Kelly Gearhart: Fraud, arson and betrayal

November 18, 2010

(Editor’s note: This is the first in a four part series about the story of North County developer Kelly Gearhart and his political allies.)

By KAREN VELIE

Amid a federal investigation into racketeering, money laundering and mail fraud, developer Kelly Gearhart’s stepmother claims her notorious stepson’s illicit activities also included forgery, bribing public officials and arson.

The latter exploit was one that helped fund Gearhart’s transition from being a prison guard to become one of San Luis Obispo County’s most prolific builders.

Marion Warner, Gearhart’s common-law stepmother of 35 years, said Gearhart’s father gave him a building in 1985 that the younger Gearhart held onto for a year before asking his father to hire an arsonist in order to collect on the structure’s insurance.

The fire left 16 people homeless, injured four firefighters, destroyed two apartment buildings and damaged three additional structures, according to The Athens Messenger, a newspaper in Ohio. Firefighters from five cities fought the flames, which authorities said was set by an unknown arsonist.

After being silent through much of her stepson’s publicized financial troubles, Warner agreed to speak for the record in a series of interviews with CalCoastNews about Gearhart.

In the interviews, which took place over several weeks, Warner talked about her view of the rise and fall of Gearhart, Atascadero Chamber’s former Citizen of the Year.

On his 18th birthday, she said Gearhart’s father gave him the family’s traditional gift for a man coming of age: a box of condoms. A few days later, John Gearhart and Warner left Atascadero for Ohio.

At the time, Kelly worked at a Scolari’s market in Atascadero. He put himself through the police academy and, after graduation, worked as a prison guard at the California Men’s Colony near San Luis Obispo.

Not long after he started his five-year stint as a prison guard, he began doing construction jobs on the side.

“He started out honest — building houses for guys at the prison,” Warner said.

While Gearhart was in his mid 20s and still working as a prison guard, his father suffered a massive heart attack and decided to move back to San Luis Obispo County, but not before transferring the small three-unit apartment building he owned in Ohio into his son’s name.

Gearhart owned the property for about a year before asking his father to hire an arsonist to follow through on their plan to collect on the insurance, Warner said.

On Oct. 9, 1986, authorities said an unidentified arsonist started the fire in an upstairs apartment in Gearhart’s building at 22 Hocking St. in Nelsonville, Ohio. A pair of tenants moved from the apartment building the day before the fire, leaving the three-unit building vacant, according to The Messenger.

The fire spread to a second apartment and business complex leaving 16 people homeless, many escaping with just the clothes on their backs. Three additional buildings – the WAIS radio station building, the Nelsonville TV cable office and a residence – sustained smoke and water damage.

Four firefighters suffered smoke inhalation, one seriously, according to the Messenger. Volunteer firefighter Pat Bullock was admitted to Doctors Hospital where he remained for three days in the intensive-care unit.

According to the Athens County Tax Assessor’s office, Gearhart’s former apartment building was destroyed and the land where it stood is now a parking lot.

“The Gearharts are not above a little larceny,” Warner noted seriously. “They got a healthy chunk of change out of it.”

Warner said she was with Kelly Gearhart’s father John Gearhart when the authorities called to inform him about the fire.

“He acted surprised,” Warner said and added that she knows the person from Nelsonville who John Gearhart hired to start the fire.

The money received from the insurance, along with Gearhart’s connections to government officials, helped to start his new career as a developer in Atascadero.

Although arson was the determined cause, no one has been accused of or arrested for setting the blaze.

Following the fire, Gearhart suddenly had the funds to go ahead with his projects while avoiding many of the hurdles and fees less connected developers had to deal with in Atascadero.

Gearhart’s alleged ability to manipulate public officials by plying them with favors and gifts helped make him immune to some of the building inspections and fee requirements that were required of other developers.

Warner said Gearhart would brag to his father and to her that he had “paid off”  public officials such as Atascadero City Manager Wade McKinney and County Tax Assessor Tom Bordonaro with cash, excursions in his jet and exclusive event tickets.

“He would say that McKinney had been taken care of,” Warner said. “Kelly said you had to put money out to get things done.

“Kelly gave goodies like the dream ticket (boxing). It was OK, like a realtor buying a contractor a case of booze after a sale.”

During family visits, she said Gearhart would boast to his father and her that Atascadero City Councilmen Tom O’Malley and Jerry Clay were his guys and those who wouldn’t do what he wanted were described by him as “commies” or “nuts.”

“While he was on the phone, I would hear him saying stuff like. ‘I told you there is no way anyone is going to find that’ ”, Warner quoted him as saying. “One time, he said, ‘I told you, I took care of that guy, he won’t ask any more questions.’ ”

As Gearhart worked to build more than 400 new homes in the Atascadero area, some city inspectors and officials looked the other way, allowing Gearhart to avoid paying city fees due to falsified and unfinished inspection reports costing the city several hundred thousand dollars.

After former Mayor Mike Brennler went to the San Luis Obispo County District Attorney’s office with information that the city had failed to collect more than $200,000 in fees from Gearhart because 30 cottages were not finalized correctly, he was chastised by local news reporters for attempting to tarnish Gearhart’s name.

