SEC sues ex-USA Capital president

The federal government on Wednesday filed a lawsuit accusing former USA Capital President Joe Milanowski of fraud and securities violations that contributed to the hard-money lender's collapse two years ago.

The Securities and Exchange Commission alleged that Milanowski, 46, violated several provisions of a securities prospectus for a trust fund and misused money in the fund. Milanowski, for example, used 94 percent of the money for unsecured loans, despite reporting that the money would only be used for loans secured by real estate. Much of the money in the fund was siphoned off for loans to companies in which Milanowski had a stake, another violation, the SEC lawsuit said.

Milanowski is a Las Vegas resident. Former partner Tom Hantges, who founded USA Capital, was not named in the federal lawsuit.

Hantges, however, left USA Capital before it filed for bankruptcy in April 2006 and relied on Milanowski to manage its day-to-day operations. While Hantges did sign some papers at USA Capital, Milanowski's signature appears on many more documents, sources say.

Milanowski's attorney, Brent Baker of Salt Lake City, said he wondered why the SEC failed to name Hantges.

He said Milanowski has been working with attorneys on the USA Capital bankruptcy cases.

"He's trying to do the right thing and get the money back to investors," Baker said.

The firm was handling loans totaling $962 million when it filed for Chapter 11 bankruptcy in April 2006.

Its creditors include 6,800 investors who invested in short-term mortgage loans to developers. Investors, who enjoyed double-digit interest rates on their investments, relied on real estate collateral that could be foreclosed if the borrower failed to pay.

The SEC lawsuit focuses on USA Capital Diversified Trust Deed Fund, which raised $150 million from 1,900 investors over five years. USA Capital investors also invested in another fund and made investments in individual loans.

The lawsuit claims that Milanowski failed to register the Diversified fund with the SEC, as required, and accuses him of two fraud violations. It asks U.S. District Judge Kent Dawson to order Milanowski to forfeit "ill-gotten gains from his illegal conduct."

Kelly Bowers, SEC senior assistant regional director, said the commission often seeks to have any recovered money distributed to investors, but sometimes the amount of the recovery is too small and the number of investors too numerous to make that feasible. In that case, the money is turned over to the U.S. Treasury.

Phyllis Resler, 71, one of the Diversified fund investors, invested $50,000 in the fund and has recovered only about $1,000 so far, she said. Diversified fund investors are expected to recover only 26 cents to 46 cents on each dollar they invested, according to the lawsuit.

She considers the SEC action a good thing but questioned how the SEC could recover any more assets, because Milanowski and USA Capital already are in bankruptcy.

"None of the shareholders in USA Capital has been able to find out what is going on, and the attorneys are having a field day," Resler said.

Some, if not all of the SEC allegations, have been made before by bankruptcy attorneys in the USA Capital case.

Attorneys for Diversified also have argued that Hantges shouldn't be allowed to discharge his debts in a personal bankruptcy because Hantges was involved in fraud.

Criminal defense attorney Frank Cremen said that the SEC sued Milanowski and not Hantges doesn't give any clues about whether either may be defendants in a possible criminal case.

A year ago, the government notified at least one Diversified investor of a criminal investigation, and the FBI earlier confirmed that it was reviewing the USA Capital matter. A spokeswoman for the U.S. Attorney didn't return a call for comment Wednesday.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.