Former executives of Estate Financial of Paso Robles plan to plead quilty

In a surprise move, attorneys for former Estate Financial executives Karen Guth and Joshua Yaguda say their clients will plead guilty to 26 felony counts in what is the biggest financial fraud case in San Luis Obispo County history.

The pleading is set to take place at what was to be the beginning of a preliminary hearing on Monday in San Luis Obispo Superior Court. Those hearings are intended to determine whether a case could proceed to a trial.

At that time, Guth and Yaguda are expected to admit to all of the crimes alleged against them by the District Attorney’s Office.Those include fraudulently selling real estate-backed securities, illegally taking more than a half a million dollars and taking or destroying property worth more than $3.2 million.

Estate Financial, a lender based in Paso Robles, had collected $340 million from an estimated 3,000 private investors in real estate-backed securities before it started collapsing in 2007.

Called a “hard money” lending business, the company offered high interest rates to its investors.

The firm then lent that money to builders of homes and commercial developments — also at high interest — and promised investors return of their principal in one to three years.

Steve C. Smith — one of the two Southern California defense attorneys on the case — said Friday that the defendants were ready to plead guilty after Judge Jac Crawford told them he would consider a sentence of 12 years for Guth and eight for Yaguda, should they plead guilty to all the counts as charged by the District Attorney’s Office.

Those sentences “made sense for us,” Smith said.

At the same time, he thought investors would get what they were asking for.

“They’re pleading guilty ... they’re trying to take responsibility for what happened,” Smith said. “Karen is 67, so 12 years is practically a life sentence. On top of that, she will be penniless. ... She’s giving everything she had to restitution.”

Investors’ reactions

John and Colleen Childers, who helped organize Estate Financial investors in an attempt to put Guth and Yaguda in jail — and recoup their losses —said they will be happy to see Guth and Yaguda admit to wrongdoing.

“We’re upset it took so long to get to this point,” Colleen Childers said. “This last year’s been very frustrating, with those defense lawyers dragging things out.

“At least it’ll put an end to all the court hearings,” she added. “Although I’m still hoping they’ll do more time than what’s now being discussed by the judge.”

John Childers also said he still has a lot of questions about the losses the company suffered.

During the real estate boom, the business grew quickly, adding hundreds of millions of dollars worth of complicated real estate deed transactions.

Estate Financial not only sold securities to investors and then lent that money out, it also held a vested interest in a number of properties, further complicating its business.

After the real estate market began to collapse, Guth, who was Estate Financial’s president, said the subprime mortage crisis was to blame. Investors cried foul, and she put the firm in Chapter 11 bankruptcy protection in July 2008.

She and Yaguda — the vice president of the firm and her son — were arrested and charged with criminal malfeasance in October 2008. They have been in County Jail since, awaiting trial in lieu of posting $5 million bail.

Defense attorneys Smith and Dyke Huish had postponed the mother and son’s initial arraignment plea for months.

They said they needed more time to understand the complexities of the financial case. Guth and Yaguda pleaded not guilty on May 15.

Other terms of deal

For a week and a half, attorneys on both sides and Crawford have been discussing other terms and conditions.

Those include Guth and Yaguda’s agreement to waive the right for an appeal, give up their rights to all of their assets — so that they may be used to reimburse investors — surrender their license to the state Department of Real Estate and otherwise work to give their investors restitution for any losses caused by their firm, Smith said.

How much they owe investors, and how many people are owed, is yet to be determined, he said, adding, “Those kinds of things could take a year on their own.”

Guth’s defense attorney also pointed out that the decision to plead guilty will forgo a lengthy and costly preliminary hearing and trial.