Development Plan That Became House of Cards : Probe: The state is investigating Anaheim Hills-based Hill Williams for allegedly luring elderly investors into a 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.”
Peterson had joined the firm a year earlier as director of residential development and had quickly come to suspect that Williams was using investors’ money to build a house of cards. Since 1989, Hill Williams had raised through partnerships nearly $90 million from about 5,000 investors, many of them retirees, for the stated purpose of building and selling affordable houses, mainly in Riverside and San Bernardino counties.
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.
Peterson gave his information to the state Department of Corporations, the regulator of securities sales in California. Earlier this month, the department accused Hill Williams of operating “a classic Ponzi scheme” in which the company used new investor funds to meet its obligations to previous investors. “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 charged in a civil complaint demanding restitution.
State officials filed their allegations just days after Williams shocked investors Feb. 26 by filing for the liquidation of the fund-raising partnerships. On March 3, the real estate investment company also sought liquidation under Chapter 7 of the U.S. Bankruptcy Code.
Meanwhile, Postal Inspector Aaron Ward confirmed that his agency, 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 the 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 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.
The concept seemed reasonable enough to the investors who were dazzled by Williams’ pitch. He assured them 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 were practically nonexistent.
Investors were promised a healthy annual return of 15%, to be paid in monthly installments.
The liaison between Hill Williams and investors was Colton Financial, a Newport Beach financial adviser that acted as underwriter for the 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.
Many investors now say they relied entirely on the word of their brokers. Had they studied the investment documents, they would have known that Hill Williams was risky.
One 150-page prospectus prepared last fall 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.”
Clifford Larsen of Yorba Linda and his wife, Louise, invested $30,000. “After a while, you get inured to warnings--you don’t read them very carefully,” said 75-year-old Clifford Larsen.
Charles De Late, who also invested $30,000, took two tours of Hill Williams properties and saw four homes. 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 targets: elderly, living on a fixed income and attracted to investments offering a high yield to cover their monthly bills.
Not all of the investors, however, were elderly. After her husband died in a traffic accident, Carole Coleman invested $15,000 of his individual retirement money in a Hill Williams fund.
“I didn’t want to discuss money matters with my children because they were grieving their father’s death,” said Coleman, a 55-year-old Huntington Beach teacher who said she followed the advice of a financial planner. “I just went along with the man’s recommendation.”
Two lawsuits, including a class-action suit, have been filed against Hill Williams on behalf of investors. Both suits also name as defendants the brokerages that sold the investments and underwriter Colton Financial.
David Colton, the boyish, 40-year-old founder and president of the Newport Beach underwriting company, says his firm, like everyone else, was hoodwinked and is suing Hill Williams.
“The only thing I’m worried about is that my professional reputation could be tarnished, which would be unfair,” he said. “After all, I did a great job for Hill Williams--I raised $90 million.”
Whether he 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. “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 were the agencies that should have been looking out for the investors, said Ronald Rus, attorney for the bankruptcy trustee of the partnerships’ estate. 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 cannot possibly police every company that submits an application to sell securities.
