I note that Craig Davis, once a friend, whom my bank had done business with, has pleaded guilty to defrauding investors of almost $2 million, and now faces up to 10 years in prison.
Craig's fraud has become too familiar in the early part of this century. I know three other guys, quite well, that that pulled virtually the same scam. Of those, one committed suicide, one is on probation, and one more or less got away with it.
PI reporter John Colson describes the scheme as complex, which it most likely was, at least in execution; the devil is always in the details.
But in concept it was simple. What Craig, and the others, did was to take money from investors and make real estate loans. In Craig's case, he started out with construction loans that weren't quite bankable, secured money from private investors, or, sometimes banks, and then made and serviced the loans until completion of the improvements and payoff by a permanent, long-term loan from a standard mortgage lender.
The bank that I was associated with did some deals with Craig, and we had no problems. We structured the loan so that we had a strong investor as a participant in the loan, with our bank getting out first if there was any problem. Only one of these loans went into foreclosure and in that instance, our participant took title to the house, sold it and was made whole.
Ironically, in one of the cases cited above, our bank, along with 11 others, was taken for a total of some $12 million by the scammer. We were covered by our blanket bond, so we came out OK. I described this scheme to Craig, and often wondered if some felonious seeds might have been planted. Probably not; when these operators' business gets in a bind, there's an obvious path of least resistance that they all seem to take.
Generally, they don't start out to be crooks, and even in the midst of perpetrating fraud, they don't view themselves as thieves; just smart, hardworking businesspeople. In boom times, they get out ahead of themselves: They have more borrowers than they have investors. So they start making loans without enough money to fund the entire deal. This is particularly prevalent with the ones making construction loans.
Say the cost of construction is $300,000. The executive of the company originating the deal has $150,000 lined up and figures that he'll find the rest of the dough by the time the first $150,000 is used up. But he doesn't. So now this exec, soon to become a crook, gets an epiphany. Another project just reached completion, has been sold, and is being paid off with a new loan. Our guy takes the money, releases the deed of trust on the completed property, and pays the contractor bills on the other property, fully intending to make the investors on the sold property whole when the one with the short loan finally sells in a couple of months. As you can see, it's a simple idea that can get very complicated as more and more balls get in the air.
At this point, if it's pointed out that a crime is being committed, the response could very well be: "What, me a crook? Absolutely not. I'm just managing cash flow like any good business person. Give me time, and everybody will come out fine."
At some point, I understand that Craig became a principal in construction projects. If so, at that point he would have been one step beyond just "managing cash flow."
He also took money from individual investors, people who couldn't afford to lose it; people who didn't have a blanket banking bond to protect them.
Craig's lucky that he's facing only 10 years in stir. The so called "widows and orphans syndrome" is on the minds of a lot of sentencing judges these days. That is, you can face a pretty stiff sentence if you steal somebody's life savings. The best example of this is the case of Will Hoover, a Denver investment manager, back around 2003. I did not know Mr. Hoover, but one of his victims is a good friend. He was convicted of 20 separate accounts of defrauding individual investors. The judge sentenced him to five years on each count: to run consecutively. Yup, that's 100 years, probably the stiffest white collar sentence ever handed down.
Private mortgage lending can be a pretty secure investment these days. But if you're considering it, make sure you don't give the control of the deal to someone else. Be certain the loan is in your name as the lender, and you are the one to accept a payoff from the borrower, not a third party.
Doesn't matter whether it's Bernie (as in Madoff) or Craig (as in Davis): Make sure you call the shots on your money.
Pat Dalrymple is a valley native. He's been in the mortgage and banking business since 1961. He'll be happy to answer your questions or hear your comments. His e-mail is dalrymple@ sopris.net.