THE HILL WILLIAMS SAGA : Puzzling Investment Venture Led to O.C. Developer’s Downfall : State Agency Alleges Firm Used ‘Classic Ponzi Scheme’

Rob Peterson stood at his second-floor office window one morning last fall watching people, most of them elderly, board a bus outside the lobby of Hill Williams Development Corp.

Within minutes, founder Donald Hill Williams Jr. would be treating yet another group of prospective investors to a tour of his company’s desert properties, telling them how their dollars could turn the raw land into planned communities.

“I felt sick to my stomach,” Peterson said. “The people looked so vulnerable.”

A year before, when he first came to the Anaheim Hills company, Peterson viewed Hill Williams as a place for career advancement. He joined the staff as director of residential development--an opportunity to see large-scale real estate projects through from start to finish. But he soon noticed that Williams, the company’s ever-affable president, showed scant interest in floor plans or how best to mass-produce affordable homes.

“He just didn’t care,” Peterson said. “Development was not on his mind. The company’s entire emphasis was on raising more money from investors.”

Since 1989, Hill Williams had been soliciting funds for the stated purpose of building and selling affordable houses, mainly in Riverside and San Bernardino counties. However, after a few frustrating months during which he could not get a single project off the ground, Peterson suspected that Williams instead was using investors’ money to build a house of cards.

During a three-year period, the company raised nearly $90 million from about 5,000 investors, many of them retirees. Without missing a beat, Hill Williams sent investors their generous dividend checks on the first of every month. Yet even as that wealth of money flowed in, Peterson was unable to get Williams’ approval for a simple architect’s rendering or other preliminary activities. Furthermore, the company had sold only about 50 houses since it started raising capital.

By October, Peterson had begun to wonder just where the investors’ money was going.

He scouted through computer files and came across an unimpressive list of about 30 properties, most of which were so encumbered with loans that they had little immediate value. Those debt-heavy properties were all the company had to show for the millions it had collected.

Stunned, he sought advice from a friend who is an attorney. A few weeks later, Peterson found himself telling all in a meeting with the state Department of Corporations, which regulates the sales of securities in California.

Much of his testimony ended up in documentation filed by the department earlier this month accusing Hill Williams of operating “a classic Ponzi scheme” in which the company used new investor funds to meet obligations to previous investors. State officials filed their allegations just days after Williams shocked investors on Feb. 26 by plunging fund-raising partnerships into bankruptcy proceedings by filing for their liquidation. On March 3, the real estate investment company also sought liquidation under Chapter 7 of the U.S. Bankruptcy Code.

“Since at least December, 1990, Hill Williams had insufficient income from sources other than investors’ funds . . . to make monthly distributions to the investors,” the Department of Corporations charged in a civil complaint demanding restitution.

Meanwhile, Postal Inspector Aaron Ward confirmed that the U.S. Postal Inspection Service, the Orange County district attorney’s office and the state attorney general’s office have opened a joint criminal investigation of the company.

For investors, the first hint of any difficulty came early in January, when Hill Williams failed to deliver monthly checks. Instead, investors received Williams’ explanation: The slow real estate market had forced a temporary halt to the payments, but the investors’ principal was safe.

That crack in Williams’ facade instantly sparked a legal free-for-all. Investors sued both Hill Williams and the stockbrokers who had recommended its programs. Brokers responded with suits of their own against Hill Williams, and lenders accelerated the pace of foreclosures on Hill Williams properties.

Now that the curtain has been pulled back, the scene is a puzzling one. How did thousands of investors fall victim to Hill Williams? Why didn’t state security regulations afford them greater protection? And why did brokers and the company’s underwriter promote such a precarious venture?

The concept seemed reasonable enough to the investors who were regaled by Williams’ pitch. He assured them that they could fill a critical void by providing him money to buy and develop properties at a time when real estate loans from customary sources bordered on nonexistent.

“You are the bank, you are the bank--he repeated that continually,” said San Diego resident Edith Tauf, 67, recalling one of Williams’ trademark bus tours. “He told us that he once built luxury homes, but now his focus was on--what do you call them?--entry-level homes because, even in a recession, there’s a big market for that kind of house.”

