Investors testify they were duped in $200 million fraud scheme
Kathy Adams of Healdsburg invested $600,000 with adviser Gary Armitage, also of Healdsburg.
MARK ARONOFF/The Press Democrat/2008Published: Thursday, April 8, 2010 at 4:20 p.m.
Last Modified: Thursday, April 8, 2010 at 4:20 p.m.
Savvy and unsophisticated investors alike took the witnesses stand in a Redding courtroom Thursday and testified that two Sonoma County investment brokers defrauded them out of their retirement savings.
It was the third day of testimony in the preliminary hearing for what prosecutors say is the one of the largest and most complex financial fraud cases in state history, involving more than 2,000 investors with $200 million in losses.
Healdsburg resident Kathleen Adams, 66, testified that she completely relied on the advice of Gary Armitage, of Healdsburg, when making investment decisions.
“Gary was my very good friend and I trusted him,” Adams said. “I just took whatever he said as gospel truth.”
Armitage and Santa Rosa resident Jeffrey Guidi were partners in AGA Financial, the Santa Rosa investment firm that collapsed in 2008. They, along with a third man, James Koenig of Redding, now face dozens of securities fraud and burglary charges in what prosecutors say was an elaborate real estate Ponzi scheme.
The case is being prosecuted by the state Attorney General's Office in Redding because that is where Koenig's company, Asset Real Estate & Investment, was located. Most of the alleged victims are from the North Coast because Armitage and Guidi were the most active brokers selling tax-free real estate investments created by AREI.
Adams' testified that not only did Armitage not tell her about the risks involved in the investments, he encouraged her to ignore the warnings.
Adams said she didn't read the prospectuses and investment agreements regarding her $600,000 in investments because Armitage told her not to bother.
“I made it very clear to Gary that I didn't know about legal things and he said, ‘Don't worry about it, that's my job,'” Adams said.
Armitage told her just to initial and sign certain documents and to put the thick disclosure documents in storage, she said.
And she testified that he dismissed the language warning Adams about the high risk involved in the investments as meaningless boilerplate.
“He said, ‘Don't worry about, that's just the legal department putting that in there to cover their butts,'” she recalled. “I put it in a drawer and didn't look at it.”
In 2006, Adams said she put $101,000 she had inherited into an investment called Newhall Capital Resources, LLC, making 8 percent a month. Later that year, she and her husband Rick Adams took Armitage's advice and sold a rental property they owned, she said.
They rolled the entire $503,000 from the sale of the home into a new investment, a senior living center in Peoria, Ariz. Intially, the investments generated $3,800 a month in interest and they planned to travel, she said. But when Newhall, a senior living center in Southern California, went bankrupt, she lost her entire investment, she said.
When the Peoria facility ran into trouble, she became part of a group of investors that wrested control of it away from Koenig, she said. That investment remains active, but she said she had to spend $25,000 to get it back on track and hasn't been making income on it since.
When she learned about Koenig's felony conviction after reading it in the newspaper, Adams said she confronted Armitage and he dismissed it.
“He sloughed it off and said it wasn't (Koenig's) fault. It was just a mail fraud thing and it wasn't his fault,” she said.
Koenig had been convicted in federal court in 1986 of mail fraud in connection with gold scam. He served time in prison and was ordered to pay $5 million in restitution to his victims.
But it wasn't just novice, trusting investors like Adams who testified Thursday.
A more sophisticated investor, 71-year-old San Anselmo resident George Sullivan, testified that he had been investing in stocks and bonds for over 30 years when he and his wife began investing with Jeffrey Guidi, Armitage's long-time partner in the now defunct AGA Financial of Santa Rosa.
Sullivan testified that he had a net worth, excluding his home, of about $1.3 million when he began working with Guidi.
But Sullivan testified that he didn't understand the complexities of the investments offered by Guidi, which were part of a web of interconnected companies owned or controlled by the three defendants.
Even though the financial disclosures he signed pointed it out, Sullivan said he had no idea that Guidi had a potential conflict of interest in one investment, Lakeside Financial Group.
Guidi and Armitage were part owners of Lakeside, an entity controlled by Koenig, which lent money to developers, including AREI projects. Lakeside is now defunct and Sullivan estimated he's lost about $170,000.
Similarly, Sullivan said he believed he was investing $200,000 in a senior care facility in Northridge. Only after the facility was sold and he didn't get most of his money back, did he learn that the investment had not been fully secured by the property, he said.
When one of Guidi's defense attorneys pointed to Sullivan's signatures beside such explanations, Sullivan said he didn't understand the document as well as he thought.
“I did not read this document thoroughly,” Sullivan said. “Most important was my trust in Mr. Guidi.”
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