Pioneer’s Golden Lure Turns to Lead for Trusting Investors

Marge Kennelly jokes that she moved to San Diego two years ago for her California dream, which included a sparkling condo, a part-time real estate job and, eventually, retirement.

But, before buying the condo, Kennelly, 60, ignored her “gut feeling” and followed the advice of friends to join them as investors at Pioneer Mortgage, a 45-year-old La Mesa-based mortgage investment firm that was offering hefty returns that far exceeded what she could have gotten elsewhere.

Kennelly, who sold real estate in New Jersey for 25 years, had always invested her own money directly by buying condominiums and houses that she could resell at a profit. But this time she “took a chance” and parked her life’s savings--$110,000--with Pioneer Mortgage, which in turn loaned the money to borrowers who promised to pay high interest rates.

Now, Kennelly’s dream has turned into a nightmare. Earlier this month, Pioneer filed for protection under Chapter 11 of the U.S. bankruptcy code. The action has frozen the money invested by Kennelly and 2,500 others. She said she has no idea how much, if any, of her $110,000 she will ever see again.

The tidy cottage Kennelly rented in Pacific Beach was supposed to be a “stopover” on the way to retirement and the condominium that eventually would be passed along to her children.

“It looks like I’ll be staying here for a while,” said Kennelly, who is now working full time at a Century 21 real estate brokerage office in La Jolla.

Kennelly is among an estimated 2,500 people who invested more than $230 million with Pioneer Mortgage. A significant number of those investors are from San Diego’s Jewish community. And almost all learned of Pioneer through a grapevine that encompasses two generations of family members, friends and business associates in San Diego.

Investors were attracted to Pioneer by promised returns of 12% or more on their money. But the high returns were counterbalanced by the riskiness of the investments. In many cases, borrowers turned to Pioneer because they were unable to get loans from banks, savings and loans or finance companies.

Although some Pioneer investors received first trust deeds, others received second, third or other junior instruments, which, because of their status, carried more risks. Trust deeds are a form of lien on real estate.

Until last month, when a cash crunch forced Pioneer President and Chief Executive Gary Naiman to stop sending out checks, the 45-year-old company paid monthly checks like a machine.

Now, Pioneer investors, most of whom live in San Diego, are clamoring for information about their investments and fearing the worst.

“It was a hell of a good investment for a long time,” said Charles W. Weinberg, a retired veterinarian who has $40,000 invested with Pioneer. “I earned a lot of money with them. . . . I can’t even holler at the guy (Naiman) . . . although I sure would like my money back now.”

Weinberg, who had invested with Pioneer for 13 years, said Naiman never missed a monthly payment until late in 1990. “How could you not trust a man like that?” Weinberg said.

A goodly number of Pioneer investors evidently did stop trusting Naiman in late 1990 when word filtered out that monthly payments would be delayed. Mild concern evolved into near panic for many investors in December when Naiman advised investors in a letter that payments were being halted across the board.

Nearly 700 worried people jammed a Mission Valley hotel meeting room on Jan. 3 to discuss legal strategies. Most favored sending Pioneer into involuntary bankruptcy.

Naiman, who for weeks had resisted seeking protection in bankruptcy court, on Jan. 9 initiated filings voluntarily. He subsequently turned control of the ailing company over to Dennis Schmucker, a San Diego businessman with extensive experience as a court-appointed trustee.

Schmucker is now staffing an “investor hot line” that will give investors the status of individual investments, according to attorneys who represent Naiman.

The attorneys also said that Naiman has agreed to leave management of the company to Schmucker, who has worked reorganizations of several highly publicized bankruptcy cases, including San Jacinto Savings Assn., American Home Mortgage Corp. and U.S. Financial Inc.

Naiman, according to attorneys representing Pioneer, retains no control over Pioneer or its affiliated companies. He can no longer sign Pioneer checks, has turned in his company credit cards and vacated his Pioneer office, the attorneys said.

Schmucker also has changed the locks at Pioneer’s office building, transferred loan files to a separate, locked office and created backup files of Pioneer’s computerized accounting records, the attorneys said.

After the Jan. 3 meeting, it became apparent there were deep divisions among investors. One bitter investor described Naiman as a “Pied Piper.” But the woman blames Pioneer investors for “acting like children. . . . I can’t believe we trusted him to that degree.”

However, a good number of investors still believe that Naiman, who declined to be interviewed for this article, could restore financial stability at Pioneer if given time.

It is that kind of trust that attracted investors to the company that dates back to 1946, when it was founded by Morrie Naiman, Gary Naiman’s uncle.

“This was like a family tree,” said one investor who asked to remain unidentified. “It grew and grew and grew like it was contagious.”

Cynthia Stein, an El Cajon investor who helped organize the Jan. 3 meeting, is urging fellow investors to remain calm.

“We are a family of people here,” Stein said. “Nobody wants to see anybody get hurt. We don’t want a mud-slinging contest.”

Over the years, Pioneer drew most of its investors from San Diego’s Jewish community, and Naiman was heavily involved in local religious, charitable and social activities.

Naiman has served on the boards of many organizations, including Congregation Beth Tefilah, the San Diego Hebrew Home, the Jewish Community Center, the United Jewish Federation and the Israel Bond Committee.

Many investors sat next to each other at religious services. Others socialized together on weekends. And many willingly told friends and neighbors about the fabulous returns that ranged upward from 12%.

Pioneer, old investors told new investors, was no flash in the pan like J. David & Co., the fraud-ridden investment firm that, during the early 1980s, attracted some of San Diego County’s richest and most prominent residents.