Investors were promised a healthy annual return of 15%, to be paid in monthly installments.

Williams formed the first fund-raising partnership in September, 1989, four years after he had founded his development company. With the help of what would become routine seminars and “infomercials” on cable television, Hill Williams Income Fund I swiftly attracted $20 million in minimum investments of $5,000. Williams, the fund’s general partner, kept the power to lend all investor money to Hill Williams, his wholly owned development company.

Hill Williams put Fund I money toward eight properties. To this day, most of those properties languish as partially developed land with only an occasional model home on site.

The Department of Corporations subsequently approved three more partnerships--the last of which was offered in October, 1992, at about the same time the agency began to investigate Hill Williams. And Hill Williams began planning for an $80-million fund that, unlike previous investors restricted to Californians, would be offered across the nation.

Many of the people who bought a stake in Fund I were so impressed with their punctual monthly checks that they put more money into ensuing partnerships and recommended Hill Williams to their friends and families.

The liaison between Hill Williams and investors was Colton Financial, a Newport Beach financial adviser that acted as underwriter for the Hill Williams partnerships. Colton peddled the programs to the broker community.

Because the partnerships paid a generous 8% commission on transactions, the brokers were more than eager to close deals, investors’ lawsuits allege. And as long as the checks kept coming, investors apparently figured there was no reason to ask questions.

Williams enclosed a chatty newsletter with each check, boasting of the company’s success and coaxing investors to open their pocketbooks again. Periodically he included a “project update” that, in retrospect, was wanting. For instance, Fund II listed such heady sounding developments as Pacific Hills--143 Homes, but the accompanying description revealed that none of the houses had been built.

“As you may note, (the properties) all seem to be progressing along nicely,” Williams wrote in a newsletter dated spring of 1992--despite the fact than no construction was underway, according to lawsuits against the company.

Many investors now say they relied entirely on the word of their brokers. Had they studied the circulars prepared for the income funds, they would have known that Hill Williams was not for the financially faint of heart. The 150-page prospectus prepared last fall for the final income fund advised that participation made sense only for “persons who have other adequate resources and are in a position to bear the loss of part or all of their investments.”

“After a while, you get inured to warnings--you don’t read them very carefully,” observed 75-year-old Clifford Larsen of Yorba Linda, who with his wife, Louise, invested $30,000.

Some investors also confess that they didn’t pay much attention to their exact whereabouts while on bus tours. “We saw some land somewhere near Palm Springs” is a common recollection of an excursion that persuaded them to chip in another $10,000.

Charles De Late signed up for two bus tours last year, hoping to see his $30,000 investment at work. The first was convincing enough, although he wondered why he saw plenty of raw land and only four homes. But he thought it odd that on the second jaunt a few months later Williams trotted out the exact same properties.

With 20-20 hindsight, the Santa Ana resident marvels at his own naivete: “As long as Williams had suckers like me sending him $5,000 checks, he had money to pay the 15% dividends. Then he ran out of suckers.”

According to the state’s investigation, De Late and his wife, Margaret--both 82--are typical Hill Williams “suckers”: elderly, living on a fixed income and attracted to investments offering a high yield to cover their monthly bills.

Generally, the money that investors entrusted to Hill Williams was their nest eggs--not mere pocket change. Retired meat cutter Jack Tauf, now 74, probably will have to return to work now that the dividend checks are no longer coming in.

“We had our savings in the bank for years, but when interest rates fell to 3%, we started looking for an alternative,” said Tauf, who with his wife, Edith, sank $20,000 into Hill Williams.

Like most middle-income people, the investors were inexperienced in handling financial transactions more complicated than buying a certificate of deposit at the local bank.

Four years ago, Carole Coleman’s husband died in a traffic accident. While Carole Coleman was still in mourning, a financial planner suggested that she transfer the $15,000 in her husband’s individual retirement account to Hill Williams Investment Fund I.

