Close-Knit O.C. Couples See World Come Unraveled : Courts: Businessman says friends knowingly invested in his firms. Now they are filing claims in bankruptcy case.

The Kleins, the Polonskys and the Berkes enjoyed a lively evening out with good friends Chuck and Bev Diamond, taking in a movie and eating pizza.

They talked that Sunday night last May about the things that good friends discuss: their children, their mutual friends and the hottest topic at the time, the O.J. Simpson murder trial.

They were wealthy folks, doctors and business owners, and some of their names popped up occasionally in the society pages. Diamond himself, a former building industry leader, was treasurer and a trustee of the Newport Harbor Art Museum.

One thing they didn’t talk about, though, was the $4.5 million that Bankruptcy Court records show they and two dozen other friends, neighbors and family members had entrusted to Chuck Diamond or his companies over the past seven years.

They say they didn’t even know that each couple had secretly given him money for what most believed was safekeeping or personal loans.

In the days after their last supper together, Charles and Beverly Diamond revealed that they were broke, the former friends now say. In separate meetings--amid tears, hugs and mournful pleas--the friends say the Diamonds told them they no longer had any money to repay them.

“Then the phones started ringing,” said Richard Polonsky of Newport Beach. “Everyone was calling each other. ‘Are you in this too?’ we were asking.”

It could have ended there, as it does in many cases, with the borrowers trying to sell assets to repay part of their debt and patching things up with longtime friends.

Instead, Chuck Diamond shocked his friends by telling them he didn’t owe them the money. It had been invested in his now-worthless companies, he told them, and was not his personal debt to repay.

His renunciation has ripped apart the close-knit community of affluent friends and neighbors and pushed Diamond into Bankruptcy Court, where proceedings have taken on the emotionally charged aura of a melodrama.

“You’ve got a lot of nerve, Chuck,” an outraged Pamela Gfeller of Newport Beach seethed as Diamond walked out of a recent hearing. Even Diamond’s brother-in-law, Sheldon Cohen, whose elderly mother gave Diamond $250,000, appeared at the hearing to denounce him.

The loss of their money has been devastating. Anna Silver of Westwood and her husband, Alfred, who is legally blind and retired, lost everything--$325,000--as did Gfeller, who had entrusted her entire $475,000 divorce settlement to Chuck Diamond.

But, they say, the monetary loss seems almost secondary to the immense loss of trust, a betrayal of the worst kind, they feel, because it involved a couple whom most of them had known for 10 to 20 years.

They laughed and cried together, they prayed at the same temple. They went skiing and vacationed together, celebrated each other’s birthdays, went to their children’s weddings.

They never would have turned over any money with so much trust and so little paperwork, they said, were it not for the fact that they were giving it to their best friend, a man they regarded as smart, successful and financially astute.

They admit now that they were naive, even stupid, in failing to have their lawyers or accountants scrutinize the transactions. They acknowledge that they made checks out to one of Diamond’s companies and that they received interest from his companies. They even listed it as income on their tax forms.

But they insist they had blind faith in Diamond.

In affluent Newport Beach, residents are known to give friends thousands of dollars as unsecured loans or investments, and borrowers in trouble usually find some way to secure their debts and avoid bankruptcy, say court observers.

But rarely have such large sums passed hands among so many of Orange County’s affluent residents, they said, noting that it is one of the bitterest bankruptcy cases they’ve ever seen.

“You think you really know someone after years of being with him,” said Polonsky, who put $1.375 million in Diamond’s hands, “and then suddenly you look at him and realize you don’t know who this person is.”

Diamond, once president of the influential Building Industry Assn. of Orange County, said in court filings and in hearings that the real estate downturn dried up his funds and left him unable to repay creditors. He wouldn’t comment for this story.

Diamond argues in court papers that he told his friends they were investing in his companies, not in him, and that they are savvy investors who knew their money was at risk.

Diamond’s bankruptcy lawyer, Rebecca Callahan of Newport Beach, contends that his friends have failed to support claims made in court papers that Diamond defrauded them or simply paid them interest from other money he gathered in a Ponzi-like scheme.

“They don’t want to get paid; they want to destroy him,” Callahan said. “They want him ostracized from his temple and his gym. They want to banish him from their kingdom. They have a right to go to court. They don’t have a right to banish him.”

She said that “less than half the people who loaned him money” have filed claims in his bankruptcy. He agreed in June to try to mediate disputed claims. Since then, a few, like the Silvers, have reached tentative settlements, but his former friends, the lawyer said, “are not remotely representative of his personal creditors.”

