At one time both were licensed to sell securities by the National Associaton of Securities Dealers.

In 1992, with very few assets, the pair met again in Oakland, and Hillman told Fanghella he had an “innovative idea”- to create a home mortgage lending business. Instead of borrowing money from banks, they would use money from private investors to fund loans. It was Hillman’s idea to ride the comet of subprime lending. Subprime is synonymous with less-than-perfect credit. The prime, or A, borrower is one with a good credit history, few debts, and not defaults. Subprime borrowers, given A- to C ratings, are a riskier clientele- mostly low –income individuals who are first-time purchasers or are refinancing. Some lenders target such borrowers with excessively high rates.

    This business plan is solidly American-profit from consumers’ “credit blemishes.” By the end of 1999, consumer debt had reached $1.4 trillion, while consumer spending had exceeded personal income, creating negative savings. PinnFund would eventually boast in its ads that its rates were “an attractive alternative to the substantially higher interest rates charged by credit card companies.” (PinnFund did not specify how much lower its rates were.) Indeed, sub-prime lending was booming: home mortgages had grown from $200 to $280 billion during the 1990’s, and the subprime sector had more than doubled its share to 20 percent.

     Why did Hillman want Fanghella? Simple. Fanghella was, one observer noted, “an excellent salesman,” a talented motivational speaker who could rouse a staff of salespeople on this new idea an have them in turn sell mortgages to borrowers in distressed neighborhoods across America. Hillman had his own métier-convincing wealthy friends and relations to invest.

     Fanghella set up Pinnacle Funding in 1993, in Del Mar Heights, and in 1998 moved the company to Carlsbad, across from Palomar Airport. He renamed the company PinnFund, USA. His associate, James Hillman-described by insiders as “Mike’s moneyman”-set up Peregrine Funding in Oakland. Hillman brought in the “platform capital” to “securitize” a loan. Under a Spot Loan Funding Agreement between Peregrine and PinnFund, Peregrine funded the loan before Pinnfund sold it, in large  bundles of loans, to one of the big mortgage buyers like GMAC or Bank of America on secondary market. To entice borrowers, Pinnfund staffed offices in low-and middle-income neighborhoods through out the country with seasoned salespeople to seek the subprime client and, as one broker described it, “to bother with the paperwork and aggravation of closing.” The goal was to have Peregrine’s money complete the cycle-from origination to sale of the mortgage-three or four times a month. This turnaround was their advantage: the faster they turned the money, the more pofit they made.

 

     Each time a loan was sold, a 2 percent premium was earned, divided 75/25 btween PinnFund and Peregrine. On a $100,000 mortgage, PinnFund received $2000. PinnFund received $2000. PinnFund kept $1500 and sent Peregrine $500-Hillman got $300 and the investors $200. The investors, though, did receive more. They got an added 10 percent per year. All told, each $100,000 invested made roughly $1500 per month, $18,000 per year.

 

     Eighteen percent per annum drew a lot of players. Dr. Bert Rettner, a 72 year old physician in Los Gatos, California, said he was in “heaven” for three years, garnering monthly checks based on a $1 million investment. “Like clock work,” Rettner received a check every 30 days for $15,000. Who else did Hillman solicit? His immediate family poured in $1.7 million and Hillman himself put up nearly $1 million of his retirement fund. some of the biggest investors-tax attorneys, real estate developers, investment bankers, and accountants, one of whom worked on a multibillion-dollar debt restructuring deal for Donald Trump-bought individual inflows of

$11 and $27 million, while one family ponied up $60 million.

 

    Under Peregrine, Hillman set up three subsidiaries, the “funding entities”: Allied Capital Partners, Grafton Partners, and (later) Six Sigman, which he opened to “super-qualified investors,” those with a $5 million net worth and a first-time $500,000 investment.

Hillman crafted an Exclusive Capital Raising Agreement between the investor entity Peregrine and the mortgage lender PinnFund. This agreement enhanced Hillman’s lucre as the only fund-raiser as well as the investors’ clout, since Peregrine’s money would be the only money that PinnFund could use to fund loans. The sum was kept in a special account which Fanghella controlled, though Hillman and accountants-those at PinnFund and those hired to perform yearly audits-could review as necessary. When loans sold, Hillman earned a commission: during 2000 his haul rose to $975,000 per month. So flush with cash was Hillman (so in need of cash was Fanghella) that, according to Fanghella, Hillman agreed to loan him money, either from Peregrine or from Hillman’s personal account.