One San Diego woman who asked not to be named is worried that the media will paint her and other Pioneer investors as “greedy money grubbers” along the lines of J. David investors. She worries that Pioneer will be unfairly “portrayed as the Jewish J. David.”

Gary Naiman, who joined the company in 1965 as a trainee, took over as president in 1975 when Morrie Naiman’s health began to fail.

Several years ago, Naiman adopted a policy of advancing checks to investors even when borrowers had fallen behind or defaulted on their loans. That had the effect of ensuring that investors would receive monthly payments.

Very few mortgage brokers in California are willing to advance payments to lenders, said William R. Henson, president of the California Independent Mortgage Brokers Assn., which represents about half the state’s mortgage brokerages.

“Sooner or later you get into trouble,” Henson said. “When the borrower doesn’t make payments . . . you advance more and more money and sooner or later you file for bankruptcy.”

In a recent press release, Naiman acknowledged that the practice of advancing money to lenders had “exhausted” the company’s ability to make payments.

Naiman and his attorneys will not say how many of Pioneer’s borrowers are delinquent, but a class-action lawsuit filed by disgruntled investors claims that as many as 50% of the company’s loans are past due.

Some Pioneer investors believe the company’s financial woes were generated by the kind of ill-advised business practices that forced several large mortgage brokers into bankruptcy during the early 1980s.

Then, several mortgage companies in Southern California “got into big problems by advancing funds out of their own money to investors because they wanted to keep investors whole,” said Randy Brendia, southern regional manager of the state Department of Real Estate.

Those advance payments were made with the expectation that borrowers would soon make current their late payments, Brendia said. But in several cases, borrowers never made payments, and the mortgage companies ran out of funds.

In other instances, appraisals made on properties used to secure loans were “over-optimistic,” Brendia said. “People thought they were investing in something worth $300,000, when in fact it was not.”

While the state passed several laws aimed at protecting investors following the bankruptcies of the early 1980s, “regulatory agencies aren’t there to hold investors’ hands at the time they make their investments,” Brendia said. “I’d suggest that, if a person doesn’t do his or her homework . . . then it’s buyer beware.”

Brendia declined to comment directly on Pioneer. The Department of Real Estate has not initiated formal action against the company, Brendia said, but regulators “are aware that they’re in bankruptcy.”

Like most families, the Pioneer clan has wealthy branches and poorer relations.

A group of 80 investors, for example, had $32 million invested in transactions brokered by Pioneer. Bankruptcy filings show that at least a handful of families and family trusts have invested more than $1 million through Pioneer.

Other members of the Pioneer family apparently had very little.

“I was shocked at how many people were using what I would describe as a relatively dangerous investment to pay for their bread and butter,” said Ted Cashuk, an accountant who himself has “something in the middle six figures” invested in Pioneer.

Based upon information gleaned from an impromptu meeting of nearly 700 Pioneer investors, Cashuk believes that individual investments ranged between $5,000 and $3 million, with most investments being under $100,000.

The common thread among the different branches of the Pioneer family was trust--specifically, trust in Gary Naiman. “They didn’t need to call it Pioneer,” Kennelly said. “They should have called it Gary.”

Kennelly said she eventually followed the spirited recommendations of nearly a dozen good friends in San Diego who were proud Pioneer investors. One day, Kennelly walked into Naiman’s La Mesa office, gave him a check and told him to invest it.

But Kennelly said Naiman balked last summer when she tried to retrieve those funds. Several attempts at freeing her investment failed, and Kennelly grew increasingly worried. But few Pioneer investors would listen to her concerns, Kennelly said.

“Gary had a gift of being a friend to everyone,” Kennelly said. “He mesmerized them. . . . He had a way of keeping me quiet for days and weeks at a time.”

Several investors interviewed for this article acknowledged that they had total faith in Naiman’s ability to wisely invest their funds. Consequently, few had completed even the most basic research into investments suggested by Naiman.

That runs counter to advice offered by George F. Coats, a Covina investor and author of “Smart Trust Deed Investment in California.” Coats maintains that trust deeds are a good investment unless “you ignore some of the primary safety features.”

Cashuk said he was “very unhappy” when he recently learned that Naiman had not placed him in “relatively safe second trust deeds.” Similarly, an investor from Coronado complained that Naiman had shifted his investment from trust deeds into collateralized mortgage obligations, a much riskier investment.

Naiman also played a role in Dee Dee Shulman’s decision to invest her inheritance with Pioneer.

Aware that relatives and friends had unwisely invested their inheritances, Shulman decided to let investments made by her parents remain with Pioneer after her father’s death in 1985.

“I was just trying to do something reasonably conservative,” Shulman said. “It was already set up . . . and, after talking to Gary Naiman . . . I thought I was being safe by leaving it.”

Shulman, a Los Angeles resident, has been unable to reach Naiman or company representatives since learning of the bankruptcy filing. Phone calls and a registered letter, she complains, have gone unanswered. Now she is monitoring the situation from Los Angeles, worrying that “all of the investment is gone.”

One investor who viewed Pioneer’s trust deeds as a speculative business is certain that Pioneer investors will recoup some of their funds through the bankruptcy proceedings. “This can be turned around because we’re talking about (trust deeds backed by) California real estate, and, as Will Rogers said, ‘They ain’t making any more of it.’ ”

Another, who invested $50,000 with Pioneer, is less optimistic. “The fifty grand was my nest egg,” said the man. “I’m not receiving my $499 a month now, so I’ll have to work harder to make it up.”

Will Pioneer investors eventually recoup their investments through bankruptcy proceedings? “I don’t know,” said the investor who, along with his wife, has invested in trust deeds for more than two decades. But he added: “If I can’t have $499 a month, how about $75 or $100?”