Real Estate Whiz Target of Rent Scam Inquiry

No one would accuse Bernard Gross of lacking entrepreneurial zeal. The bearded, rotund real estate whiz built a vast portfolio of rental properties by getting people throughout Southern California to deed him their houses for free.

But rather than winning points for ingenuity, Gross instead is the focus of a long-running fraud investigation by the FBI and the U.S. attorney’s office in Los Angeles.

Federal authorities in court papers have identified Gross, now living in Studio City, as the central figure in a massive rent-skimming scheme that they say has duped homeowners, cheated lenders of millions of dollars and clogged the bankruptcy courts with bogus petitions.

In a lengthy affidavit filed in federal court in Los Angeles, the government said “Gross and others” have defrauded “homeowners of financially distressed properties and mortgage holders of these properties” by falsely promising to prevent foreclosure and “preserve the homeowner’s credit rating” by making mortgage payments or renegotiating the loan.

After obtaining title, however, Gross and his associates rented the properties but “failed to make payments or otherwise negotiate with the mortgage holder,” the affidavit alleged. Gross also engineered numerous sham bankruptcies to delay foreclosures so he could squeeze out the maximum rent, according to the document.

Although no charges have been filed, the affidavit, in support of a search warrant application, alleged that Gross and his associates committed mail fraud, bank fraud and bankruptcy fraud. At a court hearing in January, assistant U.S. Atty. Steven J. Katzman said he hopes a decision on indictments will be made by May.

Eagerly awaiting such an outcome is a small army of lender attorneys whom Gross has run ragged through the bankruptcy courts in Los Angeles, San Bernardino, Santa Ana and San Diego. They represent mortgage-holders attempting to foreclose on properties whose owners have not kept up their loan payments.

Michael S. Polk, a lender attorney in Tarzana, said Gross once told him: “You shouldn’t be complaining and coming after me so hard. Look at all the fees I’m generating for you.”

Exasperated bankruptcy judges in Los Angeles also have complained.

“I assure you, the court is very frustrated with this pattern and practice, and we have urged that it be dealt with criminally,” Judge Lisa Hill Fenning said at a hearing last year in one of the bankruptcy cases.

Gross, 49, who a few months ago controlled as many as 800 rental properties, said he has sharply curtailed his business as a result of the federal investigation and now is so broke he is staying with friends in Studio City. Both Gross and his lawyer said he has done nothing illegal.

“I’ve helped people who were down on their luck,” he said. “I have not profited from what I have done.”

Although portrayed by some as a steely manipulator, Gross is a colorful, even outlandish character. Packing more than 300 pounds on his 5-foot-8-inch frame, Gross is prone to emotional outbursts, including tears, during appearances in court, and he is given to extravagant claims about his good intentions.

“Everything I do is to help somebody else,” he said in a recent interview. “Every single penny I’ve ever earned in my life, I’ve given away.”

Born in Santiago, Chile, to parents who fled the Nazi holocaust, Gross legally changed his name to David Love Paris in 1993--yet continues to use his old name. His attorney, David A. Katz, said Gross took the new name in a panic, after a former business associate threatened his life.

But authorities have portrayed Gross as a rajah of rent-skimming--a type of real estate scam that has flourished in Southern California. The scam has bloated bankruptcy dockets that are already by far the most crowded in the country.

Rent skimming “is a tremendously big problem, and it’s spreading,” said Maureen Tighe, deputy chief of the major frauds section of the U.S. attorney’s office in Los Angeles and coordinator of an interagency task force on bankruptcy fraud.

Here’s how it works:

Financial hardship and skidding real estate prices have triggered record numbers of foreclosures in Southern California, spawning an army of lawyers, investors and consultants who monitor foreclosure notices and pitch cures to desperate homeowners. Working through a perplexing alphabet-soup of business names and a cadre of property finders, Gross aggressively mined this field.

According to interviews, bankruptcy files and court papers, his agents presented themselves as real estate investors who would accept a gift transfer of distressed property and then square things with the bank holding the mortgage--thus averting foreclosure and repairing the homeowner’s tattered credit.

Once the market turned around, the pitchmen would say, the property would be sold and the homeowner would get a fixed percentage of the profit. In the meantime, the owner could avoid having to move from his or her home by renting the house back from his benefactor, usually at a below-market rate.