   This was the money-an astounding  $90 million, more than half of what Hillman had raised through 1999-that Fanghella claimed Hillman had actually signed over, money on which Fanghella’s opulent lifestyle depended. With Hillman replenishing the trough at a rate of $10 to $15 million every month, Fanghella could respond to his wife’s ongoing divorce filings with blasé candor: “She knew tht we had no income from PinnFund and that we were living an inflated lifestyle funded by borrowed money. It was-and is-all smoke and mirrors.” Fanghella’s bluster renewed Patrice’s ire. She rallied her lawyers to dig deeper. After all, as one of three shareholders

in the company, some portion of that $90 million was hers.

 

From Group Sex to Holy Matrimony

 

By week six of Cook and Fanghella’s affair, mid-February 2000, the pair was aloft again. To New York, where Fanghella bought her a chinchilla coat, a Rolex watch, 20 outfits at Bergdorf Goodman’s, a birthstone ring, a diamond solitaire necklace, and a diamond baguette ring from Nally’s. Then to Paris, where she selected 25 outfits at Gianni Versace, Celine, and other stores, plus a Bulgari watch. Then, the grand prize: 5.7-carat diamond ring, worth $350,000, as  a promise that they would be married. A day later, a crack in the matrimonial crystal appeared at their at their Four Seasons suite: Fanghella had gotten drunk in the bar and Cook left, “to go upstairs and sleep. Barging in at three in the morning and turning on the lights, Fanghella screamed, “How do you like being called Kelly Spagnola?” Cook said he must have rifled through her purse and found her credit cards, one stamped with that name. She recalled Fanghella’s raving and his “frothing-at-the-mouth demeanor”: “’I thought you had cut him off, I thought you were through with him:’” The card’s imprint, she said, was mere protection: Spagnola wanted her to have it because her several porn-star aliases — Kelly Jaye, Kelly Lynn, Kelly Sabo-had caused her unwelcome notoriety.

Cook has denied any promise of marriage. Ever. To her, the ring—which she took— meant “his promise to me to change his behav­ior” ----the violent temper she had just witnessed - “so I would want to be with him.” Apparently even after this incident, she still “wanted to be with him” as much as she “wanted to help him?’ Fanghella, on the other hand, has asserted that the promise of marriage was the point of his lavishness. Somewhere between Jan­uary and February he said, we both realized we loved each other. I felt comfort­able being in love with her, and I believed what she would tell me.” Namely that as soon as their divorces were finished they would wed.

As their affair ripened, Fanghella said he and Cook enjoyed a few threesomes, that is, group sex. He said Cook liked hiring escorts for that purpose; in fact, she’d enjoyed multi-part­ners sex in her videos When asked, during his deposition, just how long it was after he and Cook had group sex that he gave her this ring, Fanghella, with unembarrassable laughter, noted it was about two weeks.

“What happened in those two weeks that made the relationship move from group sex to holy matrimony?”

“That’s quite an assumption, there, counselor,” Fanghella replied. Still, he maintained, marriage did come up, when the two were considering property in Port St. Charles, Barbados. At the door of one condo, Fanghella asked Cook, “Do you like?” She said, “Yes.”. So he bought it, a cool million. And, to cinch the pre-nuptial knot, he had another surprise: he was setting up an account with Barclays bank called the Blonde Angel Trust. This trust, promised to be stocked with up to $6.5 million in cash and other assets, would pay Cook an income for life so she would never have to work again. Depend­ing on which of the pair you believe, the gifts of condo and trust did (Fanghella) or did not (Cook) carry a stipulation that they stay together for good. Cook said Fanghdlla’s behavior changed after Bar­bados. He became violent, crazy, screaming, crying. I assumed he was using drugs.” He felt nauseated when he combined his pre­scription medication for anxiety (Zoloft) with cocaine and then would go off the prescription “I’ll stop taking Zoloft” Cook recalled his telling her,” to control my temper because I’m not going to do drugs anymore. And that way you and I will  be able to get along”  He also agreed to restart rehab. She said by this time she saw Fanghella only because she “needed to keep him calm. I was extremely con­cerned about him doing something [bad] to himself”, and she told him she cared for him “as a friend.” Then in late February, apparently beaten down by Fanghella’s manic life, Cook “ended” their friendship: she and Spangnola had patched things up. But then she called Fanghella back, saying she still wanted to help, maybe one day “be with him.” Fanghella thought they were on once more-and resumed sending her gifts.

