ESTATE FINANCIAL UPDATE: Conflicts of interest?

January 11, 2009
Cattle are becoming major players in bankruptcy proceedings for hard money lender EFI.

Cattle are becoming major players in bankruptcy proceedings for hard money lender EFI.

By KAREN VELIE

Several key players in a hard money lender’s federal bankruptcy proceedings have apparent conflicts of interest, a situation which may further complicate investors’ efforts to recover hundreds of millions of dollars in lost assets.

Trustees appointed by the Santa Barbara bankruptcy court are trying to sort out the convoluted financial dealings of Estate Financial Inc. (EFI) and EFI Mortgage Fund of Paso Robles with the assistance of an investor committee chaired by John Lacey. Roger Frederickson, of the San Luis Obispo law firm of Sinsheimer Juhnke Lebens & McIvor, LLP, and Santa Barbara attorney Peter Susi represent Centennial Livestock LLC, according to court records.

John Lacey is a principal owner of Centennial Livestock LLC and the single largest investor in EFI with more than $3 million placed in EFI’s Mortgage Fund.

Yet Lacey and his livestock LLC’s attorneys, Frederickson and Susi, apparently did not disclose that John’s wife, Dee Lacey, sits on the board of directors of Heritage Oaks Bank, which reportedly lent EFI president Karen Guth $5 million, originally unsecured. A county prosecutor has suggested Heritage Oaks Bank may have “dirty hands” regarding its financial dealings with EFI principles.

Dee and John Lacey did not return requests for comment.

The bankruptcy court recently appointed John Lacey chairman of the investor committee. His attorneys, Frederickson and Susi, have become involved with the bankruptcy court through the livestock LLC.

In July, creditors forced EFI into involuntary Chapter 11 bankruptcy proceedings. Shortly thereafter, Guth and Yaguda voluntarily placed EFI Mortgage Fund into Chapter 11. On October 16, Guth and Yaguda were arrested and accused of 26 felonies. They remain in county jail with bail set at $5 million each.

Susi was approved as the attorney for the Committee of Equity Investors following a recommendation to the courts by Frederickson, sources said. Frederickson handles foreclosures and litigation against borrowers to enforce personal guarantees for the unsecured creditor committee.

All bank accounts listed on the EFI Mortgage Fund bankruptcy statement of financial affairs are with Heritage Oaks Bank. In addition to the Livestock investment, Dee Lacey invested $30,000 in her name and then another $62,000 along with her husband, with EFI, according to bankruptcy exhibit 21b.

 In the end, cattle may play a prominent role in EFI's bankruptcy proceedings.

In the end, cattle may play a prominent role in EFI's bankruptcy proceedings.

Federal banking rules prohibit board members from voting on companies or individuals where they have conflicts of interest.

A small group of investors originally hired Frederickson to help recover monies lent to EFI. Those investors would later be told by Frederickson that Centennial Livestock would assume any subsequent cost of the case, sources said. However, they were not informed of Centennial’s connection to Heritage Oaks Bank.

According to the California Rules of Professional Conduct for members of the state bar, a “member shall not, without the informed written consent of each client, accept representation of more than one client in a matter in which the interests of the clients potentially conflict….”

Frederickson said he was not aware of his clients’ ties to Heritage Oaks Bank and that he did not find Dee Lacey’s position on the bank board to be relevant. He said local prosecutors have told him Heritage Oaks Bank is not being investigated. Fredrickson further said he was appointed by the Bankruptcy Court to investigate fraud. He asked a CalCoastNews reporter to provide for him any documentation of misdeeds by the bank. The reporter declined.

Sources claim the bankruptcy court did not appoint Fredrickson to investigate fraud. Bankruptcy trustees did not return requests for comment.

Susi contacted a CalCoastNews reporter shortly before publication of this article, at the request of Frederickson, Susi said. He asked the reporter to kill the story because it would adversely affect investors. He voiced admiration for John Lacey and worried that the story could result in a change of leadership in the investor committee.

“I am not an attorney for John Lacey,” Susi added. “I was appointed by the bankruptcy court. I researched Lacey and he is a well-liked, upstanding person.”

Court documents show that Susi was an attorney for Centennial Livestock LLC, and thus John Lacey, prior to Susi’s approval by the court to represent the investor committee.

