INSIDE EFI: An Investors Nightmare
May 1, 2008
Part 1: Divorce sparks nasty public war
By DANIEL BLACKBURN
(Editors’ note: This is the first in a series examining the high-rolling, high-interest, high-risk, hard money business, and a close-up look at the primary players in one multi-million-dollar Paso Robles firm that may be headed for big trouble.)
The downward spiral in which Paso Robles’ Estate Financial Inc. (EFI) now finds itself probably started with a kiss.
Escalating personal problems between EFI’s two co-owners, Karen Guth and Charles Applebaum, eventually caused their 2004 divorce and created an environment that fostered the brokerage firm’s escalating fiscal morass.
Now the hard-money lender “is sinking fast,” according to one, “with only 20 percent of the mortgage funds invested in current loans.”
Last week, the California Department of Corporations suspended EFI’s permit to sell real estate investments while the state agency investigates dozens of complaints from EFI investors worried about their money. A series of meetings in the county over the past few weeks have attracted hundreds of investors seeking information from Guth, and ways of recovering money they have invested with EFI. The company has stopped making interest payments to many investors, and Guth has been reluctant to answer queries from investors regarding the whereabouts of their money.
Applebaum, who helped purchase the financial company in 1994 but is no longer directly involved with the firm, made those and other assertions over a four-year period during which the couple first divorced peacefully, then launched a bitter exchange through their lawyers and filed a string of legal maneuvers in disputes over distribution of the couple’s personal assets. An acrimonious confrontation centering on an alleged extramarital relationship fueled the protracted property dispute that even today continues to wind through San Luis Obispo County courts.
Guth unsuccessfully attempted to have all court proceedings relevant to the divorce kept confidential, but abandoned that effort when Applebaum dissented. That opened the door for public examination of EFI’s business operations and the practices of Guth and her son and subsequent co-partner, Joshua Yaguda. Applebaum has blamed the pair for EFI’s current critical condition.
Applbaum’s sworn assertions suggest that Estate Financial’s slide began when he and Guth separated in the aftermath of heated allegations.
The former EFI partner called into question specific financial moves made by Guth on behalf of EFI, some of which he termed “very questionable.” Appelbaum, who no longer lives in California, detailed private spending habits of Guth, as well as her distribution of investors’ funds in court records obtained by UncoveredSLO.com. In those court documents, he makes a number of predictions that many of EFI’s thousands of investors may find disturbing.
In a “Memorandum of Points and Authorities” filed with the court in 2004, the EFI principals described their business in this way:
“EFI is a licensed and regulated brokerage business. The company seeks out investors who are willing to deposit money with them. Then the company seeks out real estate builders and developers in need of money to operate their projects. The company examines and qualifies the builder and developer customers. It examines the proposed building and development projects. It then makes a decision as to which builders and developers and to which building projects it will recommend to EFI investors. EFI then handles all loan arrangements, include but not limited to loan escrows; establishment of loan-to-value ratios; review of construction plans; establishment of disbursement schedules; monitoring of the construction budget; supervision of construction; and handling of any contingencies that may occur as the projects proceed.”
Most of those particular duties, Applebaum would later assert, were handled by him; he was the one with the proper training, licenses, and expertise to oversee the construction into which investors were putting their money.
The memorandum continued:
“On the other side of the business, EFI has an active program of soliciting prospective investors by marketing and advertising its services. It interviews and qualifies prospective investors and then collects investor monies, deposits and accounts for the money, decides which investors will place their money in which projects, and apportions the money in each project so as to minimize the risk to the investor. EFI also insures that the investor’s position is secured by a first trust deed encumbering the project.”
This was the side of the business for which Guth was primarily responsible, according to court documents.
Within hours after the couple’s February 2003 separation, Applebaum said, Guth changed the locks on the business.
“She did not provide me with a key to the business for several months,” Applebaum told the court. “Ms. Guth’s lawyer then directed me not to speak to employees in the business… (which) cut me off from having direct access to individuals who operate the computer systems of the business.”
That made it impossible for him to handle his particular responsibilities to either of the two businesses the couple owned, he claimed.
Describing those companies, Applebaum said, “The company operations consist of EFI, which receives investments and makes loans to developers; and Republic Properties, which takes on defaulted loans where developers have failed.”
Then Applebaum suggested that it was not only developers who had failed:
“(Guth’s) mismanagement has led to loans being applied in ways that were improper,” said Applebaum in the papers. “In those projects during the past several years, the parties have transferred some of these projects to Republic Properties to build out the projects and attempt to salvage the loans. Luckily for the companies and the parties, the rising real estate market has allowed us to break even or make money on most of these projects.”
That limited success was possible only because Applebaum was overseeing those projects, he said, “until his exclusion from the business.”
Much of the couple’s marital business, and the resulting transparency of their financial businesses, likely would have remained away from public scrutiny had not their fight over property lasted so long. Or, if Guth had completed her court-ordered obligations to Applebaum (she still owes him $1.3 million), he might not have been inclined to say things like this about his ex-wife in sworn court documents:
“Not only is she failing to follow court orders, but (she) acts indifferent to corporate law by offering security in assets that are not hers to offer. (Also) it is clear that (Guth) is scrambling to protect herself and her best property while Estate Financial, with only 20 percent of the mortgage fund invested in current loans, is sinking fast. I have no reason to believe this situation is going to improve soon.”
He suggested Guth “is trying to protect whatever she can at whatever cost to others while her financial ship slips below the water line.”
TOMORROW: Part 2: Making money with, and for, EFI.
Tags:, Applebaum, Estate Financial, Fraud, Guth