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Friday, Jul. 10, 2009

Kelly Gearhart accused of diverting $1 million to Salinan Indian casino effort

The former Atascadero developer is also accused of trying to hide his involvement with the Salinans from his creditors

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Attorneys involved in the bankruptcy of former Atascadero developer Kelly Gearhart allege that he improperly diverted at least $1 million from local investors toward a Salinan Indian effort to develop a Central Coast casino.

They also accuse Gear­hart of trying to hide his involvement with the Salinans from his creditors, according to a complaint filed in U.S. Bankruptcy Court in Ohio, where he now lives.

Ken Gibson — one of two attorneys acting on behalf of the U.S. trustee in the bankruptcy of Gearhart and his wife, Tamara — alleges that the developer may have diverted between $1 million and $1.5 million from investors in Atascadero-based Hurst Financial Inc. toward the Salinans’ business effort, according to a June 23 filing with the court.

Hurst Financial, a now-defunct firm that is facing legal and regulatory scrutiny, was among several local nonbank lenders who would pool funds from investors to make high-interest, high-risk loans that were to fund real estate projects.

Jay Hurst Miller, president of the firm, has acknowledged that he gave Gearhart — his key borrower — millions of dollars of investors’ money on a handshake.

He acknowledged that he did so without using formal agreements or standard controls on disbursing money to fund construction, according to a recent deposition in a San Luis Obispo lawsuit accusing Gearhart and Miller of fraud.

Gearhart — who is facing several lawsuits accusing him of fraud in connection with Hurst Financial — as well as a criminal investigation into those dealings, filed for bankruptcy protection in Ohio in February.

He was a prolific developer and builder in Atascadero for more than 10 years, and was once named Citizen of the Year by that city’s Chamber of Commerce. In the fall, Gearhart and his wife moved to his home state of Ohio.

The bankruptcy attorneys’ allegations represent only one side of the story. Gearhart could not be located for comment, and his attorney, Kate Bradley, would not return The Tribune’s repeated calls to her Ohio office.

Dealings with Salinans

The Salinans’ plans called for purchasing 2,500 acres somewhere in San Luis Obispo County or Monterey County, a 250,000-square-foot gaming casino, homes for about 400 people, a school, a hospital and a “green” energy plant, according to their business plan.

Gearhart failed to report his investment in the proposed reservation and casino development as an asset in his bankruptcy filings and was therefore acting with the intent “to hinder, delay or defraud his creditors,” according to Gibson’s complaint.

Representatives of the Salinan tribe say they will continue to pursue their plans to own and develop their ancestral lands, though Gearhart’s troubles and the ensuing lack of funds have caused the project to temporarily become “dead in the water.”

Tribal representatives believe Gearhart paid between $900,000 and $1.5 million for legal, consulting, researching and lobbying fees, as well as for a Salinan tribe office on Morro Road in Atascadero and its staff salaries.

Gearhart was to be repaid by the tribe with interest of four percentage points over the benchmark prime lending rate, but not until the gaming or other enterprises could provide the Salinans an income stream, according to their business outline with Gearhart.

Salinan Contemporary Council Lead Gary Pierce and tribe member Chris Molina — the latter a partner in the business proposal — told The Tribune that they did not question Gearhart’s source of financing because he appeared extremely wealthy at the start of the partnership.

“We knew he had a jet, and he told us he was worth about $100 million,” Pierce said, adding he had been happy to have found an investor willing to take the risk of supporting their efforts.

“I figured the only way he was willing to do this was because Molina was such a good friend of his,” Pierce said.

In spite of the rapid expenditure of between $1 million and $1.5 million from the beginning of 2007 to September 2008, Gearhart failed to pay tribal staff and attorneys working on behalf of the tribe an estimated $100,000 in services, according to Pierce.

Pierce said he does not think anyone oversaw Gearhart’s spending on behalf of the tribe, nor could he verify that Gearhart actually paid for what he now claims he invested.

“We trusted him; that’s all I can say,” Pierce said. “Nobody goes out and audits the person they’re getting a check from. … Now we don’t know how we can go forward without any money” from investors.

Molina is also worried that Gearhart’s now-suspect behavior will taint the Salinans’ efforts in becoming a tribe officially recognized by the federal government.

That recognition is a critical step toward forming their own reservation.