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11 Comments

  1. ccn_debate says:

    Member Opinions:
    By: Nameless on 1/22/09
    employee on 1/21/09

    The same people who are blaming employees today to fail to stop Karen and Josh, are the ones who stood by them. Now trying to intimidate you and others who are doing the right thing. Don't let them have their way and Thank you for working with the DA.
    By: employee on 1/21/09
    Thank you nameless, when i was fired EFI was still making interest payments to investors and the housing market had not crumbled. What I did do was warn potential investors from investing, tell investors who I were aware of to remove their money, and persuade borrowers not to get loans from EFI. And yes nameless I am now having a hard time finding employment due to working for employers who are #1 in jail, and #2 business shut down, and have the looming question being asked of me, how much did I know, when did I know it, and why did I not report it. I also worked for another hard money lender who is not in jail, but closed up shop and left town. I did not lose money thru investing with them, but I did lose 6 years of verifiable employment history. And when I learned of what when on during the last 2 years at EFI, which I was not employed I did go to the authorities and am now cooperating with them in their criminal case, which does nothing for me personally, tags me as a whistleblower and possibly will prevent me from being able to find employment in the future. So to those of you to feel it was my responsibility to monitor and protect your investments that you have received 12% interest for many years, maybe your greed got in the way of common sense.
    By: Nameless on 1/20/09
    Paso_Guy

    In a perfect worldthat would be the case. As friend a long time FBI Special agent told me not long ago, "we had solid cases three four years ago about mortgage fruds, but were told by the upper ups to leave it alone". The employees who voiced their objections, or questioned Karen's practices were fired quickly. These are people too who had to provide for their families like we all do. Today we all paying the price including former employees who may have difficulties to get new jobs. How would you brag about your employement with a firm whose principals are sitting in jail on $5 Mill bail?

    (1) 1 Total Votes - 1 up - 0 down
  2. ccn_debate says:

    By: Paso_Guy on 1/20/09
    the person that was there and witnessed it and didn't report it has a character defect.

    If you saw the law being broken and looked the other way, you are no better than them.

    By: Nameless on 1/20/09
    Paso_Guy

    Read this comment again from someone who was there and witnessed it.

    By: employee on 1/17/09
    To 4warn, I assure you I am not trying to simply coverup Karens actions. I am simply trying to let all you "unaware" and "speculating" bloggers that are putting false hope into the minds of the investors that Karen had this line of credit to pad an offshore account. What I am saying is that during my employment period this money was used to fund escrows to close loans, specicially properties that Karen was purchasing thru her LLC's, and also to fund loans to make interest payments. Thats what a ponzi scheme is, to take in money to make interest payments to earlier investors to keep the cycle going, If she would not have secured this line of credit this whole thing would have came to a hault back in 2006. When you have 300 million dollars worth of investments to make interest payments to the investors and the cycle of loans closing and new investors investing stops the cash flow you gotta do something to keep everyone in the dark that you have over extended yourself. Karens favorite line when we questioned the fact that she was still doing "new Loans" was "thats how we make money around here. New loans bring in "commissions" and "service Fees" and thats what pays the bills and all of you around here". And when you completely fund construction loans to cover the interest payments and cover loan commissions, when it comes time to actually build a house, there is no money left, hence making it impossible for the contractor to build a house, sell the house, payoff the loan, and keep the cash flow coming in. Unless you have worked in this business and actually been there to witness these practices, you should keep your fingers from typing things that you have no idea about, much less accusing someone who is trying to help the investors of telling lies and covering up Karens criminal acts. Anyone who posts negative crap about people who were actually there should shut up.
    By: Paso_Guy on 1/20/09
    Insider

    Those were not my words, but a quote from the previous poster. Now that you understand that, maybe what I said makes more sense.

    It's easy for anyone to assume offshore accounts ect., but where is the evidence?

    I'm sold on the fact that the manner in which they operated was criminal due to negligence…but what I'd like to see is the evidence overt acts that were criminal. Has it been in the papers, posted on this site or introduced in court?

    I still feel that their ligit operation morphed into a ponzi scheme when they mismanged the projects

    Paso Guy AKA BCP
    By: Nameless on 1/20/09
    Black_Copter_Pilot

    What was a criminal intent? They knowingly made loans with no intention of funding them as contracted for. They knowingly took investors money to take their fees making interest payments from investors funds. For years they operated the business hoping that somehow a miracle happens and prices keep escalating at 20% annually. They quickly quited everyone who was asking pertinent questions. Fired employees who could see the clouds gathering. Even if they don't have offshore accounts, they lived off of investors hard earned money very well.
    The ranch and other of Karen's investments were paid for by EFI and its investors. Karen used EFI and EFMF as her own personal account. The 20 Mill credit line became Investors liability.

    (0) 0 Total Votes - 0 up - 0 down

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