Two for the Money

At the height of the real estate boom last year, a group of investment promoters crisscrossed California, touting a plan to build rental duplexes in distant states.

Mile High Capital Group’s scheme generated so much interest that its executives said they were interested only in buyers who were willing to take a risk. And after investors handed over a $16,500 down payment for each duplex, Mile High founder Rick Dryer warned: “It’s no longer your money. It’s our money.”

That turned out to be all too true for hundreds of Mile High buyers, who fear they will never see the money again.

The Denver company filed for bankruptcy protection last month and is all but defunct. It collected deposits on nearly 1,200 duplexes but finished building only 55 of them. Regulators say the company’s files are in such disarray that it will be a long time before they know exactly what happened and who was responsible.

Allegations of real estate fraud have tripled in the last two years, the FBI says. As a hot housing market becomes tepid, economists and other observers warn that many of those who bought speculative properties could wind up losing a bundle -- some because of the market downturn, others because of frauds coming undone.

Mile High Capital stands as a vivid example of the latter. A court-appointed receiver says the company’s books provide indications of “fraudulent and deceptive conduct by one or more of the company’s current or former officers, directors, shareholders or employees.”

The 57-year-old Dryer, celebrated at Mile High’s sales seminars as a millionaire home builder and author of a book on real estate investing, turned out to have a record of securities fraud stretching back a quarter of a century.

His book didn’t exist either, despite the fact that it was pictured on promotional materials at the seminars.

Dryer’s lawyer said in an interview that his client was being made a scapegoat for the problems at Mile High and that the person to blame for any fraud was Andy McFaul, the former chief operating officer who, the attorney said, had control of the firm’s day-to-day operations.

McFaul joined Mile High in late 2004, a few weeks after he pleaded guilty to felony theft for stealing more than $10,000 of tools from the workers building his house.

McFaul’s lawyer said the 41-year-old executive left Mile High last summer after realizing that “he and many others had been the victims of an enormous scam orchestrated by Mr. Dryer and Mr. Dryer alone.”

Michael Noone, a lawyer for the receiver who took control of Mile High in October after complaints were made to Colorado regulators, said the company had almost no money at that time, despite claims of $175 million in revenue during the prior six months.

Noone compared the structure of Mile High to a Ponzi scheme, saying investors’ money was used to pay operating costs rather than build $330,000 duplexes. “The first time anyone decides not to send money in, it all comes crashing down,” he said.

To thousands of investors who attended the Mile High seminars, the pitch was irresistible.

Massoud Balbas, a Laguna Niguel computer consultant, went to three seminars last winter. He bought a duplex each time -- one in Colorado, one in Texas, one in “North Carolina or South Carolina or one of those places.”

Those first few months of 2005 were a heady time, a moment when it seemed more important to buy real estate immediately, before it went up again, than to think too much about where the property was or how much it cost. Homeowners were refinancing and taking cash out at unprecedented levels. Some of the money was invested in projects like Mile High’s.

The Mile High executives “knew where the money was,” Balbas said. “People were vulnerable, and fell into their trap.”

The 60-year-old’s own fall was particularly hard: “I was a brand-new investor. I thought I was doing the right thing, but it looks like I lost everything. My wife is mad at me.”

Several factors combined to make Balbas and the other investors so eager to surrender their money.

First and most elemental was the siren song of real estate. The metaphors at the seminars may have been mixed -- “Our duplexes are appreciating like an avalanche and cash-flowing like a freight train,” a promotional film asserted -- but the message was clear.

“If you don’t have several million dollars’ worth of real estate working for you by the time you retire, you’re going to condemn yourself to a life of struggle,” Dryer said at a San Francisco seminar.

Prospective buyers were advised that they should refinance their duplexes every year, taking money out to buy another. “Appreciation projections” were handed out showing that, under that method, an investor would have as much as $2.5 million in equity after a decade.

“You’re in the harvesting business,” Dryer said. “You’re harvesting money.”

To add intellectual ballast at the San Francisco seminar, Forbes magazine Publisher Rich Karlgaard touted his book about the coming population shift from the coasts to the heartland. In San Diego, author Mark Victor Hansen, co-creator of the inspirational “Chicken Soup for the Soul” series, shared the stage. (Hansen and Karlgaard say they were hired speakers and weren’t endorsing Mile High’s products.)

