Former real estate developer and Atascadero Citizen of the Year Kelly Gearhart pleaded guilty Wednesday in federal court in Los Angeles to fraud and money laundering charges after scamming investors out of up to $20 million.
Gearhart, 53, who now lives in Wadsworth, Ohio, accepted a plea agreement with prosecutors Wednesday and pleaded guilty to two counts of wire fraud and one count of money laundering.
Prosecutors plan to seek a term of more than 11 years in federal prison when Gearhart is sentenced on Dec. 29.
Gearhart was indicted on 16 counts of fraud and money laundering by a federal grand jury in U.S. District Court in Los Angeles in 2012.
Those charges stemmed from several Gearhart projects from 2004 to 2008.
With a deal to plead guilty to two counts of wire fraud and one count of money laundering, the remaining counts of the indictment will be dismissed at sentencing, the plea agreement states.
The plea agreement also permits prosecutors to seek restitution for victim investors of the Vista Del Hombre project, as well as any other project related to Gearhart involving fraud — a figure the U.S. Attorney’s Office said could be as high as $20 million.
However, it remains unclear whether there is any money available to repay victims, said Thom Mrozek, public affairs officer for the U.S. Attorney’s Office.
“It is very common in fraud cases for fraudsters to rapidly burn through money from their victims,” said Mrozek.
He said the financial litigation unit of the U.S. Attorney’s Office will continue to look for assets such as bank accounts, houses and cars that can be appropriated for victims even while Gearhart is in prison serving his sentence.
“There is not a bank account with $20 million sitting in it that we will be able to get for the victims,” Mrozek said.
One Los Osos victim, Kelly Christensen, said Wednesday that his ordeal has been devastating.
“It destroyed my life,” said Christensen. “As far as I am concerned, he is a murderer. He is the worst and he got away with it. I don’t feel 11 years is enough of a stretch. He ruined people’s lives by the hundreds.”
Christensen lost $73,000 after investing almost all of his savings with Atascadero hard-money lender Jay Hurst Miller, who worked in connection with Gearhart.
Miller previously pleaded guilty to fraud and money laundering charges and is scheduled for sentencing in September.
In his plea agreement filed late Tuesday, Gearhart admitted he intentionally made misrepresentations regarding his Vista Del Hombre real estate project to encourage investment from his victims.
“Defendant made his misrepresentations with the intent to commit fraud, and they were material because they influenced the victims to part with their money,” according to the plea agreement signed by Gearhart Tuesday.
According to the indictment in 2012, Gearhart solicited loans from investors, telling them they were secured with specific lots from the project and would be paid back with interest. But according to the U.S. Attorney’s Office, Gearhart admitted in court that he sold the lots associated with the development project even though they were supposedly used to secure the loans. He further admitted to using the same lots to secure bank financing.
In the indictment preceding Wednesday’s plea agreement, the grand jury alleged that Gearhart did not own the land and was instead using investors’ money for his “lavish” lifestyle and for other “luxury” items; to make interest payments to other investors on other real estate projects; and to develop other projects.
The plea agreement allows prosecutors to prove at his sentencing that Gearhart made additional misrepresentations as part of the scheme, according to a news release.
Each wire fraud charge carries a statutory maximum penalty of 20 years in federal prison, and the money laundering charge carries a maximum of 10 years.
Gearhart’s attorney said he will fight against any sentence of more than 57 months, according to the U.S. Attorney’s Office, but U.S. District Judge Otis D. Wright II may legally consider a statutory maximum of 50 years in prison.
The U.S. Attorney’s Office told Gearhart that it does not intend to prosecute his wife, Tamara Gearhart — a statement that Gearhart insisted be included in the plea agreement.
The U.S. Probation Office will prepare a lengthy pre-sentence report that will be considered by the judge at the time of sentencing.
Gearhart’s case was related to that of Miller, the former president of the Atascadero-based Hurst Financial Corp. Miller pooled investors’ money for real estate investments, promising them a high return. He then gave millions of dollars in loans to Gearhart, as well as other local builders, to develop the projects.
In 2007, the company had about $86 million in active real estate-secured loans and more than 1,200 investors, according to state documents.
The company gave a $1.5 million loan to Gearhart through his corporation, Morro Road Homes LLC, and regulators allege that Hurst Financial worked with Gearhart to bilk some investors by transferring properties that secured that loan without their knowledge.