The former president of USA Capital, which failed in 2006 while owing $962 million to several thousand investors, has agreed to cooperate with prosecutors in return for a possible four-year reduction in his prison sentence.
The disclosure came in a written agreement in which the ex-president, Joe Milanowski pleaded guilty to wire fraud. A federal judge unsealed the agreement Oct. 2.
Milanowski, 48, pleaded guilty in August in return for a recommendation by the prosecution that he be sentenced to 12 years in prison. However, the plea agreement discloses that the U.S. attorney's office would recommend cutting the sentence to as little as eight years if Milanowski provides "substantial assistance" to prosecutors.
It's not known if Milanowski has agreed to testify against other potential defendants, including his former partner, Tom Hantges, or if he would get the sentence reduction solely for helping recover money for investors.
Defense attorney David Chesnoff, who represents Hantges, said he hasn't been told that his client is a target of the investigation.
Natalie Collins, spokeswoman for the U.S. attorney's office, said she could not identify targets of investigations unless the individuals have been charged with a crime. Milanowski is the only former USA Capital employee charged with a criminal offense.
The plea agreement also provides details about Milanowski's crimes.
Like others in the hard-money business, USA Capital solicited money from individual investors and used the money to make short-term loans, typically for one year, to developers and others with real estate to provide as collateral. Investors were attracted by double-digit interest rates that they earned on the loans.
Some investors acquired fractional interests in loans directly, but USA Capital also pooled investors' money in the Diversified Trust Deed Fund, which was designed to make loans secured by real estate.
The fund prospectus said no loans would be made to company insiders, no loans would be made without real estate collateral and no loan would exceed $20 million, but those provisions were violated.
Money from the fund was used to fund projects developed by USA Capital insiders, although no real estate security was provided for the loan. Other loans were provided to Twelve Horses, a Web design and online marketing company in Reno, and to develop an old Colts firearms factory.
An auditor in 2004 warned USA Capital executives about fund violations. When borrowers started to default, the fund continued making distribution payments to "lull investors into a false sense of security that their investments were still solvent and performing."
U.S. District Judge Roger Hunt changed the hearing for sentencing from Friday to Jan. 15 to give victims an opportunity to testify.
Contact reporter John G. Edwards at firstname.lastname@example.org or 702-383-0420.