“I didn’t want to discuss money matters with my children because they were grieving their father’s death,” said Coleman, 55, a teacher who lives in Huntington Beach. “I just went along with the man’s recommendation.”

Coleman feels not only cheated but personally betrayed: “I was doubly duped--taken advantage of during a traumatic time in my life.”

Gemma Heffernan, manager of social services for the Leisure World Laguna Hills retirement community, said recent widows are common targets for investment pitches.

“Traditionally, women have left money management to their husbands, so they are particularly vulnerable to the influence of others,” Heffernan said. “A nice young man tells them about this wonderful monthly income they could get from their investment; they don’t realize it’s coming out of their principal.”

Often, those same people have become accustomed to the high yields that safe investments like CDs offered 10 years ago, Heffernan said. “They see an ad on cable TV for a company guaranteeing a 15% return, and they somehow construe it as an endorsement of the company by the station.”

Alan S. Zall, a real estate attorney in Tustin, said elderly people with limited resources should never buy a real estate partnership’s securities in the first place: “If they rely on this money for income, they shouldn’t lock it into an investment that cannot be immediately liquidated if they need to get to it.”

That point is made in two lawsuits, including a class-action suit, filed against Hill Williams on behalf of investors. Both suits also name as defendants the brokerages that sold the investments and underwriter Colton Financial. “They facilitated the Hill Williams scheme,” said San Diego attorney James Pollock, who represents about 200 investors. “Had they done their proper due diligence, this never would have happened.”

If David Colton, founder and president of the Newport Beach underwriting company, is concerned that he could be swept into the legal quagmire facing Hill Williams, he isn’t letting on.

A boyish 40-year-old, Colton maintains that “the only thing I’m worried about is that my professional reputation could be tarnished, which would be unfair.”

“After all, I did a great job for Hill Williams--I raised $90 million .”

Colton, a former UCLA baseball star who briefly played center field for the California Angels, had a visible role in promoting Hill Williams to brokers and investors. He frequently presented seminars for prospective investors and on occasion stood in for Williams as the bus-tour guide.

But Colton insists that he, like everyone else, was hoodwinked by Williams. He and two brokerages have filed a lawsuit against Hill Williams alleging deceit.

Even so, Colton said, he doesn’t think that Williams intended to set up a Ponzi scheme. “I believe he had a business plan that went bad,” he said. “He hid those problems from us because he felt a tremendous obligation to the investors and didn’t want let them down.”

Despite attempts to make contact, Colton said, he hasn’t spoken with his former business colleague since January. Williams vacated his Newport Beach house weeks ago, Colton said, and is staying in Corona to escape threats from angry investors.

Colton said that, as the misinformed middleman, he feels no personal guilt about the investments he touted. Still, he said, he wants to make things right. During the past month, he has been holding meetings for the investors to share his ideas about how to recover their money. “I’m rallying the troops,” Colton said.

On a recent afternoon, about 40 investors gathered at Bergland Co., an Anaheim financial planner that had recommended Hill Williams to many of its clients. Colton opened his talk with a 45-minute discourse about how he, too, had the rug pulled out from under him. Then he spelled out his solution.

Joining one of the lawsuits is not the answer, he said: “If they tie these properties up in courts for six or seven months, I guarantee you there will be no assets left.”

Rather, proceeding with development plans is the only way to pluck investor money from the properties, he said. Colton proposed that, with the investors’ support, he replace Williams as general partner of the four income funds--and take control of the properties from the Hill Williams bankruptcy trustee.

“Where will the money for development come from?” an audience member asked.

“One source would be to go back to existing investors and say, ‘Do you want to come up with more money?’ ” Colton said.

By the end of the two-hour session, Colton had won over many of the investors.

“We’ve got two alternatives: We can sit on our hands and do nothing, or we can get you in as general partner and get this thing rolling again,” Norm Gramley, 71, an Orange resident with $20,000 on the line, told Colton.

A few participants, however, were more skeptical. Clifford Larsen bluntly demanded: “How is it possible you did not know that no construction was taking place? How were you so damned ignorant about what was going on?”

