CEO of defunct Irvine property firm convicted in $169 million Ponzi scheme

A federal jury convicted the chief executive of an Irvine-based real estate firm of bilking investors out of $169 million when his company’s business model essentially turned into a Ponzi scheme after the housing market crashed, according to the U.S. attorney’s office in Los Angeles.

Michael J. Stewart, 68, of San Clemente was found guilty Friday of 11 counts of mail fraud and could face a maximum sentence of 220 years in federal prison. He is scheduled to be sentenced Nov. 9, according to court records.

Stewart founded the now-defunct Pacific Property Assets with Long Beach resident John Packard in 1999, according to federal prosecutors. The company had offices in Irvine and Long Beach.

Packard, who testified against Stewart during Stewart’s nine-day trial, pleaded guilty in November to one count of mail fraud, federal officials said. He also is scheduled for sentencing Nov. 9.

Pacific Property Assets would buy apartment complexes in Southern California and Arizona, raise investor money to renovate them and, after a few years, refinance or sell the properties at a higher value.

Prosecutors said the company never made money from the rental business, but because property values kept increasing, it turned a profit from the refinancing and selling.

However, authorities said, that ended around 2007 when the housing market started to flounder and credit for refinancing dried up.

By 2008, a company official sent Stewart and Packard an email warning that the company would start losing as much as $2 million a month if it had to keep paying its mortgage and investor debt without new revenue, according to prosecutors.

Over the next two years, Stewart and Packard kept the business going by raising $34 million from new investors, many of whom were elderly and retired, prosecutors said.

“For example, one 74-year-old investor testified at trial that in early 2009, shortly after her husband passed away, Stewart’s staff persuaded her to invest virtually all her retirement savings in [the business],” federal officials wrote in a news release.

Prosecutors said the new funds did not go toward buying more properties, as Stewart and Packard had promised. Instead, the money was used to pay back earlier investors and mortgage lenders and for other expenses, including $750,000 salaries for Stewart and Packard, prosecutors said.

Officials said Stewart manipulated financial documents to make it look like the company was still viable, though it had “effectively become a Ponzi scheme, using funds from new investors to pay back earlier investors.”

Pacific Property Assets filed for bankruptcy protection in 2009. At that point, the company said it had 647 private investors.

A trustee overseeing the case later said that those investors lost $169 million in the bust and would only get back “pennies on the dollar” through the bankruptcy process, prosecutors said.