   

During 2000, when cook was in contact with Fanghella, she accepted every gift and claimed no knowledge that the money he spent on her may not have been his to spend. Fanghella told Cook that PinnFund had made him a multimillionaire; he told Patrice he was worth nothing, leveraged on loans from the trust account. Had this been known by the more than 200 investors who put money into Peregrine….but then it wasn’t known. What no one knew was that Fanghella, Hillman, and others had, according to one court document, “created and operated a classic Ponzi scheme, “ bilking investors out of $330 million. In one of the nation’s largest mortgage scams ever, Fanghella and others were looting the investor trust account, falsifying audit reports and other financial records, lying on required filings with the Department of Housing and Urban Development(HUD), and jeopardizing the livelihoods of 450 PinnFund employees in 53 regional and branch offices in 45 states. PinnFund would pancake under its own weight of debt, scattering hundreds of victims and teams of lawyers through family court as well as civil, criminal, and bankruptcy venues of the United States District court for the Southern District of California. (Dozens of depositions and thousands of pages of court records reveal the story of the fraud.)

The company in its eight years never made a profit— a lie kept under wraps by certain Pinnfund managers and sent to the warehouses  in the forms of falsified audits for the last two and a half years of the mortgage enders existence.

 

On March 21 2001, the Securities and Exchange Commission(SEC) closed PinnFund and, one month Iater froze the assets of Pinn­Fund and Peregrine. The SEC wrote that “Pinnpund and Peregrine had concealed more than $95 million in losses since 1997 and the transfer of more than $109 million to Fanghella since 1997” Losses may have been the cost of doing busi­ness, but the transfers were illegal. Former acting U.S. Attorney Charles La Bella, known for a 1996 probe into Clinton/Gore fund-raising, was appointed receiver in charge of  retrieving as much money as pos­sible to pay the snookered investors as well as Pinn­Fund employees and cred­itors. When La Bella looked at the Union Bank trust account, the vault in Pinn­Fund’s house where the investors’ money went, he found that out of the $330 million that should have been there, only $1.5 million was left. Scores of the savviest investors had been had.

 

The SEC has said that Fanghella and “cohorts” fal­sified the Levitz, Zacks 1997-98 audit which showed that PinnFund was losing money at a good $20 million per year. But except for the auditors, the defrauders, and HUD — no one else knew one audit report from the other. Thus, Fanghella could claim that the falsi­fied one was real and the real one (detailing the losses) was false. For many investors who had received checks every month, some for more than six years, the discov­ery that their funds were spent hit ihem like a bird fly­ing into a glass window.

 

Within 24 hours of the SEC’s closure of PinnFund’s offices, Fanghella was on a plane for Barbados, where he had stashed several

mil­lion dollars. There, he began transferring the assets of the Blonde Angel Trust from Kelly Cook to a Las Vegas flame, Denise Marohl. ‘Within days he was e-mail­ing Corrina Licardi, a woman with whom he’d been living for several months in his Rancho Santa Fe condo, where he’d left her. “He went out to walk the dog,” she told a friend, crying, “and he never came home.” Fanghella wrote Licardi: “Send money. Sell my ring and send me the money.” This was his father’s diamond ring, which Fanghella’s grown son Vincent had taken —-and refused to sell.

 

Fund or Die

 

Before the Ponzi collapsed, there was a mortgage-lend­ing business up and run­ning at the company’s 95,000-square-foot of head quarters in Carlsbad. The two-story building tops a ridge along a wide, SUVfriendly boulevard,  and there PinnFund created its corporate paradise-a nonsmoking, health-savvy organization that paid its workers good salaries and benefits, catered lavish yearly parties, and kept itself tech-current. Recalled one manager, the indefatigable Fanghella loved computers. “He was a geek. He would buy software just for the sake of having it. He liked the whistles and bells-bigger, better, faster, he would always preach.”

