USA Capital investor found in contempt

A federal judge is expected next week to sign orders stemming from his oral rulings that Reno investor Donna Cangelosi is in civil contempt of court for trying to usurp the right of a New York private equity firm servicing USA Capital loans.

U.S. District Judge Robert Jones also found that it was probable that a court would find Cangelosi violated federal securities laws in failing to register limited liability companies she organized through solicitations of USA Capital investors.

Jones did not order Cangelosi to make any payments to Compass Partners, the New York private equity firm, but he said that issue may be addressed in a later trial over damages that Compass and Cangelosi's group made in counterclaims against each other.

The judge continued a preliminary injunction that prohibits Cangelosi and affiliated companies from interfering with Compass Partners' handling of USA Capital loan servicing, including distributions of payments to investors. The preliminary injunction also restricts actions of Compass Partners, which has been accused of violating its fiduciary obligations to loan investors.

USA Capital, a private lender owned by Tom Hantges and Joe Milanowski, solicited investments from individual investors for trust deeds, loans typically made to developers who provided real estate as collateral.

The firm was servicing $966 million in loans funded by about 6,000 investors when it became insolvent and filed for bankruptcy in April 2006.

Bankruptcy Judge Linda Riegle approved a plan of reorganization for USA Capital that incorporated the results of an auction of the bankrupt businesses assets.

Under that plan, Compass acquired ownership interests in some loans and also the rights to service about 50 USA Capital loans in February for $67 million.

In the wake of USA Capital's 2006 bankruptcy filings, Cangelosi emerged as the informal leader of numerous USA Capital investors through Web sites, chat rooms and e-mails. The organized investors called themselves the Lenders Protection Group.

Cangelosi gave elderly investors, many of whom were confused by the bankruptcy case, legal advice. She frequently criticized bankruptcy Judge Riegle, bankruptcy attorneys and the postbankruptcy management of USA Capital.

Unhappy with loan servicing by USA Capital, Cangelosi this year organized limited liability companies that represented investors in specific loans, according to testimony. Investors who joined the limited liability companies relinquished their rights to vote on how the loans problems would be resolved and whether loan payment compromises would be accepted.

People associated with the Lenders Protection Group and the limited liability companies sent letters to borrowers in May, telling them to stop making payments to Compass.

Cangelosi separately established FTH Management Co., which she owned, and sought to obtain loan servicing rights for USA Capital loans.

The limited liability companies were allowed to borrow money with loan interests as collateral. The loan proceeds could be used to pay for legal representation in USA Capital matters or for other purposes.

During cross-examination by Compass attorney Linda Dakin-Grimm, Cangelosi admitted that she had falsely testified at a deposition that she had a degree from New York University.

Cangelosi acknowledged getting a copy of documents and inside information from a former agent of Compass Partners. Cangelosi said the Compass agent held discussions with developers who had loans funded by USA Capital investors.

"She had a lot of good motives, no question" in organizing investors for various purposes, Jones said. But the judge also said Cangelosi had other motivations that were self-serving.

"She went over the border of securities violations and misrepresentations" in soliciting investors to join the limited liability companies, Jones said Tuesday.

The federal judge said Cangelosi also violated securities laws because she did not register her limited liability company investments with regulators.

The judge allowed Cangelosi and other investors to continue operating the limited liability companies, but Jones said the companies would need to ask for investors who joined those companies a second time before he would consider arguments to terminate loan servicing rights held by Compass.

Cangelosi, Jones said, came to the federal court with "unclean hands" because of contempt of bankruptcy court and securities law violations.

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