A federal grand jury has indicted Cedar Funding president David Nilsen and loan servicing manager Manoel Errico with conspiracy to commit mail, wire and securities fraud, the United State Attorney and Monterey County District Attorney's Office announced today.
The indictment was issued Tuesday but remained sealed until Nilsen surrendered to authorities in San Jose today, according to the news release.
"The indictment accuses Nilsen and Errico of defrauding investors in Cedar Funding, a Monterey-based “hard money” lender, in connection with investments in loans purportedly secured by deeds of trust and in a fund that invested in those same loans," the statement says. "According to the court document, Cedar Funding had more than 1,000 investors and the loss to those investors could exceed $100 million."
The indictment comes a year and half after lawyers sued Cedar Funding alleging Nilsen was running a Ponzi scheme. The case has been tied up in bankruptcy court since Nilsen filed for Chapter 11 protection in May 2008. Investors have grown increasingly impatient with the lengthy criminal investigation. The prosecution came after a 16-month investigation by the U.S. Attorney, U.S. Postal Inspection Service, FBI and Monterey County DA's Office.
According to the U.S. Attorney: "The indictment further alleges that Nilsen, 58, and Errico, 55, defrauded investors in fractional interests in loans secured by deeds of trusts, and in Cedar Funding Mortgage Fund, LLC, by making materially false statements, failing to disclose material facts, and creating a materially deceptive and misleading scheme, plan and artifice to defraud.
"The indictment alleges in part that, through, among other things, documents provided to investors, advertisements, interest payments and verbal communications, Nilsen and Errico created the false and misleading appearance that the investors’ funds were invested in sound, secured real estate loans, which offered high returns and safety of principal. In truth, by in or about 2004 and increasingly thereafter, most of the loans were not performing, and the investors’ funds were not secure.
"As borrowers increasingly failed to pay off loans, Nilsen and Errico, without the investors’ prior knowledge or consent, extended the loan maturity dates and advanced more investor funds, which caused the loan balances to balloon beyond the initial loan amounts, diluted the investors’ fractional interests in the loans and increased the likelihood that they would lose some or all of their principal.
"The indictment also alleges that, unknown to investors, the source of a substantial part of the interest that Nilsen and Errico caused Cedar Funding to pay to existing investors came from new investors’ funds rather than from performing borrowers."
Nilsen made a court appearance today and was released after executing a co-signed, $1 million bond. Errico is a fugitive. Nilsen's next hearing is Sept. 28. Nilsen and Errico are each charged with 31 counts. The maximum sentence for the conspiracy count is 20 years in prison