Sean Cutting, the former president and CEO of the failed Sonoma Valley Bank, was arrested at his Sonoma home Wednesday morning and was taken into custody by federal agents, charged with conspiracy, bank fraud, wire fraud (six counts), money laundering (12 counts), false statements to a bank, and false bank entries (five counts).
Also arrested and similarly charged were Brian Melland, 45, of Santa Rosa, former senior loan officer and vice president of the bank; Bijan Madjlessi, 58, of Mill Valley, a real estate investor who defaulted on a $30 million loan for a Santa Rosa property; and Santa Rosa attorney David Lonich, 59, who is accused of participating in a scheme to repurchase the defaulted property through a Sonoma Valley Bank Loan using “nominee borrowers” and thus disguising the real borrowers – Madjlessi and himself.
The four were arraigned in Federal District Court in San Francisco Wednesday afternoon, before U.S. Magistrate Judge Joseph C. Spero, when a sealed indictment was opened and read.
All four suspects have posted $250,000 bail bonds and have been released.
The indictment followed a three-and-a-half year joint investigation involving the Special Inspector General of the Troubled Asset Relief Program (TARP), the Federal Housing Finance Agency and the FDIC. The Sonoma County Sheriff’s Office, the Marin County Sheriff’s Office and the Santa Rosa Police Department participated in the investigation.
According to the indictment, returned by a federal grand jury on March 19, the convoluted scheme, in which the four are alleged to have participated, revolved around a number of real estate properties and the defaulted $30 million loan that Madjlessi had personally guaranteed. That loan related to a Santa Rosa housing project known as Park Lane Villas East.
The indictment charges that Madjlessi, working with Lonich, Cutting and Melland, allegedly “obtained a loan from Sonoma Valley Bank to purchase his own defaulted loan on the premise that the nominee was the actual borrower when, in fact, he and Lonich were the true borrowers.” Cutting and Melland, the indictment states, “failed to disclose their knowledge of the true identities of the borrowers to Sonoma Valley Bank and took steps to authorize the loan.” As a result, Madjlessi’s nominee successfully obtained the loan from Sonoma Valley Bank and purchased the defaulted loan from a Federal Deposit Insurance Corporation contractor. Madjlessi, Lonich and the nominee later settled litigation regarding the foreclosed loan, and Madjlessi and Lonich obtained title to the Park Lane Villas East.
According to a press release from the U.S. Attorney’s Office, the indictment further alleges that, “Cutting helped Madjlessi and Lonich gain control of additional units at the Park Lane Villas East by issuing letters on Sonoma Valley Bank letterhead falsely stating that potential nominee buyers had sufficient funds at Sonoma Valley Bank for the purchase. Madjlessi and Lonich are also alleged to have instructed the nominee to make false claims to federal agents and to a federal grand jury investigating the transactions.”
The criminal investigation followed the 2010 collapse of Sonoma Valley Bank, which had received some $8.65 million in TARP funds. The bank was seized by federal and state regulators in August 2010, and the FDIC subsequently sued Cutting, Melland and one-time CEO Mel Switzer to recover more than $12 million in losses, claiming the three knowingly acted in violation of state banking regulations, and the bank’s own internal standards, regarding loan concentration by a single borrower – Madjlessi. The FDIC also charged the three with approving loans with “stale or inadequate appraisals, excessive loan to value ratios, lending to individuals or limited liability companies already heavily burdened by existing debt and with insufficient liquidity to repay the loans, lending to borrowers with little or no equity invested in the financed project, lending on projects outside the bank’s primary service area of the Sonoma Valley.”