NEVADA CITY His personal finances in disarray and his ability to do his job compromised, Nevada County District Attorney Clifford Newell sat in a local cafe, eyes welling, as he described how he became beholden to a loan broker who is under investigation for bilking investors.
A few years ago, Newell and his wife assumed crushing debts to keep their summer camp business solvent. Unable to get a conventional loan "Neither of us were qualified," Newell said they borrowed from what is called a "hard money" broker, the equivalent, some say, of a legal loan shark who uses others' money to make high-priced loans.
That decision inextricably linked Newell, the county's top law enforcement officer, to Philip Lester. That hard money broker has since been accused by investors of cheating them, leading to investigations by police, and now the state attorney general's office, for securities fraud.
A yearlong Bee investigation found that Newell, 54, received favorable treatment on his own loans from two hard money brokers. Documents show that one of them, Lester, tried to help the Newells avoid foreclosure and possible bankruptcy by raising money for a loan and misleading investors who contributed.
Lester has since forfeited his lending license, ceased doing business, and admitted to numerous violations of laws designed to protect investors, involving other loans. Newell said he did not know about the false statements to investors and could recall little about his own transactions with Lester.
Newell said he and his wife "were moving property and loans, trying to keep all the balls in the air. Some of it was smoke and mirrors."
Newell's ties to the broker offer a window into a culture of fraud in the hard money community in Nevada County. A Bee review of thousands of pages of court and regulatory filings shows that for more than 20 years, a number of hard money brokers have misused or stolen their investors' money. Some brokers landed in prison; many investors lost their life savings.
Abuses typify the hard money industry. A Bee review of statewide data for the biggest 344 brokers operating around the peak of the real estate bubble found one out of every four has been accused of wrongdoing or sanctioned by the state Department of Real Estate in the past decade.
Hard money brokers targeted Nevada County because it had become a magnet for retirees and others with hefty nest eggs. At the peak, hundreds of local investors put up about $130 million for such loans, according to public records and brokers. Lester's business alone raised $40 million from people who were eager to get in on real estate appreciation and construction projects. Their money was pooled into loans with extraordinarily high interest and fees, often provided to borrowers who did not qualify for bank loans.
When property values imploded and the recession settled in, investor allegations about missing money started reaching Newell.
When asked, Newell said he followed up on complaints as well as he could given his small staff of nine attorneys. First elected in 2006, Newell said he recently opened prosecutions against contractors who allegedly misused investor money and has carefully avoided conflicts of interest.
Margaret Fowler doesn't believe that. One of several investors who said their money disappeared, she blames Newell for not pursuing fraud allegations because of his financial ties to the industry.
"Victims' complaints were basically ignored," Fowler said.
Newell said he never was asked by a law enforcement agency to prosecute Lester or his company, Gold Country Lenders Inc. When he learned local police were looking into complaints of fraud against the firm, he said he had a conflict. "I was very upfront with the investigating officer that I had a personal relationship with that business and that I shouldn't be involved in it whatsoever," Newell said.
'Legalized loan sharking'
Done honestly, hard money fills market gaps, funding worthy projects rejected by banks. But the loosely regulated industry also invites fraud.
The hard money process is simple. Brokers function like private banks for people who don't qualify for a traditional mortgage or need money fast. Unlike banks, brokers care less that borrowers have enough income to make their payments than about the value of property used as collateral in case of default.
One broker said it's called "hard money" because of "hard to swallow" terms, often double the cost of conventional loans. Such deals cause many unsophisticated borrowers to lose their property to foreclosure.
"Hard money lending is the real estate equivalent of a pawn shop," said Bert Ely, an independent banking analyst in Alexandria, Va. "Some might call this legalized loan sharking."
Nevada County brokers raised money from investors, some savvy, others naive. Some investors said they failed to keep records, didn't monitor projects and weren't even sure where the money was invested, and didn't care, as long as the profits rolled in.
But Nevada County's hard money losses were particularly severe due to a deeply rooted culture of fraud, according to investors, convicted brokers and public records.
Debbie Warnke, 50, said she grew up in Nevada County, and knew hard money brokers through her work at a title company. She lost $110,000 in a hard money transaction gone bad.
"Nevada County seems to be the cesspool of this kind of activity," she said. "(The brokers) are all friends. They are all in a little loop. It's been that way for years."
Problems included overly high appraisals, shoddy project oversight and fraud.
"You learn from your role models," said E. John Vodonick, a local attorney who prevailed in court against a broker. "And the role models are often not honest people."
The original role model in Nevada County was the late Donald Timoney, who in 1979 wrote the book on hard money: "Borrow, Lend and Get Rich."
Timoney was convicted in 1995 for running a Ponzi scheme. In that fraud, investors are promised high returns but paid with new investors' funds, while perpetrators skim money off the top. Ponzi schemes typically collapse when raising enough money to pay off earlier investors becomes impossible.
"Your hardest work," he and a co-author wrote, "is just to sit back and figure out how you will spend the money."