Several employees and city officials said that City Manager Wade McKinney, Assistant City Manager Jim Lewis, and Community Development Director Warren Frace instructed city staff to allow Gearhart to skip the city’s Planning Department and deal directly with upper-level city employees.

City officials contend staff would have noticed if initials had been forged.

Warner describes afternoons at Gearhart’s office on Morro Road in Atascadero with Kelly’s wife, Tamara Lowe, and Gearhart laughing over which one was the best at forging initials of Atascadero employees on the city’s inspection reports.

After forging the documents, Gearhart had an employee in the city who would place the falsified reports into city project files, Warner said.

“We were ordered to do illegal things,” said one city employee, who refused to be named — as did a handful of other city workers – out of fear of being fired or blackballed for future jobs.

“Gearhart’s projects were fast tracked. Projects went directly to Warren Frace and skipped planning,” this city employee added.

Gearhart had a number of sub-contractors that he worked with when he started building homes locally in the 1980s. During that time, he persuaded them to move into positions where they could assist him, several sources claim.

Two of the most notables among these former sub-contractors are former Atascadero City Councilman Ken Lerno and current San Luis Obispo County Planning Commissioner Bruce White, Warner said.

Lerno, Gearhart’s former electrician, got into the lending business and began working for Hurst Financial Inc., the lending company that allegedly worked with Gearhart in running a Ponzi scheme that has left area investors claiming more than $100 million in losses.

While Lerno worked for Gearhart’s lender, he continued working with Gearhart and the pair began developing properties together.

Gearhart and Hurst Financial Inc. CEO, Jay Miller, asked Lerno to a weekend in Lake Tahoe where they wined and dined Lerno while encouraging him to seek a seat on the Atascadero City Council, where his votes could have a financial benefit for each of them, said a former friend of the builders who has asked to remain unnamed because of fears of those involved with Gearhart.

Lerno agreed and in 1996 he was elected to the City Council.

In 1999, Gearhart purchased a property on Traffic Way close to a property he and Lerno owned, according to city documents.

A few months later, Gearhart transferred the Traffic Way property to one of his longtime business partners, Daniel Mackey.

However, Gearhart’s name remained as the communication contact for the city and Gearhart continued to attend planning meetings to discuss the proposed project known by some as the “Shacks on the Tracks,” a high-density, low-cost housing project.

Lerno voted to approve the project, which included the proposed construction of homes that were to be built on a narrow piece of land adjacent to Union Pacific’s railroad tracks.

A concerned citizen then stood before the council and explained Lerno’s financial ties to Gearhart.

Lerno resigned from the council on the same day.

“Kelly was really upset when he resigned,” Warner said, contending that her stepson wanted Lerno to weather the storm and remain on the council. “Lerno was afraid of going to jail. And then the FBI started crawling up Kelly’s ass.”

After Lerno’s resignation, Warner said FBI agents tag teamed the Gearharts in an attempt to get information about the alleged collusion. Agents found Tamara Gearhart at the Gearhart office in Atascadero and Kelly Gearhart at a job site in Santa Ynez in Santa Barbara County, where he was working on a project with his longtime golfing buddy and one of the owners in a group of bars in San Luis Obispo, Habib Tavassoli.

Shortly afterward, the grand jury interviewed his father John Gearhart over the allegations of collusion. According to Warner, he took direction from his son before he testified.

“Dad said what he was supposed to say,” Warner said, adding:

“Gearharts don’t worry about telling the truth, they worry about later on. No one got in any trouble.”

Kelly Gearhart’s former plumbing contractor and executor of his and his wife’s will, San Luis Obispo County Planning Commissioner Bruce White, who was appointed by county Supervisor Frank Mecham, was one of the few people who knew how her stepson ran his business, Warner said.

White said he was not aware of any payoffs or that he was the executor of Gearhart’s will.

“Yes I did work for Kelly as a plumbing contractor,” White said. “I do not know what Kelly did with others, but he never promoted me into any positions.”

Gearhart also bragged to his family about his productive relationship with county Assessor Tom Bordonaro, his stepmother told CalCoastNews.

“He laughed and joked with his dad about buying a dinner with the governor for Bordonaro,” Warner said. “He spent a lot more time with Bordonaro than others knew.”

An employee of Bordonaro’s said the assessor bragged that he and Gearhart went to Sacramento for a fundraiser with Republican Gov. Arnold Schwarzenegger and showed off a picture of himself and the governor to employees in the assessor’s office.

Seats at the governor’s table required a donation of between $50,000 and $100,000.

“I have never received a ticket to any fundraiser from Kelly Gearhart,” Bordonaro told CalCoastNews. “In fact, I do not have, nor have I ever seen, a picture of myself with the Governor at all.”

At about the same time, critics say Bordonaro directed his staff to do favors for Gearhart, including pushing the developer to the top of the list when processing housing subdivisions.

“I have never given Kelly Gearhart any special treatment, nor am I aware that any staff has either,” Bordonaro said in response to the allegations of favoritism.

However, it appears that Gearhart and his partners were not held to the same property deed requirements as other county builders.