The presentations emphasized that Mile High did extensive research to determine exactly which towns on the outskirts of major metropolitan areas were poised for huge growth. That gave investors the security of statistics while reinforcing the notion of a large payoff.

A further enticement was that Mile High promised to handle everything. The firm would build the duplexes, arrange for a construction loan or a mortgage and, through a subsidiary, find tenants and manage the property. It was one-stop shopping for time-pressed investors.

But the pitch wasn’t all about getting rich. Dryer spoke of the importance of tithing, of giving back to the community. You not only would become rich by investing with him, he promised, but also would help make the world a better place.

At least 825 people found the seminars compelling enough to make deposits, according to court records. More than two-thirds of those investors were in California.

An example of what happened to Mile High’s projects sits outside Fort Lupton, Colo., a town 29 miles northeast of Denver. A “preliminary concept plan” sent to prospective buyers a year ago showed a 38-acre neighborhood with streets, a park and 67 duplexes. Only six were listed as still available.

The development never made it past a paper existence. Cliff Carter, a local farmer, said that Mile High was to purchase the field from him through an intermediary last March. But just before the deal closed, Mile High sued the intermediary, and the dispute killed the transaction.

Carter still tends the alfalfa fields that Dryer had touted to investors as Carter Centennial Ranch. On the parcel sits one vacant white clapboard house, a crumbling garage, a swing set and, in the distance, a grain silo. Prairie dogs scamper about.

“I don’t think Mile High was really about developing real estate,” said Denver attorney Jonathan Oster, who is suing the company on behalf of investors. “They were guys who were promoters of a concept, but they weren’t the type of guys who could carry out the concept.”

They were certainly brash, in the manner of dot-com executives circa 1999. After a skeptical article about the company appeared in the Los Angeles Times last year, McFaul, the chief operating officer, offered to bet the paper $10,000 that its duplexes would be worth more in three years than another real estate investment.

McFaul was described in Mile High news releases as a successful entrepreneur who began with a small pallet company in Wisconsin. “McFaul started acquiring other pallet companies, eventually owning dozens of facilities and employing 6,000 people” at a company called PalEx, the releases say. McFaul made identical claims on his short-lived weblog.

Though McFaul did sell a small Wisconsin pallet company to PalEx and continue to run it for a year, he had no larger managerial role, former PalEx executives say. “We employed 3,000 people, and Andy was in charge of 50 of them,” said Vance Maultsby, PalEx’s former chief executive.

In 2002, McFaul started building a $4-million home in the Colorado ski resort of Crested Butte. For more than a year, his contractor was plagued by disappearing equipment.

A police investigation ended when McFaul revealed a hidden room containing the missing tools, with the serial numbers removed. He said he took them as a joke.

On Nov. 29, 2004, a few weeks before starting at Mile High Capital, McFaul pleaded guilty to two counts of theft and one count of possessing illegal weapons -- two sawed-off shotguns that police found during their search.

The public record on Dryer also begins in Wisconsin. Dryer committed securities fraud numerous times while living there in the late 1970s, a Wisconsin Circuit Court file indicates. For instance, Dryer formed a limited partnership to buy a plot of monastery land. But he misrepresented the deal to his partners, court papers say, and converted “substantial sums of the money invested” to his own use.

Dryer received four years’ probation in 1981. He moved to Colorado, where he pleaded no contest in 1987 to multiple counts of securities fraud. His lawyer, Patrick Ridley, declined to comment on his client’s past.

Last summer, amid a flurry of seminars, Mile High issued a news release saying McFaul and a few other investors had bought the company from Dryer for $100 million.

“I knew that the company had outgrown my skill set,” Dryer “confesses” in the release. A “longtime colleague” is quoted “on condition of anonymity”: “Rick has made all the money he cares to. He wants to spend more time with his family.”

No money ever changed hands, said McFaul attorney Philip Feigin, who calls the release “just one lie piled on top of another.” The reality, Feigin said, is that McFaul left Mile High in September.

Dryer also tried to move on. He announced the formation of a nonprofit that would help nonviolent criminals get their records sealed.

Meanwhile, investors were suing, and regulators and the Denver Business Journal were investigating. But Mile High continued selling properties as fast as it could.

Hector Vargas of Fullerton was impressed by a July seminar, especially the presence of “Chicken Soup” creator Hansen. In November, when Vargas had several