 

One of Fanghella’s corporate hats was tour director of PinnFund’s operation. He would, often with Hillman, who flew potential investors in for visits, usher guests through the building. They began in the basement, at the 5000-square-foot wellness center, with cardiovascular and weight-training equipment, showers ad locker rooms, and aerobics floor, two onsite athletic trainers, and a certified nutritionist. There nearly half the 200 employees were “members,” signing up to attend twice weekly. And they did, working the stationary weights with a trainer or getting advice on low-cholesterol diets.

 

Fanghella and Hillman would show off the 40-seat theater, site of PowerPoint presentations and nutri­tion classes; the first-floor executive suites with an adjoining living room and its gallery of original oil paintings; and the food court where employees ordered healthful cuisine, and maybe a glass of wine with dinner, if they were working late. Long hours:’ one employee told me, was “the nature of the job”.

Investor tours, passing through hallways with pho­tos of Fanghella speaking at charity events or of Hill-man looking solemn, ended in the executive dining room.

There food and wine were served and, according to Chris Belaire, Fanghella’s wine buyer, the boss liked to brag about his wine “ver­ticals” collection of con­secutive vintages from the same producer. (At his wed­ding Keith Grubba, Pinn­Fund’s CEO, received from Fanghella a vertical of Grace Family Cabernet, valued at $40,000). If potential investors took a liking to Fanghella’s vino bravado, he told Belaire to “bring out a bottle.” Fanghella would then, the group warming their throats, describe the miracle of Pin­nacle Funding, that is, its years of unimpeachable returns. After all, that track record had compelled pre­vious investors to send their buddies, the newest the n­ewest clientele, to the Carlsbad mecca to see the phenomenon for themselves.

 

Before Fanghella’s driver’s license was revoked, employees knew when he was in — his British rac­ing green jaguar was sparked in its executive slot. Later, in the limo days, he trav­eled more and was in the office less frequently. When present, he would on occa­sion assemble the 200 employees below the stair­case, and, perched above, he would launch into one of his Tony Robbins—like motivational tune-ups. One lawyer in the company recalled Fanghella’s “very spontaneous

rah-rahs to the troops. Basically it was to quell rumors, to get the people to rally ‘round the PinnFund flag. In those cases, he admitted that things were tough, but we would get through it. He was very effective”.

However, no matter a company’s amenities, no matter its leadership dur­ing crises, the mortgage-lending business is extremely stressful. Case in point was a poster above the water cooler displaying Pinn­Fund’s mantra: “Fund or Die?’ On dress-down Fri­days, some employees wore their “Fund or Die” T-shirts, the words splattered with bloodstains. Write the loan, approve the loan, fund the -loan, bundle and sell the loan — and start all over again. On top of that is a housing market subject to volatile interest rates. On top of that is a subprime clientele whose creditwor­thiness took time (often failing in the interim) to establish. On top of that is, at its maximum, a 650-employee payroll, the overhead, and the investors’ 1.5 percent by the tenth of every month.

 

In charge of those pay-outs was CFO John Garitta, whose primary job was to clean out Fanghella’s financial litter box. When he was first hired in 1996—from

“tenip-to-perm” accoun­tant position, he became CFO in less than a year — it took him three months in to figure out what Piun­Fund did. Garittds primary and thankless task was to make payroll, as PinnFund’s money left the company daily for everything but pay­roll. An example: one day in late 1999, the comptroller Valerie Frislie, begged Garitta to deal with the irate Madame Bridgett Girard From Paris, who was yelling at her on the phone. “Mike promised me this money. Where is it?” “How much?” Garitta asked Frislie — $150,000. “You don’t have to talk to prostitutes,” Garitta told her. “That’s not your job”.  During this period, Garitta said. “All Faughella cared about was the hook­ers.” No wonder insiders re-christened the company “Pornfund”.

 

Garitta complained that “we were not able to make our bills in Decem­ber 1999, because Mike was having his New York Christmas party where he spent $500,000, $600,000.” For that party, Fanghella had flown his wait staff from PinnFunds catering divi­sion and, Garitta said, bought them $1200 Tag Heuer watches. Do you know how ridiculous it is to see bus boys [in Pinn­Fund’s executive dining room] pushing carts around with $1200 watches?”

