Investors lose again in lending scheme

Investors who say they lost millions in a hard-money lending scheme settled for dimes on the dollar recently. They said they had no other choice, except going to trial against a corporation they believed had no assets.

District Judge David Wall had ruled the trial would start May 29, even though some plaintiffs said they were not ready and asked for more time. Wall already had dismissed from the lawsuit the individuals accused of being responsible for the losses, and ruled those individuals' actions could not be presented as evidence.

The lawsuit involved only one $8.5 million loan out of a complex series involving some $38 million.

Plaintiffs were reluctant to discuss terms of the settlement, but sources said that after paying attorney fees, typical investors will recover only about 23 percent of their $8.5 million -- without interest for the nine years it has been tied up. Luke Ciciliano, the lawyer who was handed the plaintiffs' case at the last minute and worked out the settlement, declined to reveal the amount of the settlement and said he could not make time for an interview. Defense lawyer Larry Johns did not return a phone call.

The case was on the court docket as Diversified Agricultural Products et al v. U.S. Mortgage Corp., but had been consolidated with another named Jerry Engel et al v. J.M.K. Investments Ltd. J.M.K. Investments was a hard-money lender, finding multiple investors to pool their resources and finance large mortgages for real estate investments. J.M.K. was run by John Keilly, who is also listed on Nevada corporate documents as president, secretary, and treasurer of U.S. Mortgage Corp. In 1996 Keilly began soliciting money from investors to loan to developer John Saxton.

Engel, a 77-year-old retired accountant, said the investors were typically promised 20 percent returns on their money. But in 1997, Keilly informed investors that the original collateral had been replaced by a 125-acre property near the North Las Vegas Airport, known as Taylor Ranch, and interest had been reduced to 15 percent to "stay competitive." A deed of trust was issued indicating $5.3 million had been loaned to Saxton, secured by the 125 acres.

One investor, Leonard Torrealba, is also a lawyer who practices in California and was thus able to follow the tangled threads of ensuing transactions.

Torrealba said Saxton subdivided the Taylor Ranch land and in December 1997 sold 37.6 acres of it to U.S. Mortgage. Few, if any, investors in Saxton's Taylor Ranch loan were aware of the sale, nor that U.S. Mortgage was owned by Keilly. As an executive of the company through which Torrealba and others had invested in mortgages, Keilly was supposed to look after his investors' interests, Torrealba pointed out. "So what's he doing buying a portion of my security for himself?"

In connection with this sale, Keilly filed documents with the Clark County Recorder, which purport to be powers of attorney from investors in the Taylor Ranch loan releasing the 37.6 acres to U.S. Mortgage. Torrealba says he and his wife didn't sign any such powers. Others also denied signing them, he said.

The powers of attorney released, without compensation to investors, about 30 percent of the land that had once secured their Taylor Ranch loans.

"You have to ask whether any investor would knowingly agree to that," Torrealba said.

Because Saxton eventually defaulted on the Taylor Ranch loan, the land was sold to settle the debt.

"If the 125 acres had still been there, we still would have made a profit. But we only got paid for the remaining 87 acres."

In June 1998, six months after sale of the 37.6 acres to Keilly's U.S. Mortgage, but before that default, Keilly's J.M.K. company organized investors, some of them the same ones he had used in the earlier deal, to loan $8.5 million to U.S. Mortgage to acquire land and build warehouses on a North Las Vegas property. It was not revealed to investors that the land securing this loan was some of the same land they still thought was securing their earlier loan to Saxton, Torrealba said.

"I get a closing statement saying Keilly has charged $400,000 for brokering this loan," Torrealba said. "A loan to himself! But I didn't get that statement in any timely fashion, not until about November of 2002, and I had to really hammer to get it."

When investors received notice in March 2000 that Saxton was defaulting on mortgages, Keilly proposed, and investors agreed, Saxton would resolve part of his debt by signing over a 900-acre property near Tucson, Ariz., called Gladden Farms.

"After all is said and done," Torrealba said, "it turned out that Saxton didn't own it. He had put down a $1.04 million deposit but never closed escrow. So investors have given him $38 million and released him from that debt for only $1.04 million."

Saxton's company later declared bankruptcy. In connection with that proceeding, bankruptcy examiner Larry Bertsch submitted a report that much of the $8.5 million loaned to U.S. Mortgage for construction actually was "diverted to other uses than what the investors were led to believe." Of the total loan request, $5.46 million was designated for "construction and interest reserve."

Bertsch said the normal method of disbursing funds for a construction loan, and interest payments on the loan, is through an account controlled by the lending company. Instead, on June 30, 1998, a check for $1.7 million and a check for $3.76 million were written directly to Saxton's company and deposited in his account. The very next day Saxton Inc. made a $5 million wire transfer to pay off a bank's earlier and unrelated loans to Saxton Inc.