Polonsky, a plastics manufacturer who had been involved in real estate deals in Massachusetts, was a partner with him on three real estate projects and, Diamond said, was a “sophisticated businessman.”

Diamond and Callahan, whose legal fees total $100,000 since the Aug. 30 bankruptcy, now are pushing a reorganization plan in U.S. Bankruptcy Court that would repay his personal creditors much of their money over the next eight years, and leave him with substantial funds to start anew.

As for his friends, Diamond has settled some of the claims for half the amount. But Diamond and his lawyer have threatened others with legal action should they file or pursue claims against his personal estate, Nanette Sanders, a lawyer for the creditors committee, said in court last week.

Diamond even lists a possible defamation action against Polonsky in his court papers as a potential source of funds for creditors.

Callahan warns that a protracted fight could force a liquidation of Diamond’s assets, with creditors getting pennies on the dollar.

“My client’s objective is to get his creditors repaid, and the emphasis is on his creditors,” not his companies’ creditors, she said in an interview. “He went into bankruptcy because he could never do this with the others pushing him.”

A Miami native, Diamond, 56, moved with his family to Southern California in 1957. After a stint in the Navy, he joined the Kenneth Leventhal & Co. accounting firm in Los Angeles in 1968 and eventually became the firm’s first non-accountant partner.

He joined Newport Beach builder Konwiser Corp. in 1976 as a vice president in charge of securing entitlements for projects, and moved to Orange County three years later.

Separately, he and John Konwiser began investing together in apartment complexes, accumulating 17 of them by the time he was let go in 1986. Konwiser stopped building and turned his company into a real estate management firm, so he no longer needed high-salaried development employees like Diamond, a lawyer for Konwiser said.

By then, though, Diamond had found his niche in Orange County--and his own group of friends he could tap to help him build his solo career.

He developed two residential real estate projects as Diamond Investment Co., then dissolved that firm and joined others, including Polonsky, on several more projects.

In 1989, he formed K&M; Ventures and BCKM Ventures to handle various residential and industrial real estate projects; he also formed Kaolin Ventures to acquire and sell art, according to court documents. The real estate concerns are now more than $4 million in debt. Kaolin has $24,000 worth of art.

In 1991, he and two others set up Sarmate U.S.A. to renovate and manage a brick factory in Astrakhan, Russia, but it soon began selling vitamins and pharmaceuticals. He also took trips to Russia that lasted weeks at a time, according to court records.

Friends said in interviews and in court records that when he took their money, it was always with assurances that their money was absolutely safe and always with the admonition not to tell anyone else because this deal was only a favor for a very dear friend.

It was their close relationships with Diamond, they said, that created such a casual atmosphere about the transactions.

Even though they signed checks over to Diamond’s K&M; Ventures, some said they never scrutinized the promissory notes he later gave them to learn that they were dealing with K&M;, not with Diamond.

Those who questioned the notes said in interviews and court documents that Diamond reassured them that the money was entrusted to him, that he was K&M.;

“I thought it was like giving it to a bank,” said Gfeller, who acknowledged that she was naive and unsophisticated about money matters. To her, Diamond was a haven providing monthly interest to help her pay bills.

“He never used the term, investment,” said Diamond’s longtime physical trainer, Robert Burns, who filed a claim for $40,000.

They had no idea what he did with the money, and, they allege, he told them not to ask.

“This was a family member,” said Michele Klein, who turned over her mother’s $95,000 trust fund to Diamond. “We were with these people all the time. All the time. And so why would you have any questions?”

Certainly those who went out with the Diamonds frequently, who went skiing with them in Colorado and soaked up the sun with them in Hawaii every Christmas season, said they never feared that they would be hurt by their close friends.

Marvin Brooks, a Rancho Mirage urologist who joined up to half a dozen families vacationing in Hawaii every year, said he was lying on the beach on Christmas Day 1991, talking with Chuck Diamond.

Brooks, whose daughter attended an Ojai boarding school with Diamond’s daughter, said he mentioned to Diamond that he recently had made $125,000 from the sale of a condominium.

“We were just talking,” Brooks said. “I told him I was going to put it into bonds, even though interest rates were low.”

But Diamond had another idea. As Brooks recalled:

“He said, ‘I do a lot of investing and I borrow money from the bank, and I have to pay the bank 10.5% interest. Why don’t you let me do you a favor?’ ”

Diamond, who told his friends he hadn’t paid any income taxes in years, offered to take the $125,000 and pay interest to Brooks instead of a bank.

But Brooks was worried.

“I need the money for my children’s college education,” he said he told Diamond. “If there’s the slightest chance I would lose this money, I couldn’t take it.”

Diamond, he said, told him there was absolutely no chance.