Colton replied that he was perfectly aware that Hill Williams had not built anything for more than a year. But he agreed with Williams, he said, that the recession was a good time to pick up land at bargain prices: “I said to myself, if we can raise more money to buy new properties at half the price we paid three years ago, that would help insulate Funds I and II.”

Ronald Rus, attorney for the bankruptcy trustee of the partnerships’ estate, said Colton’s plan is an exercise in futility.

“In order for the trustees’ powers to be relinquished, all of the creditors would have to be paid in full and Chapter 7 would have to be dismissed,” he said. “These investors don’t want to accept that they were duped--it is the classic psychological response.”

San Diego attorney Tim Cohelan, who filed the class-action suit against Hill Williams, said Colton’s plan would only result in throwing good money after bad: “Trying to reorganize the income funds would be like trying to reorganize a train wreck.”

Whether Colton and brokerages can let themselves off the hook by pointing the finger at Williams remains to be seen, said Skip Miller, a Los Angeles attorney who specializes in corporate securities.

“There is a general obligation in common law called fiduciary duty when a person with superior knowledge, sophistication and expertise advises another person,” Miller said. “It is not an arm’s-length contractual relationship.”

Also remiss, attorney Rus said, were the agencies that should have been looking out for the investors. He questions why the Department of Corporations kept approving more income funds for Hill Williams.

And in January, the Securities and Exchange Commission authorized Hill Williams to take its fund-raising effort nationwide.

The state’s restraining order against Hill Williams two weeks ago, Rus said, was too little, too late: “It’s like ticketing Mrs. O’Leary for allowing her cow to kick over the lantern after the town has burned down.”

But Mark Harman, attorney for the Department of Corporations, said the agency can not possibly police every company that submits an application to sell securities. For the most part, the department doesn’t investigate a business without good reason--and last year alone it received 16,000 complaints about California companies, Harman said.

“To a great extent, we have to rely upon the company to provide an accurate representation of itself,” Harman said. “Hill Williams did not come to us saying, ‘We’re going to operate a Ponzi scheme--would you approve this?’ ”

Anyone with the time and inclination might have found that Hill Williams was not the successful home builder it portrayed itself to be.

While Hill Williams continued to solicit investors late into 1992, the company knew almost two years earlier that the market for many of its planned homes was being eroded by the stalled Southern California economy.

At an Anaheim Hills project, for example, Hill Williams received permits for a retaining wall in 1990. But the permit expired, and the wall has yet to be built. Construction at the 12-lot project hasn’t moved forward in at least two years, disgruntled investors say.

And, early in 1991, a shortage of construction funds forced Hill Williams to stop work on the Pacific Hills subdivision in Loma Linda, where the company planned to build 140 homes that would sell for as much as $300,000 each.

Hill Williams officials thought that the recession had made the project too risky, according to a Jan. 16, 1992, letter from the company to Loma Linda city planners. “With the economy in its current condition, and absorption of move-up housing dramatically off of 1990 levels, it would be very risky and costly to record final maps and begin development of homes in today’s market,” the letter read.

The company optimistically--and successfully--sought a one-year extension of its preliminary building permit for the Pacific Hills project. In a fall 1991 newsletter to investors, Williams confidently stated that the region was “on the threshold of a major expansion in the economy through the year 2000.”

Hill Williams also generated complaints from owners of homes that it did finish, including several dozen in Amberly Park, a city of Redlands development that was completed in the late 1980s.

Hill Williams “did it on a shoestring budget,” said Paul Carman, president of the local homeowners association, which has an ongoing lawsuit against Hill Williams.

The homes, which initially sold for about $140,000 each, now are worth as much as $240,000. Still, Carman maintains, Hill Williams “did not deal in good faith with homeowners. . . . There were all kinds of things that they said would be taken care of . . . but weren’t.”

The list of complaints included misplaced air vents, pipes that wouldn’t drain, poorly installed windows, shoddy landscaping and cracked driveways.

