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— Two luxury-loving lawyers go on trial in superior court September 24 for fraud, embezzlement, and tax evasion. They claim that monies they allegedly stole were loans, so they owed no taxes on the loot. For prosecutor Steven Davis, deputy district attorney, history seems to be repeating itself. Three decades ago, Davis successfully prosecuted San Diego's most powerful wheeler-dealer, C. Arnholt Smith. In June, at a preliminary hearing in the upcoming case, Davis explained that Smith had paid himself bundles of money from entities he controlled. "When it came time to pay his taxes, he said it was a loan. We charged him with income tax evasion, and that was the jury's verdict. This is really no different."

The two lawyers are Paul Roesser, who lives in a $3.1 million home in Rancho Santa Fe, and Roland Colton, a former San Diegan who now lives on a $4 million estate in Laguna Niguel. Colton knows trouble: next year, he will go on trial for bankruptcy fraud in federal court here. He is charged with concealing $1.5 million in assets when he filed for bankruptcy in 2001; among those assets is a big château in France. In 1983, Colton was convicted of assisting in the filing of a false income tax return; he was sentenced to 60 days in confinement.

In the superior court case, to be tried before Judge Charles Rogers, Colton is also charged with money laundering. According to the government, he regularly turned his ill-gotten gains into cashier's checks "so [the money] couldn't be traced," Davis told the court. The judge in the preliminary hearings threw out the money-laundering charge, but Davis has the ability to reintroduce it. One of those cashier's checks went to pay off a loan on a new $100,000 Jaguar for his wife, according to Davis.

The lawyers had two businesses in the same location in Del Mar: their law firm, Colton & Roesser, and their insurance agency, Insurance Ventures. The insurance agency arranged to sell homeowners' insurance issued by Vesta Fire Insurance. The two lawyers were to deposit insurance premiums in a trust account for Vesta. Instead, those funds were commingled with other funds. Consequently, the attorneys withdrew far more than they were entitled to, according to the government.

Colton and Roesser were "just betting on the come," said Davis in the preliminary hearings. "They were taking money that they knew they were not entitled to, and they were hoping that at the end of the program, it would all balance out. That is no different than a teller in a bank saying, 'I am going to take $100 out of the till today, and I am going to Viejas tonight, and, hopefully, I will parlay it into $200 when I come back. Tomorrow, I will put the money back into the till.' "

All told, charges the prosecution, Colton and Roesser pocketed $1.42 million that belonged to Vesta. The attorneys roughly split that sum between themselves, says the government. Colton converted much of his share to cashier's checks and spent it on lavish living, including Las Vegas gambling trips, charges the government. Roesser sent his money to a brokerage house and his bank account. Davis wondered in court whether some of the money may have landed in offshore tax havens, but no such charges were made. Roesser has been the registered agent for two entities in the Netherlands Antilles, but Davis hasn't brought this out.

One method by which the lawyers allegedly embezzled the funds was by taking a percentage as soon as a policy was written rather than when the money was collected, according to the prosecution. The contract with Vesta clearly says the lawyers' cut is based on money collected, not on policies written, but defense lawyers say policy addenda smoke up that issue.

Vesta originally charged that its money was missing. It took the matter to the California Department of Insurance, which passed it to the district attorney's office as a criminal matter. The California Franchise Tax Board determined that the pair had evaded taxes.

Two of San Diego's highest-profile defense attorneys represent the lawyers. Colton is being defended by Michael Pancer, who represented former mayor Roger Hedgecock and former councilmember Ralph Inzunza in corruption trials. Roesser is represented by Charles Goldberg, who defended Ponzi schemer J. David (Jerry) Dominelli and former port commissioner David Malcolm.

At the preliminary hearings, the defense argued that a back-office firm hired by the lawyers had bungled the bookkeeping. Also, Vesta, now in bankruptcy, had been downgraded by an insurance-rating firm, essentially destroying Insurance Ventures' business and prompting a lawsuit by Colton and Roesser. "A very aggressive lawyer representing Vesta...was faced with a valid lawsuit," argued Pancer in the preliminary hearings. That lawyer took the case to the Department of Insurance, which did not understand the complexities. The whole thing is a contract dispute, says the defense. Whether the lawyers were to get their share of written or collected premiums is ambiguous in the contract, the defense claims. "Experts from the insurance industry" will deflate the prosecution's claims on that point, says Goldberg in an interview.

Says Pancer of the money-laundering charge against Colton, "He has a wife and five children, has gaming patents, clients in Vegas -- legitimate business reasons to go to Vegas. The family took vacations there." Colton didn't conceal what he did with the money, says Pancer.

The defense has presented promissory notes indicating that payments to Colton and Roesser were loans from Insurance Ventures, not income, and therefore were not taxable.

At the preliminary hearings, deputy district attorney Davis jumped on that claim. "These alleged notes are themselves proof of the fraud," said Davis, charging that Colton and Roesser cooked up the notes to avoid tax liability. "This is Colton and Roesser as the principals of Insurance Ventures negotiating with Colton and Roesser as the so-called attorneys for Insurance Ventures." The concocting of the promissory notes was "a thinly veiled contrivance."

But not an original one. C. Arnholt Smith used it in the 1970s.

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