Florida’s Old Enemy--Land Fraud--Makes a New Appearance : Real estate: The collapse of the state’s largest developer has left victims around the world. Two former officials have admitted fraudulent sales.


For 35 years, General Development Corp. sold the American Dream, gilded with Florida sunshine and sliced up into lots just the right size for a three-bedroom house. With an aggressive sales force of 3,000, GDC literally roamed the globe in search of customers who could be seduced by low monthly payments and a rosy picture of the good life that beckoned in communities with names such as Silver Spring Shores and Port St. Lucie.

And it found them--retirees from New York, blue-collar workers from the Midwest, middle-income families in Europe, and lately, investors by the thousands from Taiwan, Hong Kong and South Korea. Even a few California investors were hit. What these GDC customers had in common was hope for a place in the sun, and a vast unfamiliarity with the Florida real estate market.

So successful has GDC been over the years that by the end of 1988 the company was reporting assets of $1 billion on annual sales of $281.8 million. About 212,000 people lived in its nine developments. And the empire was expanding. While developing a 21,000-acre recreational community in Tennessee, GDC had also entered the lucrative time-share market, paying $65 million in August for Glen Ivy Financial Group Inc., a Corona, Calif., firm that operates 14 resorts in California, Hawaii and Florida.


Long Florida’s largest developer, GDC also came to be known for its considerable clout in business and political circles, wielding influence that served the company well in gaining a multimillion-dollar line of credit with major banks and in winning environmental and zoning concessions from state regulators. Among the company’s directors are former Florida Gov. Reubin Askew and Howard L. Clark Jr., chief executive of Shearson Lehman Hutton.

But finally, even the best of connections couldn’t save GDC from a federal grand jury’s finding that for years the company has been running a massive scam that targeted out-of-state buyers, particularly recent U.S. immigrants, Canadians and Asians, and left them saddled with mortgage payments on overpriced homes or with contracts to buy lots as much as 10 times more expensive than others in the same areas.

Said U.S. Atty. Dexter Lehtinen: “This fraud permeated the entire corporation and was part of its institutional policy.”

In March, GDC and its two former top executives each pleaded guilty to one of 16 criminal charges of fraud and conspiracy, admitting in federal court here that for years they knowingly bilked customers of what the U.S. attorney says is at least $100 million. As part of the plea bargain with the government, the company agreed to repay the $100 million to about 10,000 victims over 25 years.

But on April 6, two weeks after those guilty pleas, GDC collapsed into what threatens to become one of the most complicated bankruptcy cases in Florida history. With its filing under Chapter 11 of the federal bankruptcy code, the company has cast doubt on its ability to abide by the restitution plan and set off a scramble among creditors that include several banks, state tax assessors and tens of thousands of customers.

In a state that many thought had lived down its boom-time reputation for land fraud, the GDC case is viewed as a major setback, and has already spawned calls for new Florida laws to police the industry.

But the aftershock of GDC’s fall has global implications as well. Never before has an American company selling pieces of the United States launched such a sophisticated marketing scheme targeting small investors in Asia, South America and Europe. Victims are worldwide.

“This is a mega-case that affects a vast portion of the population,” said U.S. Bankruptcy Judge A. Jay Cristol. “We have a whale here that has been injured,” he added, with a nod to the legions of lawyers and accountants now involved. “I’m not going to watch that whale be devoured by sharks before it can find a safe harbor.”

Critical to GDC’s chances for survival is the question of just what assets the company has. Much of the $836 million the company claims as assets are in the form of receivables, or payments due. The largest single creditor is Prudential Insurance Co., with $75 million in GDC bonds and another $25 million in preferred stock. But the majority of creditors are working people who have been making monthly payments on home sites for which they don’t yet have the deeds.

“The dilemma for my clients, and for thousands more, is whether they should continue to make their payments,” said Miami attorney Cyrus E. Hornsby, who represents more than 1,500 Taiwanese who have signed contracts to buy GDC lots at an average price of $21,000. Once customers default on their contracts, they lose all claim to the lots. “Frankly,” said Hornsby, “this is such a mess we haven’t come up with a strategy yet.”