Amberly Park also served for a time as the site of protests by residents of a previously built Hill Williams development near Redlands, Carman said. Major water-supply lines installed at the Hill Williams project were rupturing, and disgruntled residents picketed Hill Williams’ Amberly Park sales office to show their anger, Carman said.

Carman said of the recent allegations of fraud at Hill Williams: “It doesn’t surprise me. . . . They have absolutely no ethics.”

The company’s high overhead might have been another red flag for someone interested in taking a closer look. In 1989, Williams built his two-story, 40,000-square-foot office headquarters building--now being foreclosed on by Union Bank. With only 35 employees, Williams talked of renting out most of the Anaheim Hills building, but a small mortgage company that moved in for less than a year was his only tenant.

“You could roll a bowling ball through the building and not hit anybody,” said former employee Peterson, 35, who now works as an investigator for attorney Pollock in the Hill Williams case.

Earl Garrett, a Baldwin Park resident who invested in Hill Williams, said: “I thought (Williams) spent too much money on the office building. I told him that those things are not money producers, that they’re liabilities that cost money to operate. I told him that pretty strongly.”

Signs on doorways--Hill Williams Securities, Westhill Mortgage Services--could give outsiders the impression that Hill Williams was a conglomerate with thriving subsidiaries. “But you opened the door, and there was just a big empty room with cement on the floor,” Peterson said.

As the company neared its demise, its tactics became increasingly desperate. For a couple of his bus tours last fall, Williams leased a tractor and had an employee drive it around raw land so that investors passing by would see activity, Peterson said.

On another occasion, Williams supposedly stuck Hill Williams posters and flags on land he didn’t own to show off his expanse of property to would-be investors.

“They put some flags on a date farmer’s land, and he went out and removed them,” said Allan Haeberle, community improvement officer for the city of Indio.

What Donald Williams’ motive was when he formed the first of the four investment partnerships may never be clear.

For investor Charles De Late, the bigger mystery is why he himself fell for the half-baked scheme.

“It was a matter of greed on everybody’s part, including the investors,” he said. “We saw that 15% rate of return, and we just got greedy.”

THE PLAYERS Donald Hill Williams Jr.: chairman, owner, Hill Williams Development Corp. Marvin L. Christensen: executive vice president David Colton: president, Colton Financial in Newport Beach, underwriter for Hill Williams THE DEAL Four Hill Williams partnerships raise nearly $90 million. Williams keeps power to lend all investor money to Hill Williams, his wholly owned development company. THE PITCH Investors are told they will fill a critical void if they invest in the development of affordable housing at a time when real estate loans from banks and thrifts are scarce. THE INDUCEMENT On a $5,000 minimum investment, annual return of 15% to be paid in monthly installments. Many who invest in Fund I put more money into ensuing partnerships and recommend Hill Williams to friends and families. THE INVESTORS About 5,000, many of them retirees. PROJECTS Company sold about 50 houses; owns 30 properties, most are debt-ridden. LEGAL ACTION Two civil lawsuits filed on behalf of investors against Hill Williams allege fraud.

At a Glance: Donald Hill Williams Jr. Birth date: April 1, 1948 Residence: Newport Beach Title: President, chairman, sole shareholder Company: Hill Williams Development Corp. Founded: 1985 Related corporations: Hill Williams Securities Corp.; East Hills Financial Services Inc.; Westhill Mortgage Services Inc.; East Hills Design Related proprietorship: Westport Pacific Realty Related partnerships: Hill Williams Income Fund I, II, III, IV and V; Hill Williams Investment Partners; Hill Williams Development Corp. Summerwind Ltd.; Hill Williams Properties Resume: 1975 to 1980: Regional sales manager of a real estate brokerage. 1980 to 1982: Assisted institutional lenders in management and sale of more than $9 million of distressed property. 1982 to 1985: Senior executive, Griffith Homes; managed land acquisitions, feasibility analysis, construction, sales, marketing. Professional affiliations: Licensed 1982, California Department of Real Estate; member International Council of Shopping Centers. Source: Hill Williams Income Fund V prospectus