Pioneer’s Tangled Tale Explained to Investors : Finance: Poorly managed growth and possible fraud are behind the San Diego mortgage firm’s problems.

There was little good news for the nearly 1,000 disgruntled Pioneer Mortgage investors who braved Wednesday’s hail and rainstorms to hear the first official explanations of the jumbled string of events that forced Pioneer to seek protection in U.S. Bankruptcy Court in January.

J. Cole Francis, the court-appointed examiner who has spent five weeks studying the financial unraveling of Pioneer, told investors that only 10% of the 450 loans arranged by the La Mesa-based mortgage brokerage firm for its 2,500 investors were still generating interest. The rest have been classified as “problem loans” because investors have stopped making scheduled payments.

Late last week, Francis issued a report suggesting that Pioneer, a $250-million mortgage brokerage operation, used a Ponzi scheme in late 1990 to solicit new funds that were used to pay off previous investors before the bankruptcy filing.

Francis on Wednesday told investors that Pioneer fell victim to rapid but poorly managed growth and possible fraud.

The investors, who met at Golden Hall in downtown San Diego, remained mostly silent during the four-hour meeting as Francis and the company’s current management explained steps being taken to safeguard investments.

But the crowd, which included many retirees who have turned their life savings over to Pioneer, grew noticeably upset at any mention of Gary Naiman, whose family owns Pioneer. “I hope you’re not hissing at me,” Francis said after delivering one particularly bad piece of news about Naiman’s role in Pioneer’s downfall.

Francis told investors that Dennis Schmucker, who became Pioneer’s president on Jan. 10, “inherited a terrible mess” at Pioneer, which, until last year, had compiled a nearly spotless record during 45 years in business.

Investors also learned that Naiman, the company’s beleaguered owner, had direct or indirect interests in about 25% of the loans in Pioneer’s portfolio. Naiman resigned as president Jan. 9 and turned day-to-day operations over to Schmucker. Disgruntled investors have filed more than 100 civil suits in U.S. District Court and Superior Court in San Diego alleging fraud by Naiman.

Pioneer’s skeleton staff has been struggling to piece together the record-keeping puzzle that Naiman left behind. But that effort has been hampered by Naiman’s decidedly arcane accounting and reporting system.

Pioneer kept three separate records of investments made for clients, but “none of them are right,” said Schmucker, who has played key roles in several of the nation’s largest bankruptcies. “I’ve never encountered a situation where the (loan records) . . . were so convoluted and interrelated,” Schmucker said.

The company has been unable to determine the status of many investments because, during the latter half of 1990, Naiman shifted investments without clients’ approval. And, as Pioneer’s cash evaporated, Naiman evidently directed his staff to “simply pull money from wherever they could find it” to make interest payments, meet the payroll and pay office expenses, Francis said.

For example, Pioneer employees recently spent 128 man hours untangling a single investment, Schmucker said. “With 300 problem loans in front of us, you have an idea of the magnitude of the job ahead of us,” Schmucker said.

Schmucker and Francis said it also will be difficult to determine the true value of investments that Pioneer arranged because Naiman apparently based some of his loans on inflated appraisals.

For example, Naiman appraised the value of Pioneer’s headquarters office building on El Cajon Boulevard in La Mesa at $5.5 million, but the building was recently put up for sale at $2.5 million. Pioneer investors and others loaned Naiman and Naiman-controlled companies $4.3 million with the office building serving as collateral.

Schmucker and Francis said that Pioneer’s tangled record-keeping has made it difficult to determine how many other investments arranged by Naiman were built on inflated appraisals. But, based upon the handful of investments studied so far, “the scenario is worrisome,” Francis said.

Investors on Wednesday urged Schmucker and bankruptcy court officials to take legal action that would prevent Naiman’s family from receiving funds from more than a dozen companies that, although related to Pioneer, are not tied up in bankruptcy proceedings.

Pioneer has initiated foreclosure proceedings against several Naiman-controlled properties, including the now-closed Murietta Hot Springs resort in Riverside County. Schmucker pledged that Pioneer would sue Naiman and his family’s trust in order to ensure that investors, not the Naiman family, receive any available cash from those entities.

But wringing cash from the troubled Naiman companies could be difficult. Pioneer’s investors and creditors had hoped to receive some of the $4.3 million that Naiman planned to generate through the sale of several Jack in the Box franchises that he owned along with Pioneer investors.

But that deal fell through on Wednesday largely because of Naiman’s tainted reputation, according to attorneys familiar with the transaction.

During Wednesday’s meeting, Schmucker seemed to win over many Pioneer investors, some of whom previously had questioned his independence. “Mr. Naiman probably is not happy with me,” said Schmucker, who was appointed to his job by Naiman. “He is probably upset with me now.”

In a related development Wednesday, attorneys representing Pioneer and the company’s creditors’ committee reached tentative agreement on a much-debated plan to pump needed funds into the cash-strapped company.

The agreement, which must now be approved by U.S. Bankruptcy Court Judge James W. Meyers, would allow Pioneer to pay investors the proceeds of 14 loans that soon will be paid in full by borrowers. Under terms of the agreement reached Wednesday, Schmucker would retain a percentage of the loan proceeds and use them to run the company.

The agreement, if approved by Meyers at an April 9 hearing, “would answer the important question of where we get funds needed to operate the company,” Schmucker said.