Hurst Financial president charged with defrauding investors
August 18, 2011
By KAREN VELIE
The U.S. attorney Los Angeles office today filed federal fraud and money laundering charges against the head of an Atascadero financial company alleging that he bilked investors in Central Coast real estate projects. The money was ultimately siphoned off for other purposes, the U.S. attorney’s office said in a press release.
A 2008 CalCoastNews’ investigation revealed James Hurst Miller and former north county developer Kelly Gearhart allegedly swindled some 1,200 investors out of more than $100 million in a lending scheme involving hard money.
Hard money lenders specialize in short term, high interest construction loans that are often used as bridges to help a developer finish a project. Loans are based on the value of the underlying asset rather then the borrower’s credit rating. These kinds of loans are primarily funded through private investors.
Miller, 63, the former president of the Atascadero-based Hurst Financial Inc. (HFI), was charged in a four-count criminal information filed in United States District Court. It charges Miller with mail fraud, wire fraud, money laundering, making a false statement to a bank and aiding and abetting Gearhart in making other false statements in seeking funding.
Miller’s charges came as part of a larger organized crime investigation that includes Gearhart, according to a federal seizure warrant for the proceeds from the sale of Miller’s home in 2009.
The charges allege that Miller solicited investments in the Beacon Road and Vista Del Hombre real estate development projects in Paso Robles, as well as the Salinas River real estate development project in Templeton, and that his actions were fraudulent because the funds were not used to develop those projects. After obtaining investors’ funds, Miller and Gearhart used most of the money for other purposes.
The torturous path of monies invested in the Beacon Road Project provides insight on how Miller ran his hard money lending company.
Miller solicited and collected money from eight investors between Dec. 3, 2007 and Feb. 26, 2008, ostensibly to provide construction funding for the commercial park on Beacon Road. However, the money quickly went in a much different direction.
Within a week after the first investor’s money went into the Beacon Road Project fund, HFI was apparently writing checks to itself, allegedly to pay interest to a variety of other investors on previous loans for unrelated projects. As additional investment money came into the fund, additional interest payments were made by Miller to, among others, developers on Hurst-funded projects such as David Graves and Royce Eddings, and to projects such as “Navidad” and “Las Tablas,” two local construction projects.
The payment procedures often came close to depleting the fund. And just three and a half months after the first investment, the fund had been drained. Nearly $360,000 had been paid out of the Hurst loan escrow account in recorded interest payments.
As of June 17, 2008, the fund contained $198.12. Virtually none of the fund’s proceeds have gone toward construction of the Beacon Road Project, Miller’s own records obtained by CalCoastNews indicate.
Shortly after the fund shriveled, Miller informed investors they would no longer receive interest payments due to them, citing their agreements with Hurst Financial.
In another example of Miller’s lending practices, Hurst doled out approximately 8,000 percentage ownership in the planned Paso Robles 32-building development known as Vista del Hombre.
A CalCoastNews investigation, using title documents, discovered that investors held more than 200 percent interest in each structure.
“It’s the lender’s responsibility to make sure beneficial interest adds up to 100 percent,” said one local escrow officer who declined to be identified. “You see a lot of this with Hurst and Estate Financial title reports.”
Miller also filed documents through Cuesta Title that loans on projects had been repaid to the investors even though they had not. With a clear title, Miller would then put a second and sometimes a third loan funded by investors on the same property.
For example, Gearhart got his first loan for Vista del Hombre’s purchase and initial infrastructure construction in May 2006 from HFI, in the amount of $15 million. Miller in turn had secured that money from private investors lured by promises of high interest returns and placated by Miller’s pledge of a loan-to-value ratio of 44 percent, according to one loan agreement obtained by CalCoastNews.
Translation: the hard money loan could fund no more than 44 percent of the project’s total value. That initial loan was slated to mature in late 2006, but Hurst has not reimbursed investors and ceased providing interest payments.
But by then, Hurst had already lent Gearhart another $11,850,000 for the Vista del Hombre development – raising Gearhart’s annual interest payments to $4 million. That pact was signed on June 22, 2007, after Hurst attracted more than 100 investors with the same loan-to-value promise.
Those investors received interest payments for only six months before the payments abruptly ceased.
Gearhart told CalCoastNews in a 2008 interview that his Vista del Hombre project was worth between $100 and $150 million. However, a 2008 Heritage Oaks Bank appraisal put the property’s value at $4.5 million.
Today’s charges also allege that Miller aided and abetted false statements for Kelly Gearhart to Heritage Oaks Bank relating to collateral for a loan application on Vista del Hombre.
Miller is one of a number of persons targeted in the federal investigation. The list includes developers, lenders, title officers, lawyers and public officials.
The alleged criminal acts include operating an alleged Ponzi scheme, falsifying title documents and falsifying inspection reports, acts uncovered in a CalCoastNews investigation.
The FBI investigation has taken almost four years because of the large number of people involved in the alleged criminal acts.
Early on, coverage of the alleged fraud was largely limited to CalCoastNews. The San Luis Obispo Tribune has run pieces critical of CalCoastNews for its reporting on Miller and Gearhart, a former Atascadero “Man of the Year.” Several lawsuits threats were brought by Gearhart against CalCoastNews in an attempt to stifle the reporting.
The mail fraud and wire fraud charges each carry a statutory maximum penalty of 20 years in federal prison, the money laundering count carries a statutory maximum penalty of 10 years in federal prison, and the charge of making a false statement to a bank carries a statutory maximum penalty of 30 years in federal prison.
Therefore, if he were to be convicted of all four counts listed in the charges, Miller would face a maximum sentence of 80 years in federal prison.
Nevertheless, under an alleged plea agreement discussion Miller agreed to testify against other persons being investigated by the FBI. In return, Miller has requested prosecutors reduce the four counts to one and allow him to serve a reduced prison sentence in the minimum-security federal correction facility located in Lompoc Calif.
Miller is likely to be arrested in the next two to three weeks during his first appearance at the federal courthouse in Los Angeles.
The case against Miller is the result of an ongoing investigation by the FBI and IRS. The San Luis Obispo County District Attorney’s Office provided assistance in the investigation.
Since Miller stopped making interest payments to investors, several of the victims have died, more have lost their homes and some have been forced to abandon their retirements and return to work.
Rita, 68, is a former Cambria resident who suffers from multiple sclerosis and can no longer walk. Her husband placed the couple’s savings, $830,000, with HFI prior to his death from a long term illness, thinking he had guaranteed his wife’s financial security.
“I need 24-hour care,” Rita explained in 2008. “Without my interest and possibly my investment, I’m not going to be able to afford my caregivers and I will have to sell my house. I don’t know where I will end up. I am scared.”
According to Rita, Miller failed to return numerous calls she placed to him requesting information. In the midst of the financial turmoil, Miller took a 10-day trip to Hawaii.
“I am appalled that they would leave their business in the state it was in,” Rita added. “How do they dare go on a vacation? It shows they have no concern for their investors’ situations.”
Because of Miller and Gearhart’s fraudulent scheme, Rita was forced to sell her home and currently resides in an assisted living facility in San Luis Obispo.