Wednesday, Sept. 27, 2000 | 3:46 a.m.
A Las Vegas businessman, already convicted several times of financial crimes over the years, has now agreed to pay a $55,000 fine and to stop making fraudulent and bizarre claims that dramatically overstated his company's worth.
These claims included statements by Fred Cruz that his company owned $27 million of gold ore, which in fact was dirt stored in a California warehouse; and that it had assets of $2.7 billion consisting of notes and currency from the non-existent "Dominion of Melchizedek."
The Securities and Exchange Commission on Tuesday sued Cruz and his company, Countryland Wellness Resorts Inc., as well as the company's outside auditor, Luis Hidalgo Jr. of Fremont, Calif.; and its attorney, Donald Studer of West Monroe, La. Studer is also a director of Countryland.
The SEC lawsuit in U.S. District Court accuses the defendants of fraud in the offering of Countryland stock, failing to file accurate financial reports with the SEC, failing to keep accurate books, knowingly falsifying books and records, failing to maintain internal accounting controls and making false statements to an auditor.
The defendants settled the allegations by consenting to permanent injunctions barring them from future violations of securities laws. Cruz also agreed to pay a $55,000 civil penalty. The other individual defendants couldn't afford to pay penalties, court documents they signed said.
Cruz is also known as Federico Cruz Gonzalez. He is Countryland's chairman and chief executive officer and operates the company out of his home, the SEC complaint said.
The agency's lawsuit said Countryland is formerly known as Continental Wellness Casinos Inc. and that it claims to be engaged in the mining and electrical contracting industries and "purports to plan to operate a longevity center at a wellness resort and casino in Las Vegas."
The intended side of this wellness resort may have been the El Rancho, which for some time had a sign saying "Coming soon -- Countryland."
The SEC said that in its annual and quarterly financial reports to the agency, Countryland "grossly misstated its financial condition by falsely representing that it owned assets which were in fact nonexistent."
For example, it falsely reported $30.7 million in assets in 1996 consisting of gold in storage. Assets swelled to $2.1 billion with the addition of "proven" mining reserves in 1997. They grew to as much as $3 billion in 1999 with the addition of Indonesian "bank guarantees," the SEC complaint said.
"In fact, each of the above assets was nonexistent," the government lawsuit said.
In some reports, Countryland said it had $27.3 million in gold stored in a warehouse in Compton, Calif.
"The purported 'gold' was in fact dirt" containing no more than trace amounts of gold -- 0.151 ounce per ton, the SEC said.
In filings this year, Countryland, Cruz and Studer falsely represented that Countryland had sold its mining interests, the proven reserves, for $2.7 billion to the "Dominion of Melchizedek," which doesn't exist, the SEC said.
The false reports to the government and investors, the SEC said, amounted to a "fraud or deceit upon the purchasers" of Countryland stock.
But SEC attorney Karen Matteson said the agency is aware of no outside investors who lost money because of the fraud. If there had been such losses, the agency would have demanded the defendants disgorge their ill-gotten gains, she said.
Countryland and Cruz gained notoriety last year when they became involved in the failed attempt by Las Vegas Entertainment Network Inc. of Los Angeles to buy Jackpot Enterprises Inc., a Las Vegas gaming company.
LVEN itself disclosed last month it is under investigation by the SEC, at least in part because of its financial transactions in 1999.
LVEN had made a $95 million unsolicited bid for Jackpot, which operated a slot route. The offer was not taken seriously and failed.
Despite the Jackpot offer, LVEN is perhaps best known as the company that formerly owned the old El Rancho hotel-casino, which Cruz at one point had tried to buy. The El Rancho has been sold to an unrelated Florida firm, which intends to demolish it next month.
News of last year's Jackpot buyout offer caused LVEN stock to more than double in value in one day, then crash to a level lower than its market open. While the SEC hasn't commented on why it's investigating LVEN, the unusual trading activity in LVEN stock last year after the Jackpot bid caused the SEC to halt trading in the stock at that time. This indicates the SEC may be looking into whether the stock price was manipulated.
LVEN, despite being on the brink of insolvency in 1999, claimed to have engineered a miraculous financial turnaround enabling it to buy Jackpot. This turnaround was highlighted by an alleged investment -- valued on paper at $495 million -- Cruz intended to make in the company.
The Sun reported last year that in 1996, Cruz petitioned the California Board of Podiatric Medicine for reinstatement of his license to practice medicine, which was revoked following his conviction in Los Angeles of conspiracy to commit grand theft and four counts of grand theft.
The podiatric board noted that Cruz had served a one-year term in the Nevada State Prison in 1979 after pleading guilty to obtaining money under false pretenses.
The board also said Cruz had spent 17 months in prison after a 1984 conviction in federal court in Wyoming on a charge of making false statements to the Federal Deposit Insurance Corp.
In 1988, the board said, Cruz entered a no contest plea in federal court in Las Vegas to a charge of attempting to transport a stolen security and was sentenced to three years' probation.
The board denied Cruz' bid to get his medical license back, saying, "He has not demonstrated sufficient rehabilitation to justify reinstatement ... He takes little responsibility for the conduct which led to his convictions and license discipline and he made a number of false or misleading statements to the board."
The FBI, in the meantime, this year asked at least one bank for any financial documents linked to companies and individuals who may have been involved in the rapid runup and later crash of LVEN's stock price last fall.
A bank executive who requested anonymity earlier this year confirmed that the FBI, as part of a criminal investigation, has contacted financial institutions asking for records linked to LVEN, U.S. Guarantee Corp. and some of its principals and others associated with LVEN.
The Sun also reported earlier this year that the FBI had raided the Scottsdale, Ariz., offices of U.S. Guarantee, which Cruz said had agreed to help him infuse the $495 million into LVEN.
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