EFI UPDATE: Corporate criminals?

October 11, 2008

By KAREN VELIE and DANIEL BLACKBURN

In an attempt to explain the ongoing financial calamity created by Estate Financial Inc. (EFI), trustees recently held a meeting in which they frequently used the “F” word (fraud) and appeared to explain an apparent Ponzi scheme without dropping the “P” word.

EFI is one of at least four San Luis Obispo County hard money lenders that has participated in lending schemes and inappropriate management practices that may have already cost investors more than $500 million and created an environment that could cast a shadow over personal and business finances in this county for decades.

Hard money loans are based on the value of the underlying asset rather than borrowers’ credit rating. It works if the lender finances no more than 60 to 70 percent of the project and makes payments to contractors as the work progresses. EFI principals Karen Guth and her son Joshua Yaguda failed to follow through on these promises, which led to the Department of Real Estate stating that many of EFI’s practices were fraudulent, though they did not label the fraud as “Ponzi.”

In a Ponzi scheme, lenders pay unusually high returns while utilizing incoming investor money to cover expenses, rather than making income through the alleged business activity. EFI entirely funded numerous developments that were never constructed.

Early in June, creditors forced EFI into involuntary Chapter 11 bankruptcy proceedings. About a week later, EFI owners Karen Guth and Joshua Yaguda voluntarily placed EFI’s mortgage fund into Chapter 11. Federal bankruptcy court Judge Robin Riblet appointed trustees to liquidate the companies remaining assets.

Ravenous for information, investors have traded facts mixed with a dash of scuttlebutt. EFI trustee Thomas Jeremiassen and EFI Mortgage Fund trustee Bradley Sharp attempted to set the record strait at an October 7 meeting in Santa Barbara attended by approximately 600 investors.

Wooed by the promise of whopping returns on property-secured investments, approximately 3,400 investors have entrusted their nest eggs with EFI. In July, EFI’s portfolio contained more than $317 million in monies owed to investors. Of that, only $21,000 remained unencumbered.

Rumors that investors would not receive proceeds from property sales for at least two years have spread like fire during a drought. However, trustees claim that will not always be the case.

“As we sell properties, we intend to distribute funds to an extent,” Jeremiassen said. Investors with recorded deeds who are actual co-owners (not simply creditors) stand a better chance of receiving funds shortly after a sale, he added.

Sources claim investors will be lucky to get pennies back on the dollar.

Trustees have now confirmed EFI principals Joshua Yaguda and Karen Guth co-mingled funds, paying from one investment to fund another. Although those actions closely parallel those of a Ponzi scheme, trustees — assigned with facilitating an “orderly liquidation” avoided use of the term.

Nevertheless, investors attending the meeting voiced their confidence in the trustees: “It was great meeting the trustees,” investor Sherri Bell said. “We have confidence in them.”

In March, UncoveredSLO reported Guth and Yaguda failed to disclose to some investors that they were partners in numerous EFI-funded construction projects. Trustees confirmed that Guth and Yaguda invested approximately $100 million into projects in which they had an interest.

“It’s like the guy that takes one gumball and then ends up raiding the whole machine,” said San Dimas developer Ron Cooper.

Additionally, the trustees confirmed that EFI misallocated approximately 27 percent of fund monies.

Guth and Yaguda also used investor monies slated for construction to bankroll the pairs numerous unrelated business holdings. Sources have told CalCoastNews that individuals renting property owned by EFI were told to make their rental checks out in Guth’s name.

“Those rents should have gone to us,” said one investor. “The rental checks were not disbursed to investors and the taxes were not paid.”

A pair of trustees – retained by the failed lender – want nearly a quarter-million dollars for a month and a half of work. Judge Riblet rejected the pair’s appointment in July sighting they had been tainted by Guth. Investors outraged at the charges were pleased to hear, in order to shave expenses, Jeremiassen and Sharp plan to move their audit from EFI’s offices in Paso Robles to their offices in Los Angeles within the next few weeks.

EFI’s lending practices will leave countless casualties. Particularly hard hit will be thousands of Central Coast seniors, many of whom of do not have the ability to rebound from the imploding financial ruin.

“We are there to pick up the pieces and put the puzzle together,” Jeremiassen added. We intend to put portions of the presentation on-line for the approximately 2,800 investors who were unable to attend.

Tags:, Estate Financial