Other outrageous expenses included Keith  Grubbas birthday in 1998, for which Fanghella flew 40 strippers with himself, Grubba and company employees to Las Vegas to celebrate. The dinner at San Diego’s Laurel Restaurant, totaling $3l,800 and a $5000 tip. The near-$l00,000-per-year limo bills; the white Corvettes given to com­pany brass; Fanghella’s $1 million 75-foot yacht, the Maverick, on which, allegedly, in late 2000, he was going to abandon Nun­Fund and San Diego.

All this deficit spend­ing drained the coffers. When Garitta was asked if he was ever concerned that he wouldn’t meet operating expenses, he said, “I believe the question was, “Were there times when I was not concerned to meet operat­ing expenses?” It was a nor­mal part of life where I didn’t know how I was going to cover my bills. I lost sleep over it” During the last year, he went to work thinking each day would be Pinn­Fund’s last. Garitta also said that Fanghella’s approach to Pinnfund’s business was to control everything him­self-never allow accounting, legal, human resources, executive, health, and other departments know what each other was doing. As to Fanghella’s honesty, Garitta declared, “If Mike told me the sky was blue, the one thing I was sure of was, the sky wasn’t blue.’

 

Beginning in summer 2000, things at PinnFund spun steadily out of control.Auditors were in the building constantly. One PinnFund employee who worked in risk-asset man­agement with the Kafkaesque title of loss mitigation specialist, dealt with wire trans­fers of money fin the loans. The auditors asked him for eight months’ worth of doc­uments, which, after he checked, he discovered were missing. He was told to track this paperwork down, but his superiors stonewalled. On occasion, this employee (who requested anonymity) saw documents being forged. If there was a page from an insurance company, for example, that needed sign­ing,worker would, he said “forge a signature on it us! so they could get rid of the loan?”.

 

 

A new crisis emerged in fall of 200 when PinnFund’s 401(k) contributions had lapsed: neither the money taken out of the paycheck nor the amount PinnFund had to match was being deposited. A sign of a seri­ous business slowdown, many workers stopped their 401(k) contributions. Some employees quit others were

let go; the turnover rate grew, then abruptly stopped: Pinnfund quit hiring alto­gether. For their part, the employees knew little of the company’s woes. Sure, they questioned the lifestyle of the managers, the uncorked wine, the hook­ers in Fanghella’s office. But few suspected PinnFund wasn’t making money: in fact, every month management would publicize figures—$350 million one month—to reflect the loan volume.

 

As to why things were so bad only Fanghella a chosen few knew. Garitta has admitted to knowing how bad off the company was, though he told no one. He confessed to staying on only out of loyalty to fel­low workers. Many employ­ees suspected that Pinn­Fund was failing but felt renewed effort and a sunny disposition might save the day. So they worked harder, and later, and still got paid: things couldn’t be that bad. They were young, too, the average age, 28. One worker told me that he worked every day for more than two years and “made a good salary” until a month before March 21,2001.  He asked, “How could PinnFund never have made any money and yet I was able to make enough to put a down pay­ment on my first house?” The answer is, the money lie was paid was never “made” by the company:  it was merely transferred to him (and hundreds of others) from the trust account.

 

Two things most employees didn’t know. First, Pinnfund never made a profit. Second, the entire time PinnFund was in busi­ness, the company was vio­lating its own Spot Loan Funding Agreement by using “Lines of credit” from warehouses — and not investor money— to fund loans. Financing with lines of credit is the usual means by which subprime and other mortgage lenders do business. The company signs an agreement with a ware­house, which puts up money—in effect, credit— so that the lender can find the loans for its clientele. It’s called borrowing money to lend money. For exam­ple, a warehouse lender would extend to PinnFund enough money to fund dozens of home loans, and then PinnFund would sell a bundle of these loans to a buyer like Saxon Mort­gage at a 4 or 5 percent profit. But this profit (it might be higher or lower depending on interest rates) was never enough to pay PinnFund’s and Fanghella’s  bills.

 

It might be argued that. Fanghella believed he could make more money by using warehouse lines of credit, an unlimited amount, instead of rely­ing exclusively on the investors’ money. But was Fanghella even interested in PinnFund’s making money? When Garitta told Fanghella that Pinn Fund “should be cutting checks to him based on profits” and not taking monthly withdrawals from the trust account, “he looked at me like I had two heads. It never occurred to him to make a profit for the company”.

 

But profit, as differen­tiated from investor cash, is what Patrice, the investors, Hillman, the employees — everyone— thought Pinn­Fund was generating.