Bertsch concluded that the construction and interest reserve money from the U.S. Mortgage loan was misused to pay that debt for Saxton. The lawsuit alleged that the $1.7 million was used to make initial payments to the mortgage investors so they wouldn't grow suspicious. The money would appear to reflect interest payments, but was in fact part of their original principal.

None of the millions earmarked for construction, so far as Bertsch could determine, was actually used to build anything.

Once the investors decided they'd been rooked, Torrealba tried to get somebody prosecuted. "I took it to Metro, to the fraud detail, and they said I'd be better off taking it to the state and the feds. I took it to the Nevada Financial Institutions Division, which did nothing. I talked to the FBI and they gave me the line they were busy with 9/11 and didn't have the resources. I talked to Kurt Schulke in the criminal division of the U.S. attorney's office, and he said, 'We're meeting this afternoon to talk about it.'"

The Nevada attorney general's office deposed Torrealba, and one deputy told him an indictment was being prepared, Torrealba said. But in the end, no law enforcement agency acted.

"If somebody would have just looked into the case and said we didn't have anything, I could have accepted that," said Torrealba. "But nobody said we didn't have a case; nobody investigated, and that's very disappointing."

Had Keilly been prosecuted, it wouldn't have been the first time. In 1970 he was convicted of bribery and conspiracy in a New York federal case involving the Teamsters Union pension fund. This conviction became a Nevada political issue in 2002, when Review-Journal columnist Jane Ann Morrison reported Dario Herrera, a Clark County commissioner then running for Congress, and his wife, Emily, had taken an $85,000 loan from Keilly to buy land for an expensive home they were building.

The Herreras said they turned to Keilly for the loan because Emily had worked for Keilly; she was his executive assistant in 1999, when she married Herrera. Dario Herrera was later convicted of taking bribes in a high-profile public corruption scandal.

Emily Herrera also had a role in the land deal. Torrealba and his wife, Shelly, sued Mrs. Herrera and Laurie Kesmetis, both public notaries, for guaranteeing their signatures on powers of attorney, which the Torrealbas say were forgeries. But District Judge Valorie Vega dismissed the lawsuit, saying it was not filed within the statute of limitations.

That decision has been appealed to the Nevada Supreme Court. The Nevada Secretary of State's Notary Division confirmed June 11 that the Torrealbas' complaints against both, in 2004, resulted in fines totaling $700 in Kesmetis' case and $500 in Herrera's. Neither woman remained a notary by 2004, but they would be eligible to be notaries again because they weren't convicted of felonies, said the Notary Division.

In 2000, Keilly paid a $50,000 Nevada administrative fine to settle a complaint that he had been selling mortgages for 19 years -- a period that included the curious mortgage deals secured by Taylor Ranch and Gladden Farms -- without a license, and after being denied one.

Civil lawsuits, so far, have fared little better than the attempts to get criminal prosecution. The recently settled case involved only one of many loans -- the $8.5 million loan Keilly arranged to his own company.

The case was filed in July 2002, but over the years, Judge Wall dismissed first Saxton, then others from the lawsuit. According to Torrealba, Wall also ruled that punitive damages would not be permitted in this case. And he ruled that Keilly's 37-year-old bribery conviction, and his fine as an unlicensed seller of mortgages, could not be introduced in the pending jury trial.

On April 3, he ruled neither Keilly himself, nor his wife Jo, who is president of J.M.K. Investments, nor the couple's Keilly Family Limited Partnership, which is thought to hold many of the couple's assets, could be tapped for damages.

"This leaves us with nothing but U.S. Mortgage," Torrealba said. "There's no reason to believe U.S. Mortgage has any assets."

In mid-May, Wall conducted hearings in which spokesmen for the plaintiffs' side explained that the lawyer they hired, Charles Lybarger, had not returned phone calls to most of his clients in the case. Lybarger had turned the case over to the firm of Ryan and Ciciliano, which is "of counsel" to his own firm; that raised doubts whether attorney Luke Ciciliano had a firm lawyer-client relationship with every plaintiff. The plaintiffs requested more preparation time, partly for Ciciliano to establish those relationships.

But John Pilkington and Larry Johns, representing the remaining defendants, invoked a rule requiring the lawsuit go to trial within five years of its filing. That time wouldn't be up until July 26, but Judge Wall on May 18 said the only available trial dates in his court would be the week of May 27, and set it for trial on May 29, the first of those available dates and only 11 days after his ruling.

"I'm not going to move it to another department," he said.

One reason the case has proceeded slowly, Torrealba said, has been that the plaintiffs are largely individuals of limited means who have had to rely on attorneys working on contingency -- being paid a percentage of damages awarded, if any. Few attorneys will take such a complex case on contingency.

The other side has had no such problem. Johns and Pilkington acknowledged in court recently that their fees, thought to exceed $280,000 so far, have been paid by Gladden Farms -- an entity owned partly by the people suing their clients.