Among those who took the deal were Judith Robinson and her husband, Carl W. Robinson, a contractor disabled by medical problems. Facing foreclosure, the Robinsons last April transferred their Victorville home to Gross and for the next eight months paid him $600 per month rent, only to wind up evicted by the lender anyway. Robinson said he had been approached by Robert Weinstein, who introduced himself as a representative of Orange Townhomes Inc., and U.S.W. International Investments Inc., two of Gross’ businesses. Robinson said he was told that the group “would make the loan good . . . and then . . . sell the house, and whatever we made on the house we would split. . . . The market should turn around, and . . . both of us should come out real good.”

“Just sit back and relax,” Robinson recalled being told. “You guys have been through enough. I just want to help you out.”

Robinson said they “sure done a number on me.”

“I feel I’ve done nothing wrong,” Weinstein told The Times, but he declined further comment. He was named in the federal affidavit as a Gross associate.

Roy and Jean Wagstaff heard the same pitch. Well behind in mortgage payments and about to lose their Santa Clarita Valley home, the Wagstaffs were contacted in late 1992 by Robert A. Sekeres, a representative of S&B; Commonwealth Development Co., another of Gross’ firms. He introduced himself as representative of an investment group that would negotiate with the Wagstaffs’ lender, rent them back their home for $1,100 per month and later give them one-third of the profits when the property sold, Wagstaff said.

Sekeres, named in the federal affidavit as a Gross associate, is a former insurance agent who lost his license for mishandling client premiums, according to state Insurance Department records.

It was “purely an investment approach,” Wagstaff said. “They gave us a big pitch about their marketing strategies. . . . There was nothing said about any legal maneuvers to forestall foreclosure.”

The Wagstaffs wound up paying Gross about $9,900 in rent--and then lost the home anyway. For months, they assumed that all was well and the bank holding their mortgage had been appeased, until a notice of a bankruptcy proceeding was mailed to their home. Curiosity turned to concern when they did a title search and discovered additional transfers of the home to people with “names we didn’t recognize,” Roy Wagstaff said.

He recalled, though, that all he could get from Sekeres was, “Don’t worry about it. We have our ways of doing this, so don’t get upset.” Sekeres did not return the Times’ phone calls.

Although Wagstaff, Robinson and others did not know it at the time, their properties were being tossed like hot potatoes from one bankruptcy to another. According to interviews, court documents and the affidavit, the process worked like this:

Once homeowners deeded their properties to one of the Gross businesses, Gross or his confederates executed new deeds transferring 5%, 10% or 20% shares to other individuals or businesses who had just filed or were about to file for bankruptcy. In other cases, deeds signed by homeowners allegedly were altered before they were recorded by granting fractional shares to people in or about to file for bankruptcy.

Either way, Gross and his associates took advantage of the provision of bankruptcy law meant to keep honest debtors from losing their homes. The law automatically delays foreclosure proceedings involving real estate owned by bankruptcy petitioners. And that delay created a window of opportunity for collecting rent.

A review of bankruptcy files and federal court papers reveals a series of about 30 bankruptcy cases between 1991 and 1994 that were used to fend off lenders. As new properties were acquired, fractional interests would be deeded to various bankruptcy petitioners or petitioners-to-be. And in each case, in the period immediately before and after filing for bankruptcy, the debtor would receive fractional shares of dozens or even hundreds of the homes and apartments that Gross had acquired at no cost.

Some of these bankruptcy petitions were signed by Gross on behalf of himself or his businesses. Others were filed on behalf of bodyguards, rent collectors or other employees and associates of Gross.

Records show that Giai T. Lam, who said he worked as a handyman for Orange Townhomes, one of Gross’ firms, had received an interest in nearly 300 properties when he filed a bankruptcy petition last February. Peng F. Li, another maintenance man, also got fractional shares of nearly 300 properties when he filed a similar petition last April.

Still other petitions were filed by people who sought Gross’ help in trying to save their own homes--but whose bankruptcies then became a legal haven for other properties Gross was seeking to protect.

Some debtors did not show up for their bankruptcy hearings, prompting court officials to speculate about whether they really did exist. Other hearings had a surreal quality, with debtors appearing befuddled about the source of their paper wealth.

Richard E. Goetz, whom Gross helped file for bankruptcy when Goetz’s Oxnard home was in foreclosure, said he discovered that dozens of other properties were also put in his name.

