An alleged fraud scheme that put African Methodist Episcopal Zion Church properties, including in Palo Alto, into millions of dollars of debt has led to the arrests of a former bishop and lay leader, the U.S. Department of Justice said on Tuesday.

Staccato Powell and Sheila Quintana were arrested and appeared in federal court on Tuesday to face charges of conspiracy, wire fraud and mail fraud stemming from the scheme, which targeted congregations in Palo Alto, Oakland, San Jose and Los Angeles and private lenders, U.S. Attorney Stephanie M. Hinds and FBI Special Agent in Charge Craig D. Fair said in a statement.

Powell, 62, of Wake Forest, North Carolina, and Quintana, 67, of Vallejo, were officers of the Western Episcopal District, Inc., an entity formed by Powell and Quintana in 2016 after Powell’s selection as bishop to the Western Episcopal District of the African Methodist Episcopal Zion Church (AME Zion Church), a historically African-American denomination of approximately 1.4 million adherents worldwide tracing its history to 1796.

A federal indictment filed Jan. 6 and unsealed on Tuesday alleges that Powell and Quintana conspired to defraud the AME Zion Church congregations, including University AME Zion in Palo Alto, by re-deeding the local congregations' properties in the name of Western Episcopal District Inc. (WED, Inc.), a straw entity. Prior to Powell and Quintana's actions, the congregations had little or no mortgage debt on their local church properties, which include sanctuaries, residences for pastoral staff and other structures used by the local congregations for religious purposes. In some cases, the congregations had paid off their mortgages years earlier.

Powell and Quintana used false statements and omissions to force grant deeds from local pastors, claiming the church's Book of Discipline, a guiding document, allowed Powell to place the grant deeds under Western Episcopal's ownership. Pastors who protested were removed under pretexts, so that a council that met quarterly wasn't able to congregate to vote on or approve the mortgage transfers and loans, leaving Powell with absolute control and no oversight, according to a Jan. 14, 2021, lawsuit filed in federal bankruptcy court by University AME Zion Church of Palo Alto.

The congregations didn't know that he almost immediately began taking out huge loans against the properties, according to the lawsuit, which seeks to stop Powell and Quintana from succeeding in bankruptcy proceedings that would include the church properties.

Saddled with enormous debt from private lenders, in which the congregations and churches received not a penny of the money, the scheme began to unravel after the Palo Alto church received a notice of default on one of the loans, according to the civil bankruptcy case.

According to the criminal indictment, after taking control of the church properties, Powell, Quintana and others used the real estate as collateral to obtain the high interest loans, exceeding $14 million in net proceeds. The Palo Alto church alone was indebted for more than $3.9 million, according to its lawsuit, which seeks to prevent Powell and Quintana from using the church assets as part of their attempt to settle the bankruptcy.

Powell and Quintana allegedly diverted funds from the loans for their benefit, including the acquisition of properties in North Carolina by Powell, ending mortgage debt on Powell's personal residence in North Carolina, and cash payments to Quintana's spouse. On July 30, 2020, WED Inc. filed for Chapter 11 bankruptcy protection and listed 11 churches in California, Arizona and Colorado among its assets, according to the Department of Justice.

The Rev. Kaloma Smith, pastor at University AME Zion, said on Tuesday that the church has been dealing with the case for nearly two years.

"We are grateful to the Federal Bureau of Investigation for bringing this case forward. We are grateful that somebody heard our cry and started moving on that, and we are grateful for those in the community who knew and supported us."

Palo Alto law firm Mayer Brown has taken on the civil case pro bono for the church, he said.

The church community has been resilient and bonded together to push through the situation, he added. "I'm so grateful to our church."

Powell and Quintana are each charged with one count of conspiracy to commit wire fraud and mail fraud and two counts of wire fraud. Powell is also charged with one count of mail fraud. The maximum statutory sentence is 20 years in prison, a fine up to $250,000 and three years of supervised release following prison, the Department of Justice said. Any sentence following a conviction would be imposed by a court only after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, however, the department noted.

Powell was arrested on Tuesday in Wake Forest, North Carolina and made his initial appearance in federal court in the Eastern District of North Carolina. Quintana was also arrested in Vallejo, and made her initial appearance in Sacramento. The defendants were ordered to make their initial appearances in the Northern District of California by Zoom on Feb. 2.

The case is being prosecuted by the Oakland branch of the U.S. Attorney's Office and is the result of an investigation by the FBI with assistance from the Santa Clara County District Attorney's Office.