March 22, 2002

OFFICE OF THE UNITED STATES ATTORNEY
SOUTHERN DISTRICT OF CALIFORNIA
San Diego, California

United States Attorney
Patrick K. O'Toole

For Immediate Release

NEWS RELEASE SUMMARY

United States Attorney Patrick K. O'Toole announced that Michael J. Fanghella, the former Chief Executive Officer of PinnFund, U.S.A., Inc. ("PinnFund"), pled guilty today to one count of conspiracy to commit wire fraud, one count of conspiracy to commit money laundering, three counts of tax evasion, and one count of filing a false entry with a department of the United States. PinnFund was a Carlsbad-based sub-prime mortgage lender whose offices were closed on March 22, 2001 as a result of a civil enforcement action instituted by the United States Securities and Exchange Commission,

Fanghella, 50, of San Diego, pled guilty before the Honorable Marilyn L. Huff, to a six-count Superseding Information. The Superseding Information alleges that Fanghella and others conspired to devise and perpetuate a fraudulent scheme to obtain over $300 million from investors in PinnFund's mortgage lending. In today's proceeding, Fanghella admitted that although PinnFund lost money from its mortgage business at least as early as 1996, he and others conspired to conceal this fact and attract new investor monies until PinnFund's forced closure in March of 2001. From 1997 until the end of 2000, he delivered to investors, through various partnerships, over $200 million he falsely represented to be earnings and/or part of their investment capital. These payments were, in fact, made only with new capital contributions from investors. Fanghella admitted that he made these payments in order to keep the illegal scheme going. In the plea agreement, Fanghella accepts responsibility to pay restitution to the investors in the entire amount of their losses, currently estimated at approximately $159 million.

The Superseding Information also alleges that Fanghella willfully evaded filing income tax returns for the years 1996, 1997, and 1998 on illegally-derived income of $2,240,824, $6,162,260, and $5,755,875, respectively. The taxes due and owing for those years were as follows: $873,540 (1996), $2,424,084 (1997), and $2,262,584 (1998).

Finally, the Superseding Information alleges that on or about March 31, 1999, Fanghella made a false entry in the reports PinnFund presented to the United States Department of Housing and Urban Development. More specifically, he falsely claimed that funds lent to PinnFund by Grafton Partners in 1998 were his personal funds, when he knew that such funds in fact constituted investment loans to PinnFund.

The (wire fraud) conspiracy charge (Count 1) to which Fanghella pled guilty carries a maximum penalty of five years in prison and a $250,000 fine. The money laundering conspiracy charge (Count 2) carries a maximum penalty of twenty years in prison and a fine of twice the value of the funds involved. The maximum penalties associated with the tax evasion charges (Counts 3-5) are five years in prison and a fine of $250,000. The false entry to a department of the United States carries a thirty-year maximum prison term and a fine of $1,000,000.

United States Attorney O'Toole stated, "The Ponzi scheme operating at PinnFund, U.S.A., Inc. represented one of the largest frauds in the history of the Southern District of California. The prosecution of Michael Fanghella reflects the continuing commitment of the United States Attorney's Office to address white collar crime in this district." Mr. O'Toole also stated that the federal investigation of other conduct relating to the operations of PinnFund and related entities is continuing.

Denise L. Rubin, IRS Criminal Investigation Special Agent in Charge for San Diego, stated, "This was a classic Ponzi scheme that defrauded investors out of over $300 million in one of the largest investment fraud cases in San Diego. The motive of this scheme was clearly greed. Special Agents with IRS Criminal Investigation followed the money trail, which led them to millions of dollars in unreported income. Investors should be aware that something that sounds this good probably isn't. IRS Criminal Investigation will continue to aggressively devote resources to investigate these schemes. This investigation is an excellent example of the cooperative efforts between the U.S. Attorney's Office, IRS and FBI."

William D. Gore, Special Agent in Charge, Federal Bureau of Investigation, explained that "This is a significant $300-million-dollar fraud perpetuated over a five-year period and is the largest case of its kind in the Southern District of California. To sustain and advance this scheme, Mr. Fanghella required the assistance of other individuals. Today's plea marks a substantial step in the overall investigative phase, wherein we will pursue all other individuals who helped create and continue this devastating fraud."

The case is the result of a joint investigation by the Federal Bureau of Investigation; the Internal Revenue Service - Criminal Investigation; and the Department of Housing and Urban Development, Office of Inspector General.

Sentencing will be before Judge Huff on August 19, 2002, at 9:00 a.m. in Courtroom No. 1 on the fourth floor of the United States Courthouse in San Diego.

DEFENDANT

Michael J. Fanghella
San Diego, CA 92109
Former Chief Executive Officer, PinnFund, U.S.A., Inc.

SUMMARY OF CHARGES AND MAXIMUM PENALTIES

Count 1:

Conspiracy - Title 18, United States Code, Section, 371
5 years' imprisonment; $250,000 fine

Count 2:

Conspiracy to commit money laundering - Title 18, United States Code, Sections 1956(h) and 1956(a)(1)(A)(i)
20 years' imprisonment; fine of twice the value of funds involved;

Counts 3-5:

Tax evasion - Title 26, United States Code, Section 7201
5 years' imprisonment; $250,000 fine

Count 6:

False entry - Title 18, United States Code, Section 1006
30 years' imprisonment, $1,000,000 fine

INVESTIGATING AGENCIES

Federal Bureau of Investigation
Internal Revenue Service - Criminal Investigation
Department of Housing and Urban Development, Office of the Inspector General