Adviser invested in felon's company

<p>There are plenty of safe places for people looking for low-risk retirement investments to park their nest eggs.</p><p>Most financial advisers would agree that the hands of a convicted felon is not among them.</p><p>But that's exactly where Gary Armitage put the life savings of clients, many of them senior citizens who now claim to have collectively lost millions.</p><p>Asset Real Estate & Investment Co., known as AREI, was founded in the late 1990s by Jim Koenig. Armitage, a Santa Rosa financial adviser, became a partner in the firm in 2006, according to lawsuits accusing them of bilking investors.</p><p>Before it closed in June and was raided by the state Attorney General's Office, the company controlled nearly two dozen senior-care centers around the nation, an East Bay golf course and a mortgage company, among other ventures.</p><p>But Koenig has a history of defrauding investors.</p><p>In 1985, he was convicted of federal fraud charges for running a gold-selling scam. He was sentenced to more than two years in jail and five years of probation and was ordered to pay $5 million in restitution to 143 investors, according to court documents.</p><p>Just how big AREI got before it collapsed is unclear. The Attorney General's Office has been investigating for three months, and it still doesn't know.</p><p>"I cannot even begin to calculate the amount of money or the number of people who were affected by this," said Dana Simas, spokeswoman for the office.</p><p>At its peak, AREI had more than 1,200 investors and was paying about $1 million a month in "interest" payments to investors, according to the résumé of Patricia L. Hynes, a former accountant at AREI.</p><p>Now many of those clients are suing Koenig, Armitage and their partners. Koenig cited the burden of defending himself against the suits as a reason for shutting AREI in June.</p><p>Armitage did not return repeated requests for comment over several weeks. In an e-mail, his son Jeremy said his father would have no comment, "due to the legal issues involved."</p><p>The lawsuits allege that the partners bilked investors in several ways.</p><p>AREI owned or controlled 22 senior-care centers across the nation, according to the lawsuit against Koenig, Armitage and others by Santa Rosa residents Bud and Nona Merrill, who are in their 80s.</p><p>Investments in the centers were sold as tax shelters to investors who needed to reinvest profits from one real estate deal into another to avoid paying capital gains.</p><p>Such transactions are known as 1031 exchanges, after the IRS code that allows it.</p><p>One claim is that AREI sold shares in the centers to investors but kept most of the profits when they resold the shares to new investors.</p><p>The earlier investors would make a minimal profit, but their shares were sold to new investors "at a substantial and unconscionable increase" above the original price, according to the Merrill suit.</p><p>The sales allegedly deprived the original owners of the appreciation of their real estate assets during years when the market was strong.</p><p>"Such activity was highly lucrative for the defendants and/or their co-conspirators," claims the suit, which was filed by Santa Rosa attorney Don McMillan.</p><p>Another claim is that the firm sold interests in a golf course but diverted the money for AREI partners' own use or to pay off other investors.</p><p>According to the Merrill suit, AREI sold at least $20 million in "membership interests" in the Mountain Home Golf Course project, a piece of land the company bought in 2001 for $1.5 million.</p><p>The course opened in 2006, closed in June, and is now just a brown patch of windswept ground in the Altamont Pass between Livermore and Tracy.</p><p>Between 2003 and 2007, AREI sold $60 million in corporate notes that were unsecured by any real estate, according to the suit.</p><p>The suit claims the proceeds from the sale enriched Koenig and his partners but left investors holding little more than promissory notes.</p><p>In 2006, Armitage and another broker at his Santa Rosa firm, Jeff Guidi, became partners in AREI, according to the suit. Koenig gave each man a 5 percent stake in the Redding company, the suit claims.</p><p>Guidi could not be reached for comment.</p><p>AREI stopped paying interest on the corporate notes in May 2007, according to the suit, which also questions whether the notes were legal to sell in California.</p><p>Another key claim is that Koenig and his partners secretly "looted" the investments by charging "exorbitant fees" on every real estate transaction.</p><p>For example, AREI allegedly charged investors a $2 million "origination fee" on the sale of corporate notes, the suit claims.</p><p>As investment advisers, Armitage, Guidi and others had an obligation to sell appropriate, sound investments to their clients, and either knew or should have known that the investments were inappropriate for seniors, the Merrill suit claims.</p><p>They also either knew or should have known about Koenig's criminal past, the suit claims.</p><p>"Defendants concealed the Koenig felony conviction and the factual circumstances of his unlawful conduct ... from the plaintiffs and its implications to their investing in companies controlled by Koenig," the suit claims.</p>