An equally intriguing question is how a company as old and as well-established as GDC could go so bad. “I guess it happens the same way honest people avoid paying income taxes,” said Edward Tavlin, an analyst with Josephthal & Co. who has followed GDC stock and met regularly with its officers since 1985. “You do it once, and you get away with it, and you do it again and again.”

GDC’s policy of fraud and deception was directed from the top, according to investigators. In exchange for the government’s willingness to drop 15 criminal charges, former company President Robert F. Ehrling and former board Chairman David F. Brown each pleaded guilty to a single charge of conspiracy to commit mail fraud and to transport people across state lines for fraudulent purposes. And both men--each of whom were paid $600,000 in salary alone last year--admitted in U.S. District Court that they were aware of the deceit taking place.

“I am totally sorry, and I fully regret this whole issue, and I wish to apologize to all those people injured,” said Ehrling, 50, who directed the company’s marketing operations. Said Brown, a 49-year-old lawyer: “I am sorry I did not take action sooner.”

GDC’s crimes, beginning as far back as 1983, according to the indictment, included inducing unsuspecting customers to buy its houses by misrepresenting their value and concealing the fact that its prices were substantially higher than houses of other builders in the area. At the same time, the company sold packages of its residential mortgages to financial institutions, including CalFed Inc. of Los Angeles. (CalFed Senior Vice President James Hurley said $50 million worth of mortgage loans were either paid off or sold back to GDC.)

The FBI spent more than two years on the case. But long before that investigation began, signs of trouble were evident through a series of class-action lawsuits filed on behalf of about 70,000 homeowners by Miami attorney Richard Bennett. A 43-year-old solo practitioner, Bennett received his first call from a GDC customer more than seven years ago, and since then, he said, he and his wife Lisa, also an attorney, “have been playing detective, trying to unravel the scheme by which thousands of innocent people have been lured into a vicious cycle of debt.”

Bennett, who prompted the FBI investigation of GDC, said his determination to figure out the company’s scheme became “a near-obsession because at each step of the way, what I found out was worse than what I could imagine--and I’m a cynical person.”

Typical of the way GDC duped its customers is the story of Robert and Georgia Daniels, one of 107 plaintiffs in a civil fraud suit filed by Bennett that GDC has agreed to settle. In 1970, the Danielses, then living in Toledo, Iowa, went to a local motel restaurant for a free dinner and a GDC sales pitch. They enjoyed their prime rib, and they also relished the vision of retirement living that the GDC sales representative drew. Sight unseen, they bought four lots in Port Charlotte--25 miles north of Fort Myers, and well inland from the coast--one for themselves and one each for their three children. The price was $2,500 each.

Daniels, 62, a retired public school administrator now living in Loveland, Colo., said he quickly paid for the lots in full, though he eventually changed his mind about moving to Florida. But he figured the land was a good investment, and in 1984 a call from a GDC salesman seemed to confirm that. His lots, Daniels was told, were now worth almost five times what he had paid for them if he would trade them in a deal to buy a home on another lot. With the credit for the original lots, and $6,500 in cash, the company offered to build Daniels a new $70,000 house.

At this point, the Danielses took GDC up on its offer of a weekend trip to Florida, where for three days they were wined and dined by a GDC salesman who rarely left the couple to themselves. “We were treated like kings,” Daniels recalled.

In fact, what GDC was doing, according to the criminal indictment, was consistent with its policy of keeping the “units,” as customers were called, virtual prisoners to prevent them from discovering that other builders’ homes are priced considerably lower. “In some instances, salespeople arranged with the hotel to screen telephone calls to customers’ rooms,” according to Lehtinen, the U.S. attorney.

Just hours before their scheduled departure for home, the GDC salesman who had devoted the weekend to the Danielses sat them down for the final pitch, the couple said. The couple was reminded that in exchange for one lot not yet zoned for development they would receive a “credit” of $20,000 to be applied to the cost of a new home. They were told again of the small down payment required, and advised that decorators were standing by to help them select wallpaper and curtains. They were given brochures from which to choose appliances. They were reminded that their plane for home was about to leave, and time was short.

In this high-pressure setting, three out of four people who take GDC’s Florida trip say yes, according to company statistics. That’s what the Danielses said. Twice. By the time they left for the airport, they had agreed to trade two of their four lots for two new homes which, the salesman assured them, GDC could easily rent out for more than enough to cover the monthly mortgage payments. The couple arrived home with two mortgages, written by GDC’s in-house finance company, in the amount of $51,000 each.

