Two former senior executives at Sonoma Valley Bank and an attorney for one of its biggest borrowers were sentenced to prison Friday for their roles in defrauding the bank, costing taxpayers and investors millions of dollars when it collapsed in 2010.
Sean Cutting, the bank’s former president and CEO, and Brian Melland, its former vice president and chief loan officer, each received eight-year sentences from U.S. District Court Judge Susan Illston.
David Lonich, an attorney involved in the loans that destroyed the bank, was sentenced to 6½ years in prison.
The sentences capped an emotional hearing where bank investors asked the judge to hold the men accountable for the collapse, while their attorneys painted them as honorable family men trying to save a cherished community institution during an unprecedented financial meltdown.
“I would like you to send a message that as a community, we do not accept the looting of our institutions by the greedy or the careless,” Denise Adams, whose family lost $42,000 when the bank’s stock imploded, urged the judge.
Adams said her father had invested the money in the bank’s stock to help her son go to college. Financial pressures, in part because of the loss, forced her son to drop out of school.
“My dad felt guilty until the day he died that the investment went south,” Adams said.
Supporters for the men, through letters read by their attorneys, asked the judge to view the men’s actions as efforts to save an institution in trouble, not loot it for personal gain.
Cutting’s attorney, Neal Stephens, sobbed as he addressed the judge, saying his client’s entire life was about “service to other people.” Stephens asked the judge for leniency for the sake of Cutting’s family. His wife and two young children cried and hugged one another in court.
“He didn’t make a dime off any of these loans,” Stephens said. “All of his actions were to help save the bank, not destroy the bank.”
Illston acknowledged the strong community support for the men but showed little patience for the numerous objections of their attorneys.
“This whole situation has been a dreadful one,” Illston said.
Following an eight-week trial, the three men were convicted in December of more than 25 counts of bank fraud, wire fraud, money laundering and lying to regulators about the $35 million real estate loan scandal that brought the bank down.
A fourth defendant, Marin County developer Bijan Madjlessi, died in 2014 after his car plunged off a cliff near Muir Beach not long after charges were announced against him.
Prosecutors said Madjlessi was allowed to use straw borrowers to gain unlimited access to loans, which he used to pay old debts, finance new projects and lead a lavish lifestyle. Lonich was his attorney.
Prosecutors wanted more than 30 years each for the men: Cutting, 48, formerly of Sonoma; Melland, 48, of Santa Rosa; and Lonich, 63, of Santa Rosa.
Assistant U.S. Attorney Adam Reeves offered a scathing assessment of the men’s actions. He told Illston that Cutting’s “hubris and ego” continued even after the bank was being taken over, that Melland “took a bribe,” and that Lonich “lies about as much as he breathes.”
“Perhaps worst of all, these men believe they have done nothing wrong,” Reeves said.
But Illston said she didn’t feel such stiff sentences would serve justice. She held the two bank officers to slightly longer sentences because she said they made the final decisions on the bad loans. Lonich was “simply enabling” some of the loans in question, she said.
She ordered Lonich to forfeit his interest in Park Lane Villas East, a Santa Rosa apartment complex, ruling that his stake in the property was the result of a crime. The complex is worth approximately ?$20.8 million, according to prosecutors, but it was not clear how much Lonich owns.
The judge scheduled a Sept. 18 hearing to determine the amount of restitution the three men must pay.
Taxpayers lost more than $47 million in the failure of the bank, which was insured by the Federal Deposit Insurance Corp. and had borrowed additional money from the federal government to shore up its finances.
Investors also lost money when the bank’s stock collapsed, wiping out the value of their shares. Many had been customers of the bank and had proudly purchased stock to support an independent, community bank in the Sonoma Valley, where it operated branches in Sonoma, Glen Ellen and Boyes Hot Springs.
After the sentences were read, bank investor Jerry Marino said it would do little to comfort those who lost money.
“It doesn’t help us at all because we all took a big bath,” Marino said.
One of the bank’s founders in 1988 and earliest boosters, Marino later became a sharp critic of its management, especially the decision to accept $8 million in federal bailout funds during the height of the financial crisis.
Prosecutors offered evidence at trial that Cutting likened the bailout funds, known as the Troubled Asset Relief Program, to a “cookie jar.”
“TARP is not a cookie jar, but that’s what Sonoma Valley Bank CEO Sean Cutting called it as he applied for $8 million in TARP dollars, all while knowing he was committing a massive fraud that caused holes in the bank’s books,” Christy Romero, special inspector general for the TARP program, said in a press release after the sentences were read. “TARP was intended for healthy banks, not to fill holes in fraud-riddled bank books.”
The trial focused on the financing of two Madjlessi projects – the Petaluma Greenbriar apartments and the 228-unit Park Lane Villas apartments in Santa Rosa.
Prosecutors argued that when Madjlessi was unable to make loan payments, Cutting and Melland allowed him to conceal the problem by taking out loans using other people’s names.
In 2009, when Madjlessi was defaulting on a $30 million loan to IndyMac bank, prosecutors say he turned to a business associate, James House, who posed as a straw borrower. The loan from Sonoma Valley Bank helped Madjlessi pay off his debt and avoid bankruptcy, prosecutors said.
Lonich is accused of obstructing justice by asking House to lie about his role in the formation of the shell company, 101Houseco. The conversation was captured in a secret recording played to jurors.
The “bribe” the prosecutors referred to was a $150,000 gift Madjlessi made to Melland to fund a private energy drink business called Magnus.
Melland suggested in his statement that his one regret was picking up the phone one day to discuss a loan with a “gentleman,” presumably Madjlessi, but Illston made it clear she didn’t buy it.
“That was one of your mistakes,” she interjected.
The letters in support of Cutting included some of the most prominent names in the Sonoma Valley. Steve Page, president of Sonoma Raceway, called Cutting one of “the most forthright and honorable people I have been fortunate enough to know.” Businesswoman Suzanne Brangham praised Cutting for his leadership and “fighting hard to keep the bank afloat.” Both served on the bank’s board of directors.
Cutting said he took responsibility for his actions but characterized himself as someone who was only trying to help the community. He said he and his family have been “devastated” by the collapse.
“I’m just so sorry and feel so deeply for all the people in this room and all throughout Sonoma County who were impacted when the bank failed,” he said. “There is not a day that doesn’t go by without me thinking about it, and it hurts every time.”
Marino said he doubted the men would serve their full sentences. “If they serve it, it’s fair,” he said.
During the hearing, Marino cast doubt on the executives’ claims that the housing downturn was the true cause of the bank’s 2010 collapse.
“If good banking practices and rules were followed, our community bank would still be there,” Marino said. “2008 did not take them down.”
Sonoma Valley Bank was the only bank in Sonoma County to fail during the global financial crisis of 2007 and 2008, when risky and fraudulent mortgage loans imploded, triggering a crash in the U.S. housing and financial sectors.
The men were ordered to begin serving their sentences Oct. 1. Lonich intends to file an appeal, his attorney said.