Fresno-based scam case in limbo

It’s been nearly two years since John W. Otto, the alleged mastermind of a Fresno-based scam that ensnared as many as 1,200 victims in California and other states, committed suicide just a few miles from his home in Palm Desert.

Since then, the case has generated more questions and few answers for investors about the millions of dollars they poured into what they thought were contracts for equipment leases.

Federal agents — who began looking into the case just days before Otto, 67, shot himself on May 11, 2009 — say Otto was the mastermind of a Ponzi scheme that bilked investors of as much as $138 million.

Less than a month before Otto’s death, his company, HL Leasing, missed its first payment to investors. That was the first sign of trouble for people who, in some cases, had entrusted their life savings to him.

That skipped payment ultimately triggered an investigation that has since spawned two separate lawsuits by investors; the seizure of thousands of documents, cash, a car and an airplane by the FBI; and a federal grand jury to consider criminal indictments.

A June 27 trial was set in Fresno County Superior Court for a civil class-action lawsuit seeking money from Otto’s widow, Kathleen Otto, 69, of Palm Desert; two of Otto’s business associates, HL Leasing president Dan Ramirez and Heritage Pacific Leasing chief financial officer Andy Fernandez; and three of Otto’s businesses, HL Leasing, Heritage Pacific Leasing and Air Fred LLC.

The suit alleges that the defendants committed fraud, misrepresentation and breach of contract against the investors. Over two years, the case file has grown to 14 volumes of documents, each about as thick as the Fresno phone book.

Long delays
But that trial date now appears to be on hold as Kathleen Otto’s attorneys and lawyers representing investors wrangle over whether the civil trial should wait until after the FBI and U.S. Attorney’s Office complete their criminal investigations. Kathleen Otto is also asking the court for a summary judgment dismissing her from the case.

The delays only add to the frustration of investors, many of whom say that after two years they have no expectation of ever recovering any lost money.

Wayne Cox, 71, of Clovis invested with Otto for about a year, “just long enough to lose everything,” he said of his retirement savings. “I believe it’s gone, that there was just enough money left for them to tie things up in court until who knows when.”

Esther Bolt, 84, of Oxnard said she, too, has “more or less given up hope” for restitution.

“When I spoke with an FBI agent, he didn’t give me much hope,” said Bolt, who invested in Otto’s company for four or five years. “I don’t know what Otto did with our money.

“I guess it’s either the thieves or the economy,” she added. “I’d be so grateful to get anything back.”

Investigators aren’t saying much about the potential criminal case.

“We’re still working on it, still looking at things, still taking time to investigate,” said Steve DuPre, an FBI spokesman in Sacramento. “We can’t comment on specific cases, but we hope people can take some encouragement that we’re still working on it.”

Scheme’s spoils
A Ponzi scheme typically involves using money from new investors to pay earlier investors. In the Otto case, investors believed their investments were backed by leases Otto purchased from American Express on medical, dental and farm equipment. Investors were promised returns of as much as 9% a year on their money.

After HL Leasing failed to make its scheduled April 2009 interest payment, worried investors sought out attorneys and contacted Fresno police, who turned the investigation over to the FBI.

But within days of agents beginning to work on the case, Otto shot himself in the head in the parking lot of the Palm Desert Visitors Center on the afternoon of May 11, 2009. His death came only days after his attorney sent a letter to investors stating that Otto was ill, was trying to sell the business and asking for their patience.

Court records in the Fresno County class-action suit indicate that in the weeks after Otto’s suicide, FBI agents seized dozens of boxes of financial records, two computers and a 2006 Astin Martin car from Otto’s home.

Under federal asset-forfeiture rules, agents also seized a 1993 Cessna airplane belonging to one of Otto’s companies, as well as more than $232,000 in cash from bank accounts associated with Otto’s companies.

Criminal intent?
In addition to the FBI, a federal grand jury also is examining the criminal fraud case.

In court records for the civil lawsuit, Santa Ana criminal defense attorney James Riddet — hired by Kathleen Otto — revealed the existence of a grand jury in the case.

Riddet said he was first told by Assistant U.S. Attorney Kirk Sherriff in June 2009 that a grand jury was convened.

Riddet said he has been repeatedly told by Sherriff, including as recently as a month ago, that Kathleen Otto “would be at the very least a subject of the investigation and one who could be indicted at some time in the future.”

As they argue for Otto to be dismissed as a defendant in the civil lawsuit — a motion due to be heard by a judge on May 25 — her attorneys say investors have not proved that she had anything to do with her husband’s alleged fraud.

“Instead, plaintiffs are apparently looking for the proverbial ‘pound of flesh’ by attacking the widow of John Otto because John is no longer around,” her attorneys wrote.

In court documents, however, investors allege that Kathleen Otto, as John Otto’s wife and as a trustee for the Otto Family Trust, “had been reaping the fruits of the HL Leasing Inc. scheme for a number of years. …”

“Kathleen Otto had purchased a mansion, luxury vehicles, jewelry and other items from moneys obtained through HL Leasing lenders,” argued Ara Jabagchourian, a Burlingame attorney for the investors, in court documents.

Because Otto purportedly misused funds, investors “are hindered in their ability to recover the loses (sic) on their promissory notes.”

A separate federal civil lawsuit for fraud and breach of contract was filed in March in New York by attorneys on behalf of two Nevada companies and a New York corporation alleging that they, too, were bilked by John Otto.

Kathleen Otto and HL Leasing are defendants in that suit, as are Otto’s estate, Ramirez and Fernandez, Otto’s other businesses, and several banks and funding companies that allegedly provided funding to some of Otto’s businesses.

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