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The Securities and Exchange Commission Takes Enforcement Action against PNC Financial Services Group, Inc.
U.S. Securities and Exchange Commission July 18, 2002
The Valley of Lakes Federal Case

Newspaper Headlines Driving West on 924, near Hazleton, Pennsylvania, USA, one passes the Valley of Lakes real estate development, a massive 4000+ acre planned subdivision, that has been the ruin of many American dreams. For about twenty years, many families, and individuals, from nearby, New York, New Jersey, Philadelphia, and other places, were lured here by promises of a piece of nature's paradise, together with the security of a planned community. They invested their life savings here only to purchase a lifetime's worth of grief. To understand the nature of the particular beast that inhabited this place is not a simple undertaking.

Photograh of Frank M. Cedrone 
Frank M. Cedrone

A lawsuit that was filed in federal court, as a class action, by a group of property owners on June 17, 1994, helps shed some light. The property owners sued:  the developer at the time, a Pennsylvania limited partnership named "CBG Limited"; its managing partner, a man by the name of Frank M. Cedrone; the developer's financier, First Eastern Bank, N.A., which three days later merged with PNC Bank, N.A. (PNC); and CBG's affiliates and other related parties. 

The complaint alleges that the defendants operated the Valley of Lakes real estate development as a "racketeering enterprise", in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO").  This "machine" they allege systematically victimized purchasers and property owners in numerous ways, including defrauding them in a massive real estate scam, as well as violating their civil rights by fining and punishing the property owners for any attempt to associate.

RICO is a federal criminal and civil statute that the U.S. Congress enacted in order to combat "racketeering activity". Congress included a civil provision in the statute which gives anyone who was injured by reason of "racketeering activity" the right to sue in the appropriate United States District Court. Congress included this right in order to enlist "private attorneys general" in the fight against racketeering activity.

The racketeering activity complained of by the Valley of Lakes property owners, in their federal lawsuit, allegedly began in 1986 when Frank Cedrone, through CBG, took control of the 4000+ acre subdivision, the "Valley of Lakes".

The complaint alleges that he undertook a massive real estate scam. Beginning in 1987, Frank Cedrone orchestrated a multi-state marketing and sales campaign, promising to make the Valley of Lakes "the premier resort in the Northeast." He retained celebrities such as Arnold Palmer, and promised a luxurious lifestyle, including a new lake, an "Arnold Palmer designed and managed golf course," a convention center, hotels, ski slopes, tennis courts, etc. He used all forms of media for his scam, including: television, radio, direct marketing, and advertisements and features in newspapers, such as the Philadelphia Inquirer and the New York Times.

As a result of these contractual promises, most of which were filed in registration statements with the Federal Department of Housing and Urban Development (HUD), numerous people paid inflated prices--some as much as $100,000--for unimproved lots, with no water or sewer hookups, and no road. They paid their hard earned money, and waited for the "developer" to complete his side of the bargain. He never did.

Instead, after borrowing more than $24 million, and taking in many millions from the sale of lots, the developer defaulted on virtually all of the contractual promises to the property owners. The complaint charges that the defendants never had any intention of completing the development, rather it is alleged that their intention was to take the money and run, as the previous developer had done.  The previous developer, Jack Halperin, was sent to Federal prison, after being indicted for land fraud and mail fraud, for the same type of scam that the complaint attacks in this case, e.g., promises to build the same golf course, the same lake, and the same road and water systems; as well as charging for maintenance fees for services not rendered.

The complaint charges that Cedrone, and other parties, carried out numerous other racketeering schemes, including, charging an extortion fee of 8% of the cost of the construction of any home, in order to give property owners "permission" to build their home. 

During the period that the Valley of Lakes developer carried out its real estate scam (from 1987 until 1992), First Eastern Bank, N.A. (now PNC BANK, N.A.) had a number of lines of credit with the developer, CBG, including a sophisticated financing arrangement known as a "receivable line of credit."

Under the "receivable line of credit", the developer would write purchase money mortgages, itself, to entice people to purchase his lots, at inflated prices, and would then assign the notes of the mortgages as collateral to the bank, for repayment on the millions of dollars of loans that the bank had made to the developer. The bank's agent would mail mortgage coupon books to the property owners, asking for payment in the bank's name, even though the property owners did not owe the bank anything (because the developer continued to own the mortgages).  As a result, the property owners would mail payments to the bank's agents, with checks payable to the bank. The bank's agent would then deposit the payments in a New Jersey bank account, at DIME Savings Bank of New York; and then wire the collected mortgage payments to the bank, as payments on the developer's debt. In this way, the property owners were left unknowingly making payments on the developer's debts to the bank, even though the developer had carried out a massive real estate fraud, in which he never completed the development.