Brooks also turned over $325,000 from a business trust he helped to manage, though he later pulled $10,000 out to pay trust taxes.

Brooks said that Diamond had one small request: “He said, ‘I don’t want to be doing this for other people, so don’t tell anyone else.’ ”

From 1988 to 1994, friends turned over their money to Diamond. And, like clockwork, he paid interest monthly, until last spring. If someone needed some of their money back, he told them he needed only a few days to gather it, according to court documents.

“I just trusted him so much,” Brooks said. “It wasn’t like I was looking for something to invest in. He was one of those few friends in life you trust so completely you’d give your life for him.”

Indeed, the Diamonds were a favorite in their group, their friends said in interviews. Bev Diamond “was a very sweet, sincere person,” said Pam Gfeller, who has known the couple for more than 20 years.

“I liked her instantly,” Gfeller said. The two often went to lunch together. “I enjoyed being with her.”

The Diamonds always seemed to outdo everyone else at holidays and birthdays, they said, giving expensive gifts like Mark Cross leather or fine wine. In his bankruptcy petition, Diamond values their wine collection at $10,000.

The friends would joke with the Diamonds about Bev’s shopping sprees. In interviews, they said she told them she was such a regular customer at the Neiman-Marcus store in Fashion Island that the swank store rewarded her loyalty with a free trip for two to Manhattan, something the store does for those who spend at least $45,000 a year on merchandise.

A former speech therapist, Bev was involved in fund-raisers and civic and charitable groups, such as the Newport Harbor Art Museum.

Chuck became a museum trustee and, eventually, its treasurer until he resigned last spring. In fact, Michael Botwinick, the museum’s director, entrusted $50,000 to Diamond, according to court records.

Richard and Deborah Polonsky, longtime art enthusiasts, said they had helped to instill a sense of art in the Diamonds, who then went gung-ho, buying more than 100 ceramic pieces, sculptures, paintings and other art objects--usually paying cash in full on the spot. “Their house is like a museum itself,” the Polonskys said.

Alfred Silver said he used to call Chuck Diamond the next Armand Hammer because of the art collection and the Russian connections. “The impression was that he was a very wealthy man,” Silver said.

The Diamonds, trim, fit and good-looking, also took ballroom dancing classes with William and Michele Klein. Bill Klein, an internist who had entrusted $240,000 to Diamond, was the Diamonds’ family doctor and provided medical care for free. “So it was not unnatural that he would want to do something for me,” Klein said.

By the late 1980s, he presented a picture of the idle rich, going to movies in the afternoon, his friends said.

“He had been basically retired all the time I knew him,” Brooks said. “Here, I’m working 60 hours a week, and he’s totally retired. When we went to Hawaii, we stayed in the cheapest rooms; they stayed in a suite. We flew coach; they flew first-class. It was just an image he was able to maintain.”

In January 1994, Polonsky, feeling uneasy about the amount of money he had entrusted to his friend, said he asked for the return of half the $1 million that he had turned over to Diamond.

“It was given to him in trust,” Polonsky said in an interview, and wasn’t part of earlier real estate investments the two had made together. But, Polonsky said, Diamond stalled him. That May, court records show, the Diamonds transferred their house and most other assets to six new irrevocable trusts, which put the assets out of the reach of creditors and left the couple with few personal assets in their names.

Meantime, Union Bank sued Diamond and Polonsky to collect on a loan for a failed real estate project. In a settlement last fall, they gave the bank the property and agreed to pay it $750,000. But Diamond didn’t have any money for his half of the debt and turned to Polonsky, who covered him, according to Polonsky’s court declaration.

“He and Bev came over two days later, and he said, ‘You will be paid. We know we owe you the money,’ ” Polonsky said in an interview. “And they sat on our couch, and Bev cried and hugged my wife.”

Polonsky said he simply was in denial: He refused to believe that Diamond would fail to repay him.

Diamond had looked, in part, to the Russian venture, Sarmate, to help him repay debts, but he acknowledged in court papers that the future of the money-losing operation is bleak without additional cash.

Diamond’s plan to reorganize his debts under Bankruptcy Court protection calls on him to contribute $150,000 in cash and sell his home, wine collection and some of his art to raise from $720,500 to nearly $1.1 million for creditors.

But his personal debts, he maintains, don’t include the $4.5 million his former friends contend he owes them. He continues, however, trying to settle some of the disputes over those debts.

Raymond Berke, a Newport Beach radiologist, said he “had some ill feelings” about entrusting $200,000, but he never thought Diamond “would purposely take it.”

“It makes you look at people differently,” said Berke, “the way you didn’t want to ever have to look at people.”