Giving fraud a bad name: The Ponzi scheme
Convicted fraudster and former Atascadero “Citizen of the Year” Kelly Gearhart will serve five years less than expected in federal prison due to a judicial error in his sentencing.
Gearhart, 57, was serving a 168-month sentence in the minimum-security Federal Correctional Institution, Morgantown in West Virginia for his guilty plea to wire fraud and money laundering charges in U.S. District Court in 2014.
The charges stemmed from several real estate projects Gearhart spearheaded with an Atascadero hard money lender between 2004 to 2008 that may have cost investors upwards of $20 million.
But Gearhart, whose last city of residence was Wadsworth, Ohio, argued in his appeal that the District Court judge erred when he was sentenced to 14 years for three charges when the statutory maximum he should have faced was 10 years.
On June 10, U.S. District Court Judge Otis D. Wright II re-sentenced Gearhart to a total of 108 months, or, nine years.
Ciaran McEvoy, spokesman for the U.S. Department of Justice, said Gearhart is now expected to be released in March 2023.
Reached by phone Monday, Gearhart’s Los Angeles-based attorney, Steven Brody, declined to comment on his client’s new sentence.
Gearhart was indicted in 2012 on 16 counts of fraud and money laundering by a federal grand jury in U.S. District Court in Los Angeles.
According to the indictment, Gearhart solicited investors to loan him money for various real estate projects, including Vista Del Hombre, a large-scale Paso Robles development that would have included a golf course and office park, telling stakeholders that their loans were secured with specific lots from the project and would be paid back with interest.
But the U.S. Attorney’s Office said at the time that Gearhart admitted in court that he sold the lots associated with the development project while using the same lots to secure bank financing.
When Gearhart defaulted on those loans and declared bankruptcy, the victims lost the collateral securing their loans.
The U.S. Attorney’s Office previously said in 2015 that as much as $20 million may have been lost.
A sentencing memorandum filed by the U.S. Attorney’s Office in May 2019 states that when Gearhart’s scheme collapsed at least 15 people he personally dealt with lost at least $7,620,000 and two banks had made loans directly to him totaling $3,037,500.
In an indictment preceding his plea, a grand jury alleged that Gearhart’s Ponzi-like scheme involved using investor money to support his lavish lifestyle with luxury items, and to make interest payments to investors on other real estate projects.
Gearhart’s case was related to that of James Hurst Miller, Jr., an Atascadero lender and former president of Hurst Financial Corp.
Miller’s firm acted as a middleman and pooled investor money for various projects, promising a high return. He then gave millions of dollars in loans to Gearhart, as well as other local builders, to develop the projects, according to Tribune archives.
Miller, 71, also took a plea deal in the case, pleading guilty to fraud and money laundering charges and agreeing to testify against Gearhart. He was sentenced in 2015 to seven years in prison and remains in custody at the medium-security U.S. Penitentiary in Leavenworth, Kansas.
Miller is scheduled for release in December 2020.
Gearhart appealed his sentence in 2015, arguing that Wright erred in calculating his time behind bars.
The Ninth Circuit of Appeals agreed the sentence was the result of “plain error” in 2017, vacating the sentence and sending the case back to Wright’s courtroom in U.S. District Court in Los Angeles with instructions to re-sentence Gearhart after making specific findings affecting the total loss amount, among other legal issues.
In their sentencing memo, federal prosecutors wrote to Wright that a sentence of 108 months was appropriate.
According to Gearhart’s sentencing order, once released from prison, he will be subject to stringent terms of probation, including giving federal officials access to his one permitted personal checking account and being prohibited from applying for any loan or open any line of credit without prior approval of his probation officer.
He’s also not allowed to transfer, sell, give away, or otherwise convey any asset with a fair market value of more than $500 without approval of his probation officer until all financial obligations imposed by the court have been satisfied.