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Monday, Jun. 15, 2009

More than 400 investors file suit against Cuesta Title for allegedly aiding Hurst Financial in Ponzi scheme

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Cuesta Title, based in San Luis Obispo, and Stewart Title — its Houston parent company — have been accused by more than 400 Hurst Financial investors of helping the North County lender in a multimillion-dollar Ponzi scheme that they allege preyed on the elderly.

They allege that the scheme created escrows and other documents that robbed investors’ funds that were supposed to finance construction of residential and commercial buildings.

The money was used instead to pay off earlier investors and to generate money to “keep the wrongful scheme alive,” according to the lawsuit filed in San Luis Obispo Superior Court on Friday.

Hurst Financial is among several North County lenders that are facing legal, regulatory or criminal troubles. These lenders pooled money from investors to make high-interest loans for real estate developments.

It’s estimated that thousands of individuals and organizations, mostly from San Luis Obispo County but also from elsewhere in California, invested with these firms.

The lawsuit alleges that some of the investors’ money was used to pay falsely inflated fees to Hurst Financial and Cuesta Title, as well as “improper expenditures” by Hurst Financial President Jay Hurst Miller and developer Kelly Gearhart — one of the firm’s major borrowers.

San Luis Obispo attorney Jim Buttery, legal counsel for Cuesta Title, told The Tribune Monday he was not yet authorized by his client to speak about the matter.

Executives and legal counsel for Stewart Title could not be reached for comment Monday.

Largest lawsuit so far

This is the fourth lawsuit charging both Stewart Title and Hurst Financial with fraud since September.

It estimates damages to Hurst investors at more than $60 million.

The latest suit is by far the largest and most far-reaching.

That includes the number of plaintiffs, as well as a complaint of more than 50 pages describing in detail allegedly illegal transactions by Stewart Title and Hurst Financial in five residential and commercial North County real estate developments to be built by Gearhart. There are more than 700 pages of exhibits.

Heritage Oaks Bank has also been named in the suit for allegedly helping to perpetuate the fraud through “conscious decisions to participate in the scheme to extract money from the Vista Del Hombre property ... under the auspices of purportedly legitimate loan transactions,” the lawsuit states.

Vista Del Hombre was a commercial building project Gearhart was developing on his golf course, The Links Course at Vista Del Hombre, in northeast Paso Robles.

Heritage Oaks was named because of its actions in loaning Gearhart almost $2 million for the Vista Del Hombre project, after the developer was alleged to have fraudulently cleared original investors from the deed.

Heritage Oaks Bank had an appraisal disclosing one of the fraudulent transactions, the lawsuit states.

The bank denies the charges, according to William Raver, Heritage Oaks executive vice president and legal counsel, during a phone interview with The Tribune on Monday.

In a statement by the bank earlier in the day, Raver said that the bank would work with Vista Del Hombre investors to help recover funds Gearhart borrowed in which the project was used as collateral.

But he noted, “The bank is not responsible for Hurst’s lending practices or Gearhart’s failure to repay his debts.”

“We followed strict and proper lending policies in making the loans in question and have verified that we hold valid liens against many of the Vista del Hombre parcels,” Raver said.

“It appears that the Hurst investors continue to hold valid liens against other parcels in Vista Del Hombre,” he added.

Raver said that Heritage Oaks plans to proceed with a Wednesday foreclosure sale of the property it holds as collateral in Vista Del Hombre. The bank hopes to recover as much as possible from $1.75 million it loaned to Gearheart and Vista del Hombre LLC, he said.

The suit also alleges Stewart Title participated in a cover-up by not disclosing to plaintiffs that they may have been defrauded through the mishandling of escrows.

It knew damages had been suffered when it conducted an audit of their local offices in February 2009 and conducted interviews with several employees from the local offices, the lawsuit states. That resulted in the firm closing Cuesta Title, the complaint states.

Miller solicited and collected around $20 million from private investors for Hurst Financial, most of whom were elderly, according to the suit.

The dollar value recorded with the associated trust deeds was far higher, which Stewart Title and Hurst Financial used as the basis for the percentage of fees it collected, the suit alleges.

None of the projects tied to those deeds was built, and the money is gone, the lawsuit states.

Entangled interests

Hurst Financial also allegedly commingled and withdrew money from escrow accounts in such a way that many millions of dollars worth of other loans may have been involved, according to the suit.

Hurst acted as a loan broker, soliciting money from hundreds of investors, promising them the money would go toward construction loans, which would pay them 12 percent interest until the principal was returned.

In 2007, the date of the company’s last filing with the state Department of Corporation, Hurst Financial showed more than 1,000 investors and almost $90 million in real estate loans.

Cuesta Title handled the escrow and title insurance on the majority, if not all, of the loans, and Gearhart was often the borrower promising to build specific commercial and residential projects with the money.

The suit alleges the three companies had many close associations with each other that encouraged them to help each other enrich themselves at the expense of their clients.

The companies also depended on each other for income, the suit alleges. That helped the companies lose sight of their fiduciary duty to their clients; they acted instead to help each other defraud their clients in a Ponzi scheme of millions of dollars, the suit alleges

All of Gearhart’s Hurst Financial loans went into default. Gearhart, who was once named Atascadero’s Citizen of the Year, has moved to Ohio and filed for bankruptcy protection.

Hurst Financial officers, Miller and his daughter, Courtney Brard, have surrendered their real estate license; and the company has lost its permit to sell securities amid allegations of fraud by state regulators.

Both Miller and Gearhart, as well as others involved in their transactions, are now under criminal investigation.

Although he has not been formally charged, Miller has been accused by the U.S. Department of Justice of racketeering, money laundering and interstate mail fraud, according to a recent seizure warrant on Miller’s home issued by the Federal Bureau of Investigation.

Cuesta Title, which was audited by Stewart Title at the beginning of this year, closed all of its local offices by early March — citing the economic downturn as the reason.