FBI sought evidence in real estate probe

By: CHRIS BAGLEY - Staff Writer
Following year of investigations, raid could delay investor lawsuits | Thursday, March 13, 2008 1:20 AM PDT ∞

MURRIETA -- Authorities have expanded criminal investigations into a real estate investment group that abandoned more than 100 homes to foreclosure since late 2006, a development that could put off a series of civil lawsuits against the group's managers.

The FBI searched the homes of James Duncan and Hendrix Montecastro on Feb. 22 after obtaining a warrant, according to prosecutors and an attorney defending Duncan in a related civil lawsuit. Several dozen former clients are suing the two Murrieta-area residents and a third, Maurice McLeod, alleging that the three men duped them into buying multiple houses at inflated prices and pocketed millions of dollars in bogus commissions.

Warrants require law enforcement officers to present to a judge or magistrate "probable cause" that a specific crime has been committed. A spokesman for federal prosecutors confirmed the FBI raid, but wouldn't discuss the nature of the crimes being investigated. The warrant covered a vast range of financial records, including real estate purchases brokered by Stonewood Consulting Inc., Montecastro's mortgage brokerage.

A portion of the warrant was made public in a court filing last week by Carlsbad attorney Paul Runes, who is defending Duncan and McLeod against a civil lawsuit in Riverside County Superior Court. Citing ongoing investigations by government agencies, Runes already had asked a judge to suspend what's known as "discovery," the pre-trial process in which the two sides obtain evidence from one another.

Runes plans to argue at a hearing this morning that the FBI raid underscores the possibility of criminal charges against the two men and Montecastro.

"It was in broad daylight at two different houses with lots and lots and lots and lots of law enforcement," Runes said.

String of complaints

The raid was part of an FBI investigation dating to autumn 2006, when the bureau fitted clients of the three men with hidden recording devices, said Barry Minkow, director of the nonprofit Fraud Discovery Institute, who said he had helped with the early stages of the investigation.

The FBI investigation parallels others by the U.S. Securities and Exchange Commission and the Riverside County district attorney's office. Montecastro and his father, Bob "Bayani" Montecastro, agreed to surrender their real estate licenses in July after the California Department of Real Estate accused them of arranging inflated appraisals, failing to account for clients' money and concealing brokerage fees that were as high as three times the industry standards.

No agency has filed criminal charges against any of the men.

Former clients have filed six lawsuits -- including two that were later withdrawn -- alleging that Montecastro convinced them to buy multiple houses with 100 percent financing. The clients alleged that fraudulent appraisals generated $50,000 to $100,000 in excess cash from each mortgage.

Montecastro allegedly promised that the money would be rolled into high-yield, low-risk investments that Duncan and McLeod would manage, according to the clients' lawsuits. Some of the money was used to cover mortgage payments, but the three men allegedly backed out of that arrangement in late 2006, leaving clients with monthly obligations of up to $20,000.

Stonewood and the Montecastros arranged at least 128 home purchases between late 2004 and mid-2006, according to the Multi-Regional Multiple Listing Service used by local real estate agents. Virtually all have since fallen into foreclosure.

A wide net

The lawsuits and the civil accusations filed by the Department of Real Estate and the SEC describe a vast operation in which Stonewood's real estate agents and mortgage brokers allegedly conspired with bogus investment advisers, at least one rogue loan officer for a national lender, and one or more appraisers.

The FBI's warrant covers 17 businesses that the three men allegedly operated, including Ridgeline Investments, Sunburst Financial Systems, Palm Valley Advisers and Pacific Wealth Management LLC, a Nevada-registered outfit that is unrelated to a San Diego company of the same name.

It wasn't clear what the raids turned up at Montecastro's home on Bay Meadows Drive in Murrieta or at Duncan's residence on Avenida La Cresta, in the hills west of Murrieta. Nor was it clear whether the two were at the homes at the time.

Duncan, Montecastro and McLeod bought a series of a dozen luxurious houses in western Murrieta and Rancho Santa Fe over the course of the last three years, moving back and forth among them, often living in houses that the others owned -- and ultimately defaulting on the mortgages.

Duncan's residence on Avenida La Cresta was in the name of Hendrix Montecastro's wife Brandy. The Montecastros bought the $2.49 million house in March 2006 but began defaulting on loans late last year, according to First American CoreLogic, a real estate research company.

Montecastro himself bought the Bay Meadows house in August 2005, borrowing 100 percent of the $1.1 million purchase price. Lenders began foreclosure proceedings in July.

The Montecastros borrowed $1.3 million for a house in the exclusive Crosby development near Rancho Santa Fe in January 2007. The pair made few or no payments on the mortgage, and a lender seized the house in October.

McLeod and his wife, Kimberly, were due to lose their house on Banbury Court in the upscale Bear Creek community in an auction last week after they defaulted on loans totalling $866,000, according to the foreclosure listing service. Three other houses on the same street are now in foreclosure after being purchased by Brandy Montecastro, a Duncan family member and a real estate agent who dealt with Stonewood.

Friends of Duncan's wife said one or both of the two had recently lived across from the Montecastros on Bay Meadows, in a house that a lender seized in late December. The owner's husband, Tony Contreras, was named as a "relief" defendant in the SEC accusation last month, an allegation that he received tainted money without necessarily breaking any laws.

FBI spokesman Stephen Kodak said the bureau was investigating 1,239 cases of suspected mortgage fraud at the end of 2007, up from 436 open cases in late 2003. The bureau counted 260 convictions related to mortgage fraud in the fiscal year ending Oct. 31, up from 123 in the preceding year.

-- Contact staff writer Chris Bagley at (951) 676-4315, Ext. 5444, or cbagley@californian.com.

Previous stories

Feds take action against real estate group (Feb. 28, 2008)

Wheels of justice grind slowly (July 27, 2007)

State shuts down real estate player (June 30, 2007)

Sixth lawsuit alleges money laundering (May 23, 2007)

New player emerges in fraud suits (Feb. 21, 2007)

Scope of alleged scam grows (Feb. 14, 2007)

Investors' legal battles span 5 years (Feb. 11, 2007)

Renters latest victims of alleged scam (Feb. 10, 2007)

Real-estate investors bought on faith (Jan. 14, 2007)

High-ball offers raised flags in 2004 (Jan. 9, 2007)

Suit alleges massive mortgage scam (Jan. 6, 2007)

Agent's deals gut neighborhoods (Aug. 26, 2007)

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