 

 

The Possibility of Fraud May Exist

 

In March 1999. two years before the SEC shuttered PinnFund and all but $1.5 million of $330 mil­lion was gone, Human set the table for Peregrine and PinnFund’s demise. Incor­porated under Peregrine, the three funding entities— Allied Capital, Grafton, Six Sigma — were private investment trusts, which, because of their relatively few participants, were not audited at first. But once these entities holdings bur­geoned into the many millions, investors clamored for a third party to see whether the money was where it should be and doing what it should be doing— safely funding loans. Pinn­Fund had already been audited by Levitz,  Zacks, and, by 1999, several investors were pushing Hillman to have the cash-fat Peregrine partnerships audited. So Hillman hired Pricewaterhousecoopers, one of the Big Five account­ing firms, alongside Arthur Andersen and Company, which is facing civil penal­ties for allegedly constructing complicated partnerships that kept Enron afloat. Hillman asked for a “minor” audit of the funding enti­ties Allied Capital and Grafton, for 1997 and 1998. Minor, Hillman said, meant “to verify that we recorded investor money” properly and “to substantiate when PinnFund sent us money for monthly distribution”.

 

Pricewaterhouse’s Todd Goldman was the auditor in charge of this account. He told Hillman it shouldn’t take more than three weeks. But, when Goldman looked at what he believed was Levitz, Zacks’ 1997-98 audit report for PinnFund (it is not clear who sent this to him) he discovered a prob­lem. The audit listed a $67 million liability as part of “revolving warehouse facili­ties” Goldman requested clarification from Hillman.

 

 

According to Forbes magazine, “Hillman sent a second set’ of the 1997-98 audit with an added foot­note. The footnote stated that the $67 million was part of a $78 million “credit facility, provided by private sources (Allied Capital Part­ners and Grafton Partners). The unused portion” — $11 million—of the credit facility is held in trust for PinnFund, USA” Goldman wondered where this $11 million was. It was not shown as “cash,” where it should have been.

On June 4,1999, Gold­man sent a memo to Pere­grine’s director of opera­tions, Peter Kodzis. He wrote, “As you know, there seem to be several versions of the PinnFund financial state­ments” Goldman requested that Kodzi  ask Levitz, Zacks to send him its numbers directly; Goldman also wrote, “he will not ask questions about any other aspect of PinnFund’s business”.

His memo, there was no mention of fraud. Gold­man received yet another report, this time from Pinn­Fund directly, with another explanatory footnote in place, clarifying the missing $11 million.

 

 

Still dubious about PinnFund’s books, Gold­man called Levitz, Zacics in mid-June and spoke with Kim Ufford, Levitz, Zacks’ senior manager in San Diego,wbo had helped pro­duce the 1997-98 PinnFund audit. Apparently Goldman told Ufford that PinnFund’s loans were being funded by

the two finding entities, Allied and Crafton Ufford (who along with Stanley Levitz has been contacted repeatedly for this article and has not responded) told Goldman that he didn’t know Peregrine was the funding source for Pinnfund’s loans. Ufford believed PinnFund was using ware­house lines of credit. John Garrita testified that Ufford did know about Peregrine:

“He knew the entities (Allied and Grafton) because he would see the wires com­ing in, so he was aware of who they were” Moreover, in Levitz, Zacks 1997-98 report. the following is stated:

“The Company [PinnFund] has also improved its coor­dination with investors and its underwriting procedure to a accelerate the sale of loans after funding.” This sounds as though Levitz, Zacks understood PinnFund and Peregrine’s structure. What Ufford and the firm did and did not know at the time of the audit is central to Levitz Zacks’ civil liability: Did Levitz, Zacks know there were investors who should have been notified of a potential fraud? Certainly Pricewaterhouse knew.

 

 

In court documents Ufford said that, during their phone call, he and Goldman” established that none of the page were associated with the correct audit record done by Levitz, Zacks or the car-red financial statements.” Goldman had a phony audit.

 

The original audit for calendar year 1998 included a paragraph that stated the a losses raise substan­tial doubt about its ability to continue as a going concern”. The phony audit omitted the paragraph. The original showed a retained deficit of more than $27 million. The phony showed retained earnings of $10 million. A $37 million chasm was too wide for any auditor to ignore.