A U.S. District Court Judge sentenced the founders of a Bay Area real estate development firm, including Michael Sims of Gilroy, to prison on investment fraud charges and ordered they pay back millions in restitution.
On Nov. 17, Judge Ronald Whyte sentenced 45-year-old Melvin Russell “Rusty” Shields, of Granite Falls, N.C., and Sims, 60, to 78 months and 30 months in prison, respectively, for defrauding investors through S3 Partners, LLC. The firm did business in San Jose, Palo Alto, Campbell and in two other states—North Carolina and Florida—according to the indictment.
A jury previously convicted Shields and Sims on December 2013, following a seven-week-long jury trial and an investigation initiated by the Federal Bureau of Investigation. The jury found Shields guilty of 32 charges, including conspiracy to commit wire and bank fraud, wire fraud, bank fraud, making a false statement to a bank and securities fraud. The same jury found Sims guilty of two charges of wire fraud.
Two months before Shields and Sims were convicted, a third partner—57-year-old Sam Stafford of Campbell—pleaded guilty to having conspired with the two, according to a press release from the U.S. Attorney’s Office.
The three men created a deceiving appearance that both private investor and bank funds were being applied to “sound, secured real estate development projects that offered high rates of returns,” the indictment reads. Instead, the total of more than $21 million entrusted to Shields, Sims and Stafford was spent on themselves, their own personal business ventures and other unauthorized purchases.
Evidence at trial showed all three founders defrauded individual investors across northern California in connection with multiple developments between 2006 and 2009, the press release states.
“All the S3 Partners’ projects failed, resulting in a near total loss to many investors,” the U.S. Attorney’s Office statement reads.
Shields targeted elderly investors in the scheme, even encouraging some to cash out individual retirement accounts, for example, and wire the funds to S3 Partners either to invest or buy shares. Evidence at trial showed Shields diverted investor funds for unauthorized purposes, while other evidence demonstrated Shields and Stafford fraudulently obtained millions from banks by submitting forged and fraudulent invoices and loan closing documents, according to the U.S. Attorney’s Office.
Ultimately, Shields was responsible for losses of more than $7.2 million, suffered by more than 24 individual investors and two banks.
Sims defrauded two special education teachers out of more than $411,000, the release states. He encouraged the two teachers to cash out their individual retirement accounts and wire him the proceeds so they could by a share in an S3 Partners-controlled company—one that was a ‘safe investment that would provide predictable returns,’ Sims said.
Following the sentencing, Judge Whyte ordered Shields and Sims to self-surrender by Jan. 13, as Shields, Sims, and Stafford have been out of custody on home electronic monitoring since their arrest in May 2012. Judge Whyte ordered Shields to pay just over $7.23 million to victims, while he ordered Sims pay back more than $411,460. Stafford’s sentencing is scheduled for Jan. 26.
