Fund or Die

Before the Ponzi collapsed, there was a mortgage-lend­ing business up and run­ning at the company’s 95,000-square-foot of head quarters in Carlsbad. The two-story building tops a ridge along a wide, SUVfriendly boulevard,  and there PinnFund created its corporate paradise-a nonsmoking, health-savvy organization that paid its workers good salaries and benefits, catered lavish yearly parties, and kept itself tech-current. Recalled one manager, the indefatigable Fanghella loved computers. “He was a geek. He would buy software just for the sake of having it. He liked the whistles and bells-bigger, better, faster, he would always preach.”

 

One of Fanghella’s corporate hats was tour director of PinnFund’s operation. He would, often with Hillman, who flew potential investors in for visits, usher guests through the building. They began in the basement, at the 5000-square-foot wellness center, with cardiovascular and weight-training equipment, showers ad locker rooms, and aerobics floor, two onsite athletic trainers, and a certified nutritionist. There nearly half the 200 employees were “members,” signing up to attend twice weekly. And they did, working the stationary weights with a trainer or getting advice on low-cholesterol diets.

 

Fanghella and Hillman would show off the 40-seat theater, site of PowerPoint presentations and nutri­tion classes; the first-floor executive suites with an adjoining living room and its gallery of original oil paintings; and the food court where employees ordered healthful cuisine, and maybe a glass of wine with dinner, if they were working late. Long hours:’ one employee told me, was “the nature of the job”.

Investor tours, passing through hallways with pho­tos of Fanghella speaking at charity events or of Hill-man looking solemn, ended in the executive dining room.

There food and wine were served and, according to Chris Belaire, Fanghella’s wine buyer, the boss liked to brag about his wine “ver­ticals” collection of con­secutive vintages from the same producer. (At his wed­ding Keith Grubba, Pinn­Fund’s CEO, received from Fanghella a vertical of Grace Family Cabernet, valued at $40,000). If potential investors took a liking to Fanghella’s vino bravado, he told Belaire to “bring out a bottle.” Fanghella would then, the group warming their throats, describe the miracle of Pin­nacle Funding, that is, its years of unimpeachable returns. After all, that track record had compelled pre­vious investors to send their buddies, the newest the n­ewest clientele, to the Carlsbad mecca to see the phenomenon for themselves.

 

Before Fanghella’s driver’s license was revoked, employees knew when he was in — his British rac­ing green jaguar was sparked in its executive slot. Later, in the limo days, he trav­eled more and was in the office less frequently. When present, he would on occa­sion assemble the 200 employees below the stair­case, and, perched above, he would launch into one of his Tony Robbins—like motivational tune-ups. One lawyer in the company recalled Fanghella’s “very spontaneous

rah-rahs to the troops. Basically it was to quell rumors, to get the people to rally ‘round the PinnFund flag. In those cases, he admitted that things were tough, but we would get through it. He was very effective”.

However, no matter a company’s amenities, no matter its leadership dur­ing crises, the mortgage-lending business is extremely stressful. Case in point was a poster above the water cooler displaying Pinn­Fund’s mantra: “Fund or Die?’ On dress-down Fri­days, some employees wore their “Fund or Die” T-shirts, the words splattered with bloodstains. Write the loan, approve the loan, fund the -loan, bundle and sell the loan — and start all over again. On top of that is a housing market subject to volatile interest rates. On top of that is a subprime clientele whose creditwor­thiness took time (often failing in the interim) to establish. On top of that is, at its maximum, a 650-employee payroll, the overhead, and the investors’ 1.5 percent by the tenth of every month.

 

In charge of those pay-outs was CFO John Garitta, whose primary job was to clean out Fanghella’s financial litter box. When he was first hired in 1996—from

“tenip-to-perm” accoun­tant position, he became CFO in less than a year — it took him three months in to figure out what Piun­Fund did. Garittds primary and thankless task was to make payroll, as PinnFund’s money left the company daily for everything but pay­roll. An example: one day in late 1999, the comptroller Valerie Frislie, begged Garitta to deal with the irate Madame Bridgett Girard From Paris, who was yelling at her on the phone. “Mike promised me this money. Where is it?” “How much?” Garitta asked Frislie — $150,000. “You don’t have to talk to prostitutes,” Garitta told her. “That’s not your job”.  During this period, Garitta said. “All Faughella cared about was the hook­ers.” No wonder insiders re-christened the company “Pornfund”.

 

Garitta complained that “we were not able to make our bills in Decem­ber 1999, because Mike was having his New York Christmas party where he spent $500,000, $600,000.” For that party, Fanghella had flown his wait staff from PinnFunds catering divi­sion and, Garitta said, bought them $1200 Tag Heuer watches. Do you know how ridiculous it is to see bus boys [in Pinn­Fund’s executive dining room] pushing carts around with $1200 watches?”