'Investors are greedy'
Since 1991 in this small county, Timoney and three other hard money brokers have gone to prison. Four more have lost their licenses, and four of their borrowers have been charged with or convicted of bilking investors.
Most of the brokers were linked by family ties or close business relationships. When one has been legally sanctioned or jailed, the others usually have carried on under new company names, using some of the same employees. One escrow officer worked for three different brokerages whose owners went to prison.
Lester, 63, opened Gold Country in 1991 and became one of the county's most prominent construction lenders, financing loans from the bundled savings of neighbors and acquaintances. He gained stature as a local philanthropist whose luxurious home overlooks the Auburn Valley Golf Club, which he once owned.
When Lester's business crumbled during the Great Recession, some of his investors seniors living on fixed incomes said they lost their life savings.
At a glance, Lester and his backers suffered just another hard luck story in tough times. Under the surface, his descent into legal jeopardy and financial ruin is the latest chapter in a history of local brokers who made and squandered fortunes by doing business with often-desperate borrowers and inexperienced or inattentive investors.
Last year the California Department of Real Estate accused Lester of a dozen violations of real estate law.
Sitting in the golf club's restaurant recently, Lester acknowledged, "I was guilty of every single one."
He excused his transgressions as trivial, and described the laws he broke as ambiguous and obscure. He didn't fight for his license, he said, because he could no longer afford an attorney. Gold Country's funding was gone and Lester's personal fortune spent, he said, in a vain effort to make investors whole was gone with it.
Lester accused a handful of investors of distorting his actions.
"Investors are greedy. They got used to getting this check every month," he said, later ending the interview in a tearful, profanity-laced tirade. "Don't come to me after the market has crashed and suggest I did some (action) that was illegal or unethical."
'The money is gone'
Yet investors sometimes doubted Lester's motives when they lost vast sums to failed construction projects in which he played conflicting roles.
In 2004, Lester and some partners bought a large tract of wooded hills beside Empire Mine State Historic Park. Dubbed the Osborne Hill Project, the partnership planned to build a luxury community with open space and views of the snow-capped Sierra. Lester's Gold Country investors were going to fund the project.
Lester and his partners soon realized the land might be contaminated by toxic mining hazards. To speed the development process, the Osborne Hill Project sold a part of the land thought to have the worst contamination to Curtis Haidle, a contractor who had worked with Lester on prior projects. Haidle planned to build one or more homes on the smaller parcel.
Lester's Gold Country loaned Haidle $750,000, to buy and develop the land. Of that, $450,000 was supposed to be set aside in a bank to pay for construction, according to an account of the transaction Haidle provided to The Bee.
So, wearing his Gold Country hat, Lester raised money from investors, then arranged for the funds to be loaned to Haidle. Wearing his Osborne Hill Project hat, he sold the property to Haidle and received $300,000 in Gold Country investor funds. In that way, the funds traveled a circular path back to Lester and his Osborne Hill partners.
The apparent conflict of interest might never have been an issue if Haidle's project succeeded. But when he moved to begin construction, the county refused to issue permits before the mine waste was examined and, if necessary, remediated, according to Haidle and public records. In a written account of the episode, Haidle said that was the first he learned of the problem. He concluded that he had been duped by Lester to buy tainted property.
Five years later, not one shovel of earth has been turned.
By law, investor funds for a specific project can only be used for that project. So the remaining $450,000 for construction should be available. But Haidle and some of the investors who provided the loan said Lester wouldn't tell them what happened to the leftover funds.
Kenneth Wurzel was one of the investors, having contributed $70,000 to the project. "The money is gone," he said. "Where did it go?"
Lester said he couldn't remember details of the deal and declined to check his records. Nor would he provide specifics on the flow of money in far larger projects that failed, leaving other investors with barren land whose value has since plummeted.
In August 2010, the Department of Real Estate accused Lester of serious violations of real estate law on a number of loans other than Haidle's. Among the charges: Money went missing from his investor trust funds. He improperly loaned investor funds to his own development company, the Linx Group. He failed to ensure that customers didn't invest more than 10 percent of their assets a safeguard to protect investors. He failed to place construction funds into an escrow account managed by a third party.
In December, Lester surrendered his license.
A law enforcement official with knowledge of the case, but who was not authorized to speak on the record, said the state attorney general's office has been investigating Lester and Gold Country for possible securities fraud.
Fowler, who expressed concern about the district attorney's inaction, and her husband, Dennis, complained about Lester and Gold Country at meetings with state investigators and prosecutors beginning two years ago.
The Fowlers have more than $350,000 tied up in Gold Country loans. If they and other investors are lucky, collateral property from Gold Country's $40 million in loans will be sold and they will recover some of their funds.
Paul Ggem, 81, and his wife, Eve, 72, entrusted Lester with about $400,000 of their retirement savings. It's nearly all gone. The Ggems filed a complaint with the Department of Real Estate, alleging that Lester failed to identify himself as the borrower on loans he brokered.
