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Orange County real estate lender Dan Harkey is accused of bilking investors

A lawsuit alleges he exaggerated the value of the properties used as collateral by borrowers. Harkey denies wrongdoing, blaming the downturn in the real estate and financial markets.

February 18, 2009|Stuart Pfeifer

Was it the real estate downturn, or were people misled into a risky investment scheme?

That's the question at the center of a lawsuit filed Tuesday that accuses Orange County real estate lender Dan J. Harkey of bilking dozens of investors out of more than $15 million.

In an added twist, the investors claim that their money helped fund the election of Harkey's wife, state Assemblywoman Diane L. Harkey (R-Dana Point).

The lawsuit accuses Dan Harkey of using slick marketing techniques -- including mass mailings and DVDs of sales meetings -- to attract investors in short-term, high-interest loans to real estate developers. It contends that Harkey exaggerated the value of the properties used as collateral by borrowers, making the individual investments appear much safer than they were.

Dan Harkey denied wrongdoing, saying any losses were related directly to the downturn in the real estate and financial markets.

Assemblywoman Harkey declined to be interviewed. A spokesman disputed the lawsuit's claim that she used investor money to bankroll her campaign.

"She had a 30-year career in business and banking in which she acquired substantial financial resources of her own," said Dave Gilliard, the assemblywoman's political consultant. "She used her personal resources to help fund her political campaigns."

Campaign finance records show that Diane Harkey contributed $1.1 million of her own money to two recent campaigns -- an unsuccessful bid for the state Senate in 2006 and last year's winning run for the Assembly.

Gilliard added that Diane Harkey had no ownership interest in her husband's company, Point Center Financial Inc. of Aliso Viejo.

The allegations center on a little-known and lightly regulated segment of the real estate industry known as "hard-money" lenders. These lenders often provide financing for high-risk projects that banks won't touch, such as speculative housing developments.

Wealthy individuals looking for outsized returns often provide the investment capital. The lawsuit alleges that many investors were retired people who entrusted Dan Harkey and Point Center with their life savings.

The lawsuit, filed in Orange County Superior Court in Santa Ana, claims that Point Center made millions of dollars by charging broker fees upfront to borrowers, allowing the company to profit regardless of whether the loans were repaid.

When the borrowers defaulted, the lawsuit alleges, the investors were often left with foreclosed properties worth a fraction of the money they had invested.

The suit cites a $19.3-million loan in 2006 to Burnett Development Corp., which planned to build 451 homes surrounding a golf course at the Palm Springs Country Club. The loan was made near the peak of the real estate boom, but conditions soon changed. Burnett Development defaulted on the loan in 2007 and Point Center foreclosed, according to court records. Burnett officials could not be reached.

The now-closed country club has fallen into such disrepair that the city of Palm Springs filed a lawsuit last year -- naming individual Point Center investors as defendants -- seeking immediate repairs to a property filled with weeds, polluted ponds and graffiti.

"I was shocked. I thought this was being properly handled by Point Center Financial," said Terry Holdt, an investor and one of the plaintiffs in Tuesday's lawsuit. "I knew the intention was to develop the property. I didn't realize it hadn't gone very far."

Harkey declined to address specific cases cited in the suit but said the plaintiffs represented a small group of unhappy investors. He said investors would make money once the market rebounded.

"We will manage and chart our way through this," said Harkey, 62. "I can't control it if there's a very tiny renegade group that tries to create all these illusions. We're probably the best-suited company in California to manage the portfolio back to health."

The lawsuit also cited Point Center's $10-million loan in 2005 to a company that planned to build luxury oceanfront homes in Carpinteria.

In a summary of the project distributed to prospective investors, Point Center said the property owner had "spent the past seven years securing California Coastal Commission approval" and needed only final approval from the city of Carpinteria.

The developers, brothers Paul and Richard Ehline, personally guaranteed the loan, according to the Point Center summary. The summary advertised an "estimated minimum" return of 23.5%.

It sounded like a good opportunity to Carlsbad Realtor Jim Haiduck, who said he invested $200,000 in the project based on assurances by Harkey's staff that nearly all approvals had been secured.

But the Coastal Commission had not approved the project, the lawsuit alleges. In 2007, Ehline Development Corp. defaulted on the loan, Point Center foreclosed and the Ehlines filed for bankruptcy protection.

The brothers listed $120 million in bad debt in their bankruptcy filings, including $43.6 million of debt on four separate Point Center loans.

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