Federal prosecutors think former Atascadero Citizen of the Year Kelly Gearhart should get at least 11 years in prison for defrauding hundreds of investors in a Ponzi real estate scheme, according to a court document filed by the U.S. Attorney’s Office.
Gearhart, 53, had been a prominent local developer whose properties included the Atascadero Factory Outlets and the city’s historic Printery building, which he had planned to transform into an upscale events center. But even before he and his wife were named Citizens of the Year in 2006, he was engaging in fraud, according to the U.S. Attorney’s Office.
In 2012, Gearhart, who now lives in Wadsworth, Ohio, pleaded guilty to two counts of wire fraud and one count of money laundering at the U.S. District Court in Los Angeles.
He was set to be sentenced in that same court Monday, but after some witness testimony, the hearing was continued to June 29, said Thom Mrozek, a public affairs officer with the U.S. Attorney’s Office for the Central District of California.
Federal prosecutors are seeking a term of 135 months, according to a 21-page sentencing position filed with the court.
“Many of the victims entrusted defendant with large amounts of money, some of which the victims needed for retirement,” the statement reads. “A long sentence is necessary to protect the public from defendant getting back into the real estate development business or working in fields that afford him unfettered discretion over how money is spent. Simply, the longer defendant is in custody, the longer he is segregated from those whom he might victimize.”
The report cites charges relating to more than 250 victims. In civil court, roughly 500 plaintiffs sued Gearhart, claiming they were swindled. According to federal prosecutors, Gearhart’s crimes defrauded investors of more than $14 million.
Gearhart, an Atascadero High School graduate, began buying, improving and selling land while working at the California Men’s Colony, according to The Tribune’s archives. He eventually became a high-profile North County developer, known to give back to the community.
In 2006, the Atascadero Chamber of Commerce noted that the Gearharts had given more than $500,000 to the high school and nonprofit organizations, including a North County animal shelter and Loaves and Fishes.
It was around 2004, the U.S. Attorney’s Office said, when Gearhart began committing fraud, raising money with the aid of Paso Robles-based hard-money lender Hurst Financial.
Hard-money lenders provide funds to borrowers at high interest rates, typically about 12 to 14 percent. The lenders pool investor money into securities typically backed by real estate deeds. As such, hard-money loans are considered a high-risk/high-return
Working as a middleman, Hurst owner James Hurst Miller Jr. recruited investors, executed investment contracts, collected funds from investors and gave the money to Gearhart, according to the sentencing report. He also paid investors.
Miller, who has pleaded guilty to four counts of fraud and money laundering, will be sentenced in federal court July 27.
Gearhart promised investors that their money would be used to develop specific projects and would be secured by specific pieces of property. Yet by 2008, Gearhart’s troubles became apparent when multiple lawsuits were filed against him. That same year, a criminal probe was launched.
“Eventually, defendant’s business failed, at which point the fraud came to light,” the sentencing report notes.
While the scheme was convoluted, the report said Gearhart’s crimes could be easily described.
“This case can be summarized in one sentence: Defendant solicited funds from victims by making false promises, which he did not honor.”
Instead of using investor money to develop real estate projects as he’d promised, Gearhart spent the money on other things, including making interest payments to previous investors — typically referred to as a Ponzi scheme. While he promised victims their investments were secured by specific lots, he sold the same lots to different people and used them as collateral to obtain loans from two different banks.
His biggest real estate project was Vista Del Hombre, a Paso Robles golf course on which Gearhart vowed to build an office park.
Investors for that project included Chuck Liddell, a former UFC champ and “Dancing with the Stars” contestant who purchased four lots for $2 million while living in San Luis Obispo.
Between 2004 and 2008, Gearhart transferred $12.9 million of investor money into his own account, according to the U.S. Attorney’s Office. Although not all of that money was used for personal means, the investor money was Gearhart’s only income.
“In that sense, defendant and his wife were living off his failing business while making false promises to victims,” the report states.
According to civil trial testimony and bankruptcy records, the Gearharts’ possessions included a private jet, a 1935 Packard convertible and a 1956 Chevrolet. The couple claimed about $6.5 million in assets and $45.1 million in estimated debts, according to 2009 filings with the Ohio Bankruptcy Court.
As a result of Gearhart’s bankruptcy, many of the victims have focused their lawsuits on Cuesta Title, the title company that handled escrows for Gearhart, along with related companies Stewart Title of California and Stewart Title Guaranty.
Civil suits filed by Liddell and two other parties against those companies are being tried in San Luis Obispo Superior Court.