When he attended a hearing in his case, Goetz said he was treated like a crook. “I couldn’t believe the judge was so upset,” he recalled. “She was so disgusted. She said, ‘You really do exist!’ ”

Alarmed, Goetz called Gross, who told him not to worry and who “really gloated over how (much) smarter he was than the judges and the court system.”

Separately, each bankruptcy tied up properties for only a few weeks or months. Lawyers for the mortgage-holders typically got bankruptcy judges to sign orders enabling them to proceed with foreclosure. The judges deemed most of the cases to have been filed in bad faith and quickly dismissed them. Bankruptcy is intended to allow debtors to reorganize their affairs and pay as many debts as possible. But these debtors had failed to file reorganization plans or other documents, and so their cases were thrown out.

The bankruptcies, however, were typically filed a few weeks apart; as one was dismissed, another was filed. Thanks to this overlap, lawyers for the mortgage-holding banks would be allowed to proceed with foreclosure in one case, only to discover that the property soon became tied up in a new bankruptcy filed by another holder of a fractional interest.

For example, one apartment building in Glendale went through at least six Gross-related bankruptcies in 1992-93 before lenders were able to foreclose. A Palm Springs condominium pinballed through at least 17 transfers and 11 bankruptcies in 1993 and ‘94, while a Torrance property also was tied up in 11 separate bankruptcies.

While lenders might hate them, Gross’ tactics are perfectly legal, said his lawyer, David Katz, who said it was Gross’ intention all along to sell the properties when the market turned around.

“Bernie thinks that this is a legal course of conduct within a loophole in the bankruptcy law,” Katz said. “He thinks this is legal. I think this is legal. . . . If this loophole didn’t exist, he wouldn’t do it.”

Disputing accounts of homeowners, Gross also denied that he or his agents misled people into deeding their properties.

Moreover, said Katz and Gross, these clients did benefit because they were allowed to remain for months in their homes for less rent than they would have paid elsewhere.

Some homeowners contacted by The Times acknowledged that Gross’ machinations left them financially no worse off than before. But they said they were upset about not getting the help they were promised and were embarrassed at being tricked.

“It was pretty humiliating, as far as I’m concerned,” said Jean Wagstaff, who along with her husband has been interviewed by the FBI.

“I’m bitter about being conned,” said Steven W. Boyd, who last year transferred his Orange County home to one of Gross’ firms.

“I don’t appreciate being . . . unknowingly dragged into it,” Boyd said. “I don’t like people thinking I’m a crook, and that’s the biggest gripe I have.”

The pending federal investigation is not Gross’ first brush with the law. In 1988, he was placed on probation after pleading no contest to a felony charge of grand theft. The case in Los Angeles Superior Court involved Gross’ sale of a Corvette sports car that belonged to somebody else.

In 1992, Gross was charged by the Los Angeles city attorney with state law violations after a woman claimed he tricked her into deeding away her home. He spent 77 days in jail and has filed a lawsuit over his arrest by U.S. postal inspectors and Los Angeles County sheriff’s deputies. He claimed they roughed him up and denied him medical treatment.

Last spring, Gross pleaded no contest to housing code violations at a rundown Hollywood apartment building--a gift acquisition that boomeranged. Facing foreclosure, the prior owner had deeded the building to Gross, who was then held responsible for its substandard conditions. He currently is haggling with the Los Angeles city attorney over thousands of dollars in unpaid fines, penalties and costs.

But Gross’ legal problems rose several octaves last June, when FBI agents, armed with a search warrant, raided his home and office in Chatsworth and seized bushels of business records, rental agreements, deeds and canceled checks.

Since then, Gross and Katz have fought bitterly for return of his records. At a hearing on the issue before U.S. Magistrate Joseph Reichmann last month, Gross broke down and wept.

“They robbed my entire house,” he said. “They stole everything. . . . They didn’t leave me with a pair of underwear.”

The Gross case highlights vulnerabilities of the bankruptcy system. For one, petitions can be filed by anyone who pays the fee, so there are no safeguards against filing for nonexistent persons or on behalf of real people without their knowledge.

While Gross has been targeted, authorities say other operators and tactics are also under investigation. One enterprising strategy: tying up Southland properties in bankruptcies filed in other states, apparently in hopes that lawyers and judges there will be slow to catch on.