The complaint charges that after the developer defaulted on its loans, on or about November of 1990, that PNC BANK, N.A. (i.e., First Eastern Bank, N.A., at the time) knowingly engaged in a "scheme to conceal the insolvency " of the developer, so that the property owners would continue to make their payments, not knowing that the developer was no longer financially capable of completing the promised development. Specifically, the plaintiff property owners have alleged in the complaint, and in evidence filed with the Court, that after CBG defaulted on its receivable line with the bank, and was insolvent, the bank, itself, devised and directed a scheme to conceal the developer's insolvency, by: knowingly advancing funds to straw man purchasers (to make the receivable line appear current); knowingly accepting the developer's 8% extortion fee as a source of repayment on its loans; and knowingly subordinating all of CBG's loans to a second lender (to cover immediate interest payments on CBG's debt), in order to conceal CBG's insolvency from the bank's Federal Auditors.

In March of 1992, in a "coincidence", all of Frank Cedrone's companies, responsible for developing and operating the Valley of Lakes, declared bankruptcy in unison . Not only did this result in Cedrone never completing the promised amenities, it meant that hardly any services to the subdivision were provided for four years, i.e., from March of 1992 until October of 1996 (when the bank permitted a new developer to purchase the development). As the press reported, the development was plagued with intermittent utility services, at best, and virtually no maintenance. At one point, scores of residents in the Valley of Lakes had no water service at all. It was only after WYOU TV, the local CBS affiliate, broadcast a story on the water problem that water service was resumed.

To make matters worse, Frank Cedrone ran the development like his own private fiefdom. During the bankruptcy, when the development stopped being maintained, the property owners attempted to organize themselves, only to be met by a systematic repression by Cedrone. He set up his own "court," in which he fined property owners for "illegal mailings" which criticized him, as well as for trying to associate in order to represent their interests. At the same time, while repressing any real association by the property owners, the complaint charges that Cedrone arranged to have a "puppet" property owners association formed in order to maintain his illegal rule over the development. The property owners' lawsuit includes a cause of action for civil rights based on this type of repression.

Rather than help the property owners bring Cedrone and his companies to justice, for the massive real estate scam that he carried out, the bank helped Cedrone stay in control of the Valley of Lakes, and entered into an agreement with CBG on October 22, 1992, whereby it granted the developer time to find new financing, in exchange for the developer agreeing to bring in a "management company" of the bank's choosing, namely, MLA Management Associates, Inc. In fact, this company ended up being in control of the development, almost continuously, until October of 1996.

But rather than providing real maintenance for the development, the bank's chosen company, MLA, was actually responsible for carrying out the bank's orders to close down virtually all of the Valley of Lakes' buildings, and to re-wire them to power only the security lighting. At the same time, MLA prosecuted the property owners before local justices of the peace for refusing to pay their maintenance fees for services that were not being rendered. Meanwhile, Cedrone permitted the Valley of Lakes common areas to be used as dumping grounds, to the point that the PA Dept. of Environmental Protection fined him for illegal dumping.

It was during the bankruptcy that the Valley of Lakes Property Owners turned to legal action, as their last resort. They filed their RICO action on June 17, 1994 in the U.S. District Court for the District of New Jersey, Cedrone's home state, alleging RICO violations, including a COVER UP of the racketeering activity by the bank.

Neither Cedrone, nor any of his companies, ever answered the RICO complaint.

On or about February 27, 1995, the U.S. District Court for the District of New Jersey ruled that the property owners had made a prima facie case for RICO and common law fraud against PNC; and denied PNC's motion to dismiss, but transferred the case to the U.S. District Court for the Middle District of Pennsylvania.

On December 29, 1995, the U.S. District Court for the Middle District of Pennsylvania ruled that the plaintiff property owners had made a prima facie case for RICO and civil rights violations against the Property Owners Association of the Valley of Lakes. The Court pointed out that Cedrone was engaged in "state action" based on the power that he exercised over the Valley of Lakes, including in particular his exercise of "zoning power." This finding of "state action" by the Court meant that the developer was legally obligated to comply with the "civil rights" provisions of the U.S. Constitution, the same as any local government, since he was exercising governmental power over the property owners.