Eve Ggem was forced out of retirement and sells women's handbags at a Macy's in Southern California, where the couple now live.
"It just changed our lives," she said, "I'm just really devastated."
'I did him a favor'
Nightmarish real estate mistakes that changed the life of District Attorney Newell started with a simple dream he shared with his wife, Kelly.
The two met in the 1980s as young counselors at Snow Mountain Camp in the Nevada County foothills. He taught water skiing and sailing, she taught arts and crafts. They fell in love with each other and with summer camp life. Years later, after they had married, Snow Mountain went on the market. They leaped at the chance, Newell said, spending their life savings.
The economy tanked, followed by the Sept. 11 attacks. Amid parental anxiety, the camp foundered, he said.
"When it came to the camp business it was all heart," Newell said, tearing up as he described serving children and teaching young adults. He said he thought at the time, "we've got to save this thing."
Local hard money became a lifeline.
In 2004, real estate filings show, the Newells borrowed $1.7 million from hard money broker Olympic Mortgage and Investment Co. The couple later sold off a few parcels from Snow Mountain and refinanced with Olympic. But by late 2007, a year after Newell was elected district attorney, he said, they had were having trouble making payments. Lester, a casual acquaintance, came to the rescue.
He promised to loan Newell $700,000 at 11 percent interest, records show, although he was never able to raise enough from investors to cover that amount. Lester said the money was to pay off the Olympic loan. Newell said it was to hold Olympic and other creditors at bay, but didn't recall the loan's amount or terms.
Lester proudly defended his handling of the district attorney's loan.
"I did him a favor," Lester said, adding with a laugh, "In case I ever kill anybody." Speaking seriously, Lester called the loan a gesture of good will similar to others he offered to people in the close-knit community.
Gold Country loan and disclosure documents show that in the process of helping the Newells, Lester misled his investors. He told them that if the Newells defaulted, they would be first in line to foreclose on the camp property and recoup their investment. Loan documents show that this was untrue Olympic held that first position.
Pool, the Department of Real Estate spokesman, said such actions sounded like "willful misrepresentation" that could provide "grounds for civil and potentially criminal action."
Lester denied misleading investors, but would not answer questions about his disclosures.
In essence, Gold Country investors had unwittingly given the Newells a loan effectively unsecured by any collateral, particularly given plummeting local land values. The issue was important because Lester raised no more than $260,000 for the Newell loan far below what the Newells needed to pay off Olympic, a move that would have made the camp property valid collateral for the Gold Country loan.
Apparently assuming that he could eventually raise the remaining funds from other investors, Lester had the Newells sign a deed of trust that indicates a loan of $700,000 among the details of his transactions with Lester that Newell said he didn't recall.
In March 2009, Lester wrote to his investors that the Newells had money trouble. In part, he said, Snow Mountain Camp was no longer worth enough to provide adequate collateral. Calling the Newells "very good borrowers," Lester didn't mention the couple were in danger of defaulting on their Olympic loan, or that his own investors would lose their money if the Newells defaulted.
Lester then gave the Newells another generous favor the kind of loan modification that thousands of other Californians under water with their home loans have struggled in vain to obtain from their lenders. Lester dropped the Newells' interest rate from 11 percent to 7 percent, saving them up to $10,000 per year. He also switched the collateral to a parcel the Newells co-owned in Sutter County.
Newell found out that the Grass Valley Police Department was investigating the broker. Newell told them he could not be involved, to avoid a conflict. Law enforcement agencies also sent Newell two allegations of wrongdoing with investors' money by David Lester, Philip Lester's brother and former employee.
Newell's office declined to prosecute David Lester for lack of evidence, but after The Bee's inquiries, Newell said he reconsidered and sent the complaints to the state attorney general's office.
Newell and his wife continue to pay interest on the Gold Country loan, he said, although the balloon payment for the principal is long past due.
Their summer camp dream finally ended in the form of one last favor this time from Olympic. In June 2009, Olympic accepted portions of Snow Mountain Camp in lieu of payment of more than $614,000 still owed, allowing the Newells to avoid the credit-ruining foreclosure process.
Newell said the transaction was fair, but according to the Nevada County Assessor's Office, the parcels Olympic accepted were worth only $570,000 in effect, Olympic forgave $44,000 of the Newells' debt. The most recent assessment dropped the property's value to $508,000.
"We could have gone to foreclosure, but it costs money to do that," said Phil Ruble, the company's owner. Olympic now called Olympia could sell the property when the market recovers hoping to avoid a loss, he added.
Despite favors from their lenders, the Newells' financial distress extended to their home loan. The bank holding their mortgage filed a notice of default this year after the couple fell behind on their payments. Newell said he is close to working out a short sale, in which the property is sold for less than the amount owed without foreclosure.
"Free and loose money lending is the crux of the whole problem," Newell said, reflecting on how his debts grew beyond anything he imagined a few years ago.
He added: "From the very beginning I wondered, 'why?' "