INSIDE EFI: Under The Microscope
May 4, 2008
Part 3: The good times are gone
(Editors’ note: This is the third and final article in a series examining the high-rolling, multi-million-dollar Paso Robles financial lender, EFI, and its current problems.)
By DANIEL BLACKBURN
One of the down sides of divorce is its very public nature, proceedings often revealing things about people they’d rather keep secret.
Had it not been for the bitter 2004 divorce of Guth and Charles Applebaum, then co-owners of Paso Robles’ Estate Financial Inc. (EFI) and Republic Properties, much regarding their businesses probably never would have found its way into the public domain. And if legions of investors were not today concerned about money they’ve invested with EFI, details of the pair’s divorce would have interested few.
But now the once high-flying North County hard money lending firm — bending under pressure from simultaneous federal, state and local investigations — is more exposed today than ever before. Complaints have been raised about the firm’s practices and investors have voiced concerns about conflicts of interest, mismanagement, and improper use of EFI’s mortgage fund. Investors have gathered by the hundreds in a series of meetings all over San Luis Obispo County seeking ways to recover monies that had been entrusted to EFI. Last week, the state Department of Corporations lifted EFI’s permit to sell off any of its real estate investments while the agency probes dozens of formal complaints.
EFI is in the business of making construction loans, charging high interest and – when times are good – paying high dividends to investors. When the real estate market began souring, Guth told investors that EFI’s slide was temporary, that it was just a result of the market downturn. But when investors had more questions than answers, the EFI story began to unravel.
Much of EFI’s present quagmire can be traced to Guth’s and Applebaum’s divorce, and to the couple’s increasingly hostile court confrontations over division of their personal assets… battles which continue even today.
Court documents spanning four years show that Applebaum’s departure had several immediate effects: Guth cranked up the sales and marketing machine, and EFI stopped paying much attention to construction projects in progress. In the years immediately following Applebaum’s departure, Guth and her new partner, son Joshua Yaguda, began concentrating almost exclusively on attracting new investors and making new loans.
After all, that was how they got paid: for each dollar that went out in a loan to a building contractor, EFI took one to three percent right off the top. There was more motivation to loan, less to maintain any semblance of quality control of any project.
The increased effort bore fruit. In a little more than 12 months after Applebaum left the firm, Guth and Yaguda had increased EFI’s mortgage portfolio from $95 million to $135 million.
Guth was hitting her stride in a very fertile real estate marketplace. “Fundamentally, I am a saleswoman,” she said in court documents describing the separate professional functions of the feuding couple.
In those 1994 documents, Guth explained why she thought additional business was accruing to EFI after Applebaum’s departure:
“We maintain excellent lender records and notes to ensure investors get whatever special attention they require,” she avowed. “Overwhelmingly, the reason new investors seek us out is because they have been told that when you call EFI you can always talk to Karen or Josh. Secondarily, EFI’s excellent reputation for protecting their investors, providing a continuous stream of loans for them to invest in, and the level of explanation, disclosure and attention they receive from us.”
Applebaum, on the other hand, said he didn’t think EFI’s expanding portfolio was attributable to Guth’s “expertise and personal effort,” but to the simple fact that “demand for capital in the construction market and the ability to pay ten percent when banks are paying one percent.”
And the big numbers Guth and Yaguda were putting up were misleading, he testified: “As of Nov. 28, 2007, of some approximate $172,687,619.32 in construction loans (assets) only $36,160,142.99 was invested in current, performing funds… (thus) “it is clear that only 21 percent of the entire mortgage fund portfolio is current and performing.”
Early in the property division fight, Applebaum sought financial information on one of the couple’s companies, Republic Properties. When EFI would make a bad loan, Guth would transfer it into Republic Properties, he told the court, because “she wishes to use all the cash flow from these investments… to pay interest into EFI.”
Information he sought, including the status of construction projects, was not provided, he reported.
Because Guth was at the time claiming that monthly debt service was costing EFI $107,106, Applebaum said he believed the bad debt portfolio carried by Republic Properties exceeded $12 million three years ago.
In what may turn out to be a fateful commentary, Applebaum hypothesized on Guth’s use of Republic Properties: “The real reason that EFI has had to transfer ‘bad loans’ to Republic for workout is that (Guth) decided to advance certain funds which were invested by investors in one project, to the builder for use on another project. This action is clearly inappropriate. I do not trust (Guth’s) judgment in this or other ways .”
Applebaum described one circumstance involving an office building in Paso Robles, referred to by Applebaum as the “9th Street Project,” which became a particular focus of attention during the property division hearings.
In what she termed an “update” of Republic after her separation from Applebaum, Guth sought $250,000 to finish the 9th Street project, which now serves as the company’s home office.
“I am certain,” he alleged in sworn testimony, “that (Guth) has unilaterally removed sums from the investment account without prior notice or consent and spent them in various ways that she has determined are ‘joint’ expenses.'” He also claimed that Guth “has certainly misappropriated the nearly one half million dollars we placed in the (9th Street project) investment account in October 2003.”
He claimed that the $900,000 construction fund for the 9th Street Project was spent by Guth “prior to putting a shovel in the ground.”
The travails articulated by Applebaum, ironically, echo many of EFI’s investors. Some have expressed concern that Guth has moved investment funds around from project to project in what might be a violation of contractual agreements. Still others hint at fraud.
The good days may be gone for EFI. Many of Guth’s personal assets have been liquidated to satisfy liens, judgments and other payouts. On last Valentine’s Day, the county sheriff delivered an order for Guth to sell her Paso Robles ranch, valued at between $2.5 million and $3 million, to pay the remaining debt to Applebaum and two banks. Sources have told UncoveredSLO.com that just last week Guth was busily attempting to raise capital or trade property to cover the Applebaum obligation, hoping to avoid selling the ranch.
And last but not least, her personal income is evaporating. Guth reported a $2.8 million taxable income in 2005. One year later, that had shrunk to only $1.4 million.
Tags:, Applebaum, EFI, Estate Financial, fraud, Guth, paso robles