On June 19, 1996, the Court certified the case as a class action.

On September 23, 1997, the Court entered a default against Frank M. Cedrone on all claims.

After the plaintiffs' attorneys issued subpoenas, and completed other discovery in the case, they filed a motion to Supplement and Amend the Complaint on May 27, 1998, based on the new evidence they discovered. No party opposed that motion. 

The plaintiffs' Supplemental Complaint alleged that after the developer's bankruptcy filing, on March 30, 1992, the bank had actually devised a scheme to continue to secretly receive the proceeds from CBG's purchase money mortgages, while misrepresenting to the bankruptcy court that it (the bank) was not receiving any payments from CBG. The Supplemental Complaint alleged that, to carry out this scheme, the bank knowingly kept open its bank account at DIME in New Jersey in violation of the bankruptcy's court's order of March 30, 1992, which ordered that all of CBG's bank accounts were to be closed.

The Supplemental Complaint alleged that on or about April 30, 1992, the bank fraudulently misrepresented to the bankruptcy court, that it was not receiving any payments from CBG since the bankruptcy, when it had actually secretly taken $271,415.48 from CBG's estate, as of the date that it represented to the bankruptcy court that it was receiving no payments, whatsoever. Specifically, the bank had been wired two payments: one for $164,651.00 on April 6, 1992, and the other for $106,764.48 on April 22, 1992.

The bank records, which the plaintiffs' attorneys obtained by subpoena, show that the bank took a total of approximately $1,118,595.87 in 1992. In 1993, First Eastern secretly took $921,567.30. In 1994, First Eastern and PNC secretly took $581,696.71. In 1995, PNC secretly took $439,709.98. In 1996, PNC secretly took $376,113.95. For 1997, PNC secretly took $46,236.29.

The plaintiffs' Supplemental Complaint alleged that:  "Based on these transactions, occurrences and events, PNC committed, as part of the same pattern of racketeering alleged in the original complaint, numerous RICO predicate acts of Bankruptcy Fraud (i.e., fraud connected with a case under title 11), Money Laundering (18 U.S.C. 1956), Mail Fraud (18 U.S.C. 1341), and Wire Fraud (18 U.S.C. 1343)."

On July 7, 1999, the Court entered defaults against Cedrone's companies, which never answered the RICO complaint.

On September 30, 1999, the U.S. District Court for the Middle District of Pennsylvania issued a memorandum and order which disposed of approximately ten motions that had been pending in the case. The Court found that there is evidence of "aiding and abetting" of RICO by PNC Bank, N.A.; however, the Court granted summary judgment in PNC's favor, dismissing the RICO claim, because it concluded:  (a) that based on Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644 (3d Cir. 1998), that PNC's actions could not be deemed to be "operating or managing" the RICO enterprise;(b) that a showing of "operating or managing" the RICO enterprise by the defendant, itself, was necessary to make a RICO case against each defendant; and (c) the Court concluded that allegations of "aiding and abetting" a RICO claim are no longer sufficient to establish a RICO cause of action.

The Court also ruled that the plaintiffs' common law fraud were barred by the statute of limitations. In addition, the Court decertified the case as a class action, finding that a consideration of when the statute of limitations accrued for the RICO cause of action required an analysis of each class member's claim.

On October 15, 1999, the plaintiff property owners filed a motion for reconsideration, arguing (among other things) that, at minimum, the allegations of conspiring to violate RICO, pursuant to 18 U.S.C. 1962(d), should be permitted to proceed against PNC, since the Court found evidence of aiding and abetting, because under the Supreme Court precedent of Salinas v. United States , 522 U.S. 52 (1997), it is inappropriate for the Court to add any additional elements (such as a requirement of managing and operating the RICO enterprise) to a cause of action for conspiring to violate RICO. Second, the plaintiffs argued that the evidence in the case, such as the fact that the bank, itself, hired the managing company for Valley of Lakes, and directed it to cut services to the development, building by building, overwhelmingly established the element of "managing and operating" the RICO enterprise, for trial purposes.

On February 8, 2000, the District Court denied the plaintiff property owners' motion for reconsideration.

On July 23, 2004, the U.S. Court of Appeals for the Third Circuit affirmed the decision of the District Court (PDF). A petition for rehearing was denied on August 19, 2004.

Valley of Lakes Resources:



"Truth is truth To the end of reckoning."
William Shakespeare, Measure for Measure.

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