INSIDE EFI: The Long Fall
May 3, 2008
Part 2: Maybe money does grow on trees
By DANIEL BLACKBURN
(Editors’ note: This is the second in a series examining the high-rolling, multi-million-dollar Paso Robles financial lender, EFI, and the fascinating reasons for its current critical condition.)
When Karen Guth angrily ordered the locks changed on the office housing Paso Robles’ Estate Financial Inc. (EFI) in February 2003, banishing her then-husband and partner, she helped set into motion a series of events that eventually would publicly expose both her private life and the inner working of her businesses.
And despite her penchant for marketing, the public attention has not been beneficial, to her or to the businesses.
Only last week, Guth learned that EFI’s permit allowing the sale of properties has been suspended by the California Department of Corporations. That’s the first overt action by a regulatory or law enforcement agency against EFI, but a cooperative investigation by San Luis Obispo County, state and federal agencies has been ongoing for the past month – with the Paso firm as a target.
The official probe into EFI’s practices is the outgrowth of a growing swell of anger, apprehension and legal activity by hundreds of EFI investors trying to find out where their money went. Investors are just now learning that the company currently has only 20 percent of its mortgage funds in current loans.
Charles Applebaum and his then-wife, Guth, purchased the financial brokerage in 1994. After the purchase, they divided their shares, and their duties. (The pair holds 85 percent of EFI; Guth’s adult son, Joshua Yaguda, owns the remaining 15 percent.) Guth and Applebaum own all of a subsidiary company, Republic Properties).
The man Guth calls “Charlie” became the target of her wrath in the aftermath of their marriage’s sticky breakup. Still, the inevitable divorce might have gone relatively smoothly, had Applebaum not quickly discerned that Guth was moving to lock him not only out of the office, but out of the vault, too.
This, and a whole lot more, is memorialized in a yet-growing mountain of documents, sworn declarations and other court documents, the paper fallout of four years of contentious litigation between Guth and Applebaum scrapping for the spoils of a troubled business. And it’s not over yet.
A lot was at stake when it came time to divide the couple’s assets. In 2004, Applebaum estimated their community property to be worth $10-15 million, and their business ventures another $10 million.
Applebaum’s first clue that he was being separated from both his spouse and the couple’s golden goose occurred when he read this in Guth’s response to his divorce action as she sought to gain exclusive management and control of their business interests:
“When Charlie abandoned me,” she alleged, “the bank cancelled our line of credit… several months ago, Charlie just disappeared,” she said in February 2004 court papers. “I have been running the businesses single-handedly. He has been hiring personal friends and interfering with contractors… helping himself to unusually large amounts of cash” from a Templeton service station they own. She said he leased a new Jaguar “shortly before he disappeared… (and) evidently now doesn’t want this car.”
She also belittled Applebaum’s contribution to EFI, claiming he had not been actively participating in the company’s operations “for years.”
Funny. That wasn’t the way he remembered it.
“If that was true,” Applebaum shot back through his lawyer, “then it is (Guth) alone who made the bad loans which the company has had to absorb. Those loans arose through decisions made by (Guth) in the use of various loan funds which resulted in losses of several million dollars.”
Applebaum said those bad loans “were transferred by EFI into Republic Properties so as to avoid having to hand them back to various investors in the projects… she wishes to use all the cash flow from these investments when sold to pay interest into EFI rather than use the cash flow of EFI to service EFI’s bad debt. This would have the effect of dramatically increasing the assets of EFI.”
As a result, EFI’s largest asset is a note receivable from Republic Properties, which is not collectible.
Applebaum said Guth “refuses to account in any meaningful way for the uses she has placed monies to in the past, and there is no reason to expect that she will be more forthcoming now.”
EFI’s business seeks to attract private investment money to fund construction projects. The so-called “hard money” loans cost, and sometimes pay, high interest rates. Builders often use these loans as “bridges” to complete projects.
It was Applebaum who was the managing real estate broker for EFI before the divorce. In his position, he told the court, he was responsible for establishment of loan-to-value ratios; review of construction plans; establishment of disbursement schedules; monitoring of the construction budget; and supervision of all construction. Applebaum described his professional attributes in an early 2004 divorce document: “…a B.A. degree in engineering, a Master’s in business administration. I am a certified financial planner and am a licensed California real estate broker. I have held a state general contractor’s license for 17 years.”
Once Applebaum was out of the picture, Guth turned to her son, Yaguda, to fill the empty chair. Yaguda took the state real estate broker’s exam, failed the first time, but got his license in late 2004.
The mother-son team then set out on a whirlwind marketing tour, snagging investors and pulling them in one EFI door while the loans were going out to builders through another. In a sworn deposition in March 2004, Yaguda explained his new role in EFI: “I explain to (investors) how we will handle their investments and I further answer any questions. I then try to sell them on the merits of our company and encourage them to invest with us.”
And for every dollar that Guth and Yaguda pushed into the hands of hungry developers, they took one, two, or three percent off the top for their services. There was no shortage of investors, and no shortage of supplicant builders.
When times were good, investors were making 12 to 14 percent on their money. Many simply rolled over their interest earnings into other projects. But according to court documents, Guth and Yaguda were collecting money, distributing it, and then failing to monitor construction money draws, or even the progress of building.
That had been Applebaum’s job.
While the feuding pair jockeyed for position in court, their assets slowly dwindled. They either sold or divided their stable of new vehicles – a Volvo, Jaguar, GMC Yukon, and two trucks. Residential real estate in Templeton and Cambria went on the block.
But even as Guth’s personal assets disappeared, she still found favor in the North County banking community. Around Feb. 1 2006, EFI got a $5 million unsecured revolving line of credit from Heritage Oaks Bank. In mid-November 2007, Heritage changed the terms of the loan. It was no longer a revolving account, and now was secured by collateral -– two gas stations owned by Guth and her son, Josh, one in Templeton, the other in Morro Bay.
As of January1, Guth owed Heritage Bank $1,180,629. And today, she still owes Applebaum $1.3 million. But she still has her $3 million Paso Robles ranch.
Or does she?
SUNDAY: PART 3: The shoe keeps falling.
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