Investors, many of them seniors, suing SR financial adviser for millions

The head of a Santa Rosa financial services firm is shutting his company amid allegations he defrauded elderly investors out of millions of dollars by steering them into high-risk investments from which the company secretly profited.

Gary Armitage, 58, of Healdsburg told clients earlier this month he is leaving AGA Financial, which has been hit with a flurry of lawsuits by investors who claim he put their retirement savings into a now-bankrupt Redding real estate company.

The suits claim Armitage was part of an elaborate investment scheme that has collapsed, leaving his clients facing massive losses in what were supposed to be low-risk investments.

"Defendants and/or their co-conspirators have set up and continue to run a classic Ponzi scheme," said one lawsuit filed against Armitage last month in Sonoma County Superior Court.

Armitage has 14 active customer complaints against him, most of them filed this year by customers claiming more than $6.2 million in damages, according to the Financial Industry Regulatory Authority, or FINRA, an industry group.

At least eight investors have filed lawsuits against him in Shasta, Sonoma and Marin counties, alleging various forms of financial fraud.

Armitage did not return repeated phone calls seeking comment over several weeks.

In a letter to clients earlier this month, Armitage said the economic downturn has forced him to take a "long hard look at our business model."

"In order to focus on some ongoing projects that require all my time and energy, I have decided to phase out AGA Financial," Armitage wrote.

His son Jeremy, the letter continued, would "assume the responsibility of managing my accounts" under a new company called Ethos Capital Management Inc.

In an e-mail, Jeremy Armitage said he did not have time to speak to the media because of the "mess" he was dealing with. He said neither he nor his father would have any comment, "due to the legal issues involved."

In May, Armitage was suspended as a representative of ePlanning Securities Inc., a Roseville-based network of independent securities brokers. The company, which said Armitage resigned from the board at the same time, declined to say why it suspended him.

The following month, the investments Armitage made for clients in a Redding company called Asset Real Estate & Investment Co. collapsed. AREI's founder, Jim Koenig, shut the company, closed a golf course it developed with investors' money and filed bankruptcy. Its headquarters was raided a short time later by the state Attorney General's Office.

"This kind of fraud just really infuriates me," said Deborah Orlando, a Wachovia Securities vice president who is working with one of Armitage's clients to recover her money.

Lynn Luthi, 84, of Oakmont gave Armitage nearly $700,000 to invest in 2005. Much of the money went into AREI and related companies.

Concerned she wasn't getting honest answers from Armitage, Luthi turned to the Council on Aging over the summer. In addition to providing such services as Meals on Wheels, the Santa Rosa nonprofit agency helps seniors get a handle on their finances.

At the council's request, Orlando reviewed Luthi's investments and soon concluded large pieces of her portfolio were worthless.

Orlando said the investments were not only risky and lacked diversification, but they reveal what she believes is a troublesome conflict of interest involving Armitage.

Armitage had an ownership stake or control over some of the companies his clients were invested in, she said.

According to SEC filings, Armitage was a director in Lakeside Mortgage, an investment fund founded in 2002 that provided mortgages to builders in Northern California. Armitage put $100,000 of Luthi's money into the fund.

Today, so many investors are trying to get their money out of the fund that its rules prevent investors like Luthi from withdrawing any of her money for at least 3? years, according to SEC filings.

Other lawsuits claim Armitage was a co-owner of AREI before it went under. Armitage put $400,000 of Luthi's money into AREI, including $200,000 into corporate notes that aren't backed by any real estate, Orlando said.

"It's just a bunch of worthless notes at this point," she said. "It was just a Ponzi scheme where they got more and more and more investors until it blew up one day."

A Ponzi scheme lures investors with promises of unusually high returns. But instead of investing their money in a business that generates actual profits, organizers use the funds to pay off earlier investors. The operation implodes when it can no longer attract new investors.

Some investors were able to pressure Armitage to return some of their money.

After their interest payments ceased last year, former Marin residents Monterey and Bonnie Morrissey demanded Armitage pay them back the $380,000 in AREI notes he sold them.

He signed a promissory note saying he would pay them back with interest in a series of payments totaling $422,000. He repaid nearly $250,000 in the spring but then missed payments, according to the couple's Aug. 8 lawsuit in Sonoma County Superior Court.

He renegotiated the promissory note, and they agreed in July to give Armitage more time to repay, the suit said.

"We are continuing to rely on your word," the couple wrote in a letter to Armitage. "Please do not disappoint us."

They never heard from him again, according to the suit.

The couple, now retired and living in Oregon, are suing Armitage to recover the remaining $175,000, said their San Francisco attorney, Donald Putterman.

"For the vast majority of his clients, these were retirement funds that we're talking about, which makes the whole thing particularly awful," Putterman said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.