Other outrageous expenses included Keith  Grubbas birthday in 1998, for which Fanghella flew 40 strippers with himself, Grubba and company employees to Las Vegas to celebrate. The dinner at San Diego’s Laurel Restaurant, totaling $3l,800 and a $5000 tip. The near-$l00,000-per-year limo bills; the white Corvettes given to com­pany brass; Fanghella’s $1 million 75-foot yacht, the Maverick, on which, allegedly, in late 2000, he was going to abandon Nun­Fund and San Diego.

All this deficit spend­ing drained the coffers. When Garitta was asked if he was ever concerned that he wouldn’t meet operating expenses, he said, “I believe the question was, “Were there times when I was not concerned to meet operat­ing expenses?” It was a nor­mal part of life where I didn’t know how I was going to cover my bills. I lost sleep over it” During the last year, he went to work thinking each day would be Pinn­Fund’s last. Garitta also said that Fanghella’s approach to Pinnfund’s business was to control everything him­self-never allow accounting, legal, human resources, executive, health, and other departments know what each other was doing. As to Fanghella’s honesty, Garitta declared, “If Mike told me the sky was blue, the one thing I was sure of was, the sky wasn’t blue.’

 

Beginning in summer 2000, things at PinnFund spun steadily out of control.Auditors were in the building constantly. One PinnFund employee who worked in risk-asset man­agement with the Kafkaesque title of loss mitigation specialist, dealt with wire trans­fers of money fin the loans. The auditors asked him for eight months’ worth of doc­uments, which, after he checked, he discovered were missing. He was told to track this paperwork down, but his superiors stonewalled. On occasion, this employee (who requested anonymity) saw documents being forged. If there was a page from an insurance company, for example, that needed sign­ing,worker would, he said “forge a signature on it us! so they could get rid of the loan?”.

 

 

A new crisis emerged in fall of 200 when PinnFund’s 401(k) contributions had lapsed: neither the money taken out of the paycheck nor the amount PinnFund had to match was being deposited. A sign of a seri­ous business slowdown, many workers stopped their 401(k) contributions. Some employees quit others were

let go; the turnover rate grew, then abruptly stopped: Pinnfund quit hiring alto­gether. For their part, the employees knew little of the company’s woes. Sure, they questioned the lifestyle of the managers, the uncorked wine, the hook­ers in Fanghella’s office. But few suspected PinnFund wasn’t making money: in fact, every month management would publicize figures—$350 million one month—to reflect the loan volume.

 

As to why things were so bad only Fanghella a chosen few knew. Garitta has admitted to knowing how bad off the company was, though he told no one. He confessed to staying on only out of loyalty to fel­low workers. Many employ­ees suspected that Pinn­Fund was failing but felt renewed effort and a sunny disposition might save the day. So they worked harder, and later, and still got paid: things couldn’t be that bad. They were young, too, the average age, 28. One worker told me that he worked every day for more than two years and “made a good salary” until a month before March 21,2001.  He asked, “How could PinnFund never have made any money and yet I was able to make enough to put a down pay­ment on my first house?” The answer is, the money lie was paid was never “made” by the company:  it was merely transferred to him (and hundreds of others) from the trust account.

 

Two things most employees didn’t know. First, Pinnfund never made a profit. Second, the entire time PinnFund was in busi­ness, the company was vio­lating its own Spot Loan Funding Agreement by using “Lines of credit” from warehouses — and not investor money— to fund loans. Financing with lines of credit is the usual means by which subprime and other mortgage lenders do business. The company signs an agreement with a ware­house, which puts up money—in effect, credit— so that the lender can find the loans for its clientele. It’s called borrowing money to lend money. For exam­ple, a warehouse lender would extend to PinnFund enough money to fund dozens of home loans, and then PinnFund would sell a bundle of these loans to a buyer like Saxon Mort­gage at a 4 or 5 percent profit. But this profit (it might be higher or lower depending on interest rates) was never enough to pay PinnFund’s and Fanghella’s  bills.

 

It might be argued that. Fanghella believed he could make more money by using warehouse lines of credit, an unlimited amount, instead of rely­ing exclusively on the investors’ money. But was Fanghella even interested in PinnFund’s making money? When Garitta told Fanghella that Pinn Fund “should be cutting checks to him based on profits” and not taking monthly withdrawals from the trust account, “he looked at me like I had two heads. It never occurred to him to make a profit for the company”.

 

But profit, as differen­tiated from investor cash, is what Patrice, the investors, Hillman, the employees — everyone— thought Pinn­Fund was generating.