Examiner Reports Collapse of PMC Was Not Sudden : Real estate: A report says Property Mortgage Co. has been insolvent for years, continuing to pay interest with ‘fresh money’ from new investors.

When investors in Property Mortgage Co. were told that the company had run out of cash and entered bankruptcy proceedings, the news was shocking.

After all, the 300 investors jammed in a Sherman Oaks hotel ballroom seven months ago to hear what happened to their money had received regular interest checks from PMC.

But there was nothing sudden about PMC’s collapse, according to Ted R. Roth, an examiner appointed by the bankruptcy judge overseeing the Chapter 11 reorganization of the company. Investors were unaware that PMC had struggled for years, Roth said in his first detailed report on the demise of the Sherman Oaks-based concern.

The company posted operating losses totaling $23.2 million from 1986 through 1990, Roth stated. At the end of 1990, PMC had a negative net worth of $24.7 million--its debts outweighed its assets by that amount--and was technically insolvent, according to Roth’s report, which began circulating among representatives of creditors and investors last week.

Actually, PMC, under the direction of its two co-owners and top executives, Elliot Fine and his son-in-law Stanley Glickman, had been insolvent since 1984, Roth stated.

Yet, until it landed in bankruptcy, PMC kept sending out monthly interest checks--totaling more than $1.4 million per month--to its investors, as if nothing was wrong.

It was able to do so, Roth stated, mainly by taking in new funds from investors without earmarking that cash for specific real-estate projects. The money was “unsecured funds that were commingled with other funds,” much of it sent back out to help cover the interest payments due the investors, according to Roth’s report.

That’s not dissimilar to a Ponzi scheme--although Roth did not use that term--in which money is raised from new investors merely to pay off previous investors. Nonetheless, Roth quoted Glickman in his report as saying that “as long as ‘fresh money’ was coming in, everything was ‘all right.’ ”

In the end, though, there wasn’t enough “fresh money” to keep PMC going. It “exhausted all available funds,” Roth stated.

David Gubman, a lawyer representing Glickman and Fine in the bankruptcy proceedings, declined comment on Roth’s report. Hydee R. Feldstein, a lawyer for PMC, did not return calls requesting comment.

Roth’s report also said a startling 77% of the company’s loans now outstanding are non-performing, meaning the borrowers are either behind on their payments or already in default.

PMC arranged mortgage loans for residential and commercial properties--including the property leased by the renowned Bistro restaurant in Beverly Hills--using cash provided by investors. In most cases, the loans were secured by second trust deeds, that is, second mortgages on property that already was secured by a first mortgage.

A second mortgage carries the risk that if the borrower defaults, holders of the first mortgage get first crack at foreclosing on the borrower, leaving in doubt whether there will be anything left for the holders of the seconds.

The holders of the seconds, of course, are compensated for that risk with relatively high interest rates--in PMC’s case they ranged from 12% to 15%--which is why many PMC investors kept putting their money into the company’s loans.

PMC’s investors still haven’t gotten back a penny of the collective $102 million that they plowed into the mortgage loans PMC arranged on their behalf. They won’t see any of it until PMC receives a reorganization plan approved by the U.S. Bankruptcy Court. The investors include well-heeled Beverly Hills residents and senior citizens who had their life savings in PMC and its affiliate, SLGH Investments Inc., which also is in Chapter 11.

(SLGH collected the investors’ cash. PMC, as a mortgage broker, would then arrange the loans. Roth’s report and financial data treat PMC and SLGH as one entity.)

Leon L. Vickman, a lawyer representing a group of PMC’s creditors, said there is no chance that PMC will emerge from Chapter 11 before 1992. An “official” creditors committee and PMC are trying to jointly develop a reorganization plan, but it won’t be finished and approved by year’s end, Vickman asserted.

According to Roth, some of PMC’s biggest losses were from investing heavily in apartment-house projects with a Carlsbad developer, JL Construction Co., which is owned and managed by James L. Franklin. His dealings with PMC began in 1986 with an introduction from his father, Stan Franklin, who had previously done business with PMC, the report said. Over half of PMC’s loan portfolio was tied up in JL projects, many of which ran into serious financial snags.

“JL’s difficulties, combined with the debtors’ liquidity problems, were the primary reasons” that PMC was pushed into bankruptcy last Valentine’s Day, Roth stated. Franklin said he had not yet read the report and would have no comment.

As of July 21, JL owed $64.6 million to PMC, SLGH and various partnerships headed by PMC and JL.

Roth also criticized Glickman and Fine’s management. He asserted that they used investor funds without authorization, that they personally received “advances” totaling $4 million from PMC without pledging any collateral and that “bogus journal entries” were made in PMC’s financial statements to hide losses from PMC’s employees and investors.

PMC also continued to solicit money from its investors without telling them about the company’s problems, he stated.

He claimed that PMC “haphazardly” monitored the projects in which PMC and JL had invested, even as JL “incurred substantial overruns on almost all of the projects” in which PMC had a stake.

Glickman and Fine still have their ownership stakes in PMC and its affiliates, but after PMC filed for Chapter 11, the court turned daily management of the company over to Jeffrey F. Katzer, a Los Angeles commercial-finance specialist.

Roth did not speculate about how many individual investors are affected by PMC’s collapse. Lawyers and others involved in the case have estimated that between 400 and 1,000 investors were involved.

Before it filed for bankruptcy, PMC’s “unblemished payment record” over 20 years “had an extraordinary effect on investors’ confidence,” Roth said in his report, “so much so that in many cases, investors would send in their funds as if they were dealing with a bank.”

But they weren’t dealing with a bank, so there was no federal deposit insurance to protect them. What they did have, Roth noted, was “a false sense of security.”