Real estate swindler is moving to prison

Charles Elliott Fitzgerald, an admitted architect of one of the largest real estate frauds in California history, was sentenced Friday to 14 years in federal prison for his part in bilking mortgage lenders of more than $40 million.

Fitzgerald, 48, pleaded guilty in May to conspiracy, fraud and other charges, acknowledging that he reaped at least $5 million from the scheme, which was based in Beverly Hills and involved high-end house flips.

He is the first of 11 defendants to be sentenced in the case, which foreshadowed the wave of foreclosures now washing over the wreckage of California’s real estate market. But U.S. District Judge Dean Pregerson said Fitzgerald’s scheme had no direct connection to the current financial crisis.

“This is not a deregulation case,” he said. “This is a case about good old-fashioned lying and cheating.”

Prosecutors said Fitzgerald and his alleged co-conspirators, including developer Mark Alan Abrams and star real estate agents Joseph Babajian and Kyle Grasso, hatched their scheme during California’s burgeoning real estate boom of the late 1990s and early 2000s.

They allegedly bought inexpensive houses in exclusive areas at market value, fabricated records showing them to be worth two or three times as much, and then secured $142 million in loans based on the inflated numbers.

The alleged fraud ring initially kept up payments on the properties, but by August 2003 the mortgages were slipping into default and headed for foreclosure. Money that might have been used to service the loans instead was spent by Abrams and Fitzgerald on lavish items such as private jets and vintage wines, court records in the lenders’ civil lawsuits show.

Lehman Bros. Bank, which last month spiraled into bankruptcy amid the nation’s deepening financial crisis, and another lender, RBC Mortgage Co., lost about $42 million on the loans, according to prosecutors and the civil suits.

Fitzgerald, who will serve his time at a medium-security federal prison in Colorado, was ordered to pay that amount in restitution. However, the judge noted that Fitzgerald does not have the money.

“I am sorry for everything that happened,” Fitzgerald, who wore a white prison jumpsuit and was shackled at the waist, told the judge as his wife and six children sat at the back of the courtroom.

“I apologize to the court, I apologize to the government, I apologize to every victim,” he said. “I wish I could take it back and relive those years all over again and change it all, but I can’t.”

Babajian, 55, Grasso, 37, and another defendant, appraiser Lila Rizk, 41, have pleaded not guilty and are awaiting trials that have yet to be scheduled.

Abrams, 47, and six other defendants have pleaded guilty and will be sentenced after the remaining criminal cases play out.

Fitzgerald had asked to be sentenced now because he wanted to be moved from Los Angeles, where he has been held since December 2006, to a prison closer to his family, who live in Idaho and Utah.

He apologized Friday to his wife and children, and to the Mormon Church for using it as a conduit for the fraud. Some members lost the investments he had solicited from them.

Fitzgerald and Abrams, the alleged ringleaders of the fraud, sprang onto the Beverly Hills real estate scene as the 1990s ended and the Westside market began to recover from a long downturn.

It was the beginning of an era of freewheeling lending that later helped fuel the current turmoil in U.S. credit markets. As interest rates fell, lenders jumped in with anything-goes loans, some requiring no proof of borrowers’ ability to repay them.

Those who easily got mortgages included first-time buyers who couldn’t afford them, speculators seeking fast profits on flips and, as prosecutors now contend, fraudsters such as Fitzgerald and Abrams.

Prosecutors say the pair recruited real estate agents, including Grasso and Babajian -- whose celebrity clients have included Ryan Seacrest and Oscar De La Hoya -- to find properties, negotiate sales, falsify listings and jack up the “comps,” or comparable sales figures, from other transactions in the area.

They also enlisted appraisers and used their own escrow companies to fabricate settlement documents and their own notary to validate them, prosecutors say.

In all, they bought about 80 houses in exclusive enclaves of Southern and Northern California, often using people posing as buyers who appeared to be legitimate but were not, the government contends.

The “buyers” owned the homes in name only -- Fitzgerald and Abrams allegedly kept control of the properties and rented some to raise cash to help keep their scheme going.

Some straw buyers’ identities were used without their knowledge. A dozen others told a private investigator working for Lehman Bros. that they were solicited by Fitzgerald or others to sell the use of their names and credit histories for up to $15,000 but didn’t know they had done anything wrong, court records show.

None of the straw buyers has been charged in the case.

Assistant U.S. Atty. Jeremy D. Matz, the lead prosecutor, called the scheme “an extreme case” of fraud. He and a former general counsel for RBC Mortgage Co. said the damage reached beyond the financial institutions that lost money.

Attorney Elizabeth Edelman told the court that losses of more than $20 million helped prompt the sale of RBC.

“People lost their jobs,” she said. “Innocent people at RBC were affected.”

As the fraud unraveled, Fitzgerald fled the country with his wife and children in 2003. He left behind a second woman he married in Las Vegas in 1999, and their young son, court records state.

Fitzgerald was arrested in Western Samoa in December 2006 and deported to the U.S.

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kim.christensen@latimes.com

diane.wedner@latimes.com