The houses were quickly built, and GDC did rent them out, Robert Daniels said. But not for the $600 per month they needed for the mortgage payments. “We were getting $375 a month rent (for each),” Daniels said. “And we were soon in a situation where that was hurting.”

Early in 1988, Daniels said, he decided to sell the houses that he believed were worth $70,000 each. He hired an appraiser with no connection to GDC, and found out they were actually valued at a little more than $40,000 apiece. For the past two years, the couple has continued to make monthly mortgage payments despite the belief, as he said, “that we’re pouring money down a hole.”

Some GDC customers who complained loudly enough about being cheated often were bought off, according to investigators. In his March 22 court appearance, Ehrling admitted that in 1986 he authorized the payment of $17,000 to one dissatisfied home buyer.

A year earlier, GDC quietly paid off a California couple who claimed fraud after winning a GDC home on the NBC-TV quiz show “Dream House,” according to the grand jury indictment. Don Reid, the producer, said he contracted with GDC to buy at cost a home purportedly worth between $85,000 and $100,000. But after contestants Michael D. and Della Sue Rose of Huntington Beach selected a GDC home in Silver Spring Shores in Central Florida, they discovered the real value was about $40,000. To silence the couple, GDC first gave them $20,000 as a loan to pay taxes on the house, and later bought back the property for $70,000, according to the indictment.

Said Reid: “We gave away about 29 houses during the show’s two years, and that’s the only one we had problems with.”

At the same time GDC’s tactics were coming under increasing scrutiny in the United States, the company stepped up its marketing efforts outside the country. In 1988, in fact, $102 million of the company’s $281 million in sales came from Europe and Asia, chiefly Taiwan.

But GDC’s problems were mounting overseas as well, the most dramatic being in South Korea, where last fall the company’s sales chief, Ray Pionikoski, was jailed for two weeks and then run out of the country after press reports there accused GDC of selling Florida “reed land.” Pionikoski was freed only after entreaties from Florida senators Bob Graham and Connie Mack, and U.S. Rep. Dante Fascell, and the return by GDC of $4.8 million in down payments and monthly installments, according to reports.

Today, just four months after moving into six floors of a gleaming new waterfront office building in Miami, GDC seems to be on the brink, hemorrhaging money and staggering toward a spectacular demise.

The work force that two months ago numbered 5,200 has been pared by more than half. Legal fees have recently been averaging $15 million a year. And Charles J. Simons, the outside director named to head the company, has ordered a stop to all Florida trips and shut down all out-of-state sales offices because, he has said, he can’t be sure that all fraudulent practices have ended.

The company’s stock, which reached a high of $18.875 per share last year on the New York Stock Exchange, on Friday closed at $1.50.

“It’s a surreal situation to say the least,” said Bennett, the lawyer who has spent much of the past seven years representing unhappy GDC customers. “Since we have no idea whether the company has more assets than liabilities, we don’t know if our clients are throwing away their money by making payments or not. We do know that the settlement checks GDC gave us last week have bounced.

“We still hope to recover something for people who have been making payments on the dream. They have sacrificed, and for most it’s been devastating.”

On May 22, a federal judge is to rule on a reorganization plan and to pronounce sentence on the company and on Brown and Ehrling, who each face a maximum penalty of five years in prison and a fine of $250,000.

Meanwhile, residents of nine GDC communities are wondering if the company will ever pay about $10 million in overdue property taxes, and whether unfinished roads and sewers will ever go in.

“We have a lot of concern for the future because of this,” said Wayne Allgire, city manager of Port St. Lucie, which GDC carved out of Central Florida scrubland in 1961 and is now home to 60,000 people. “We have 230 miles of roads and a lot of drainage structures that were to be updated. But the biggest impact (of a GDC bankruptcy) is going to be on long-term growth. For 10 years we have been one of the fastest growing cities in Florida. But now I think we’ll have to increase taxes to cover the indebtedness we inherit from GDC.”

Also damaged is Florida’s image as a state where land fraud was a chapter from the past. “A lot of people in Florida who had nothing to do with GDC suffer because we all get tainted as land swindlers,” said Tavlin, the analyst. “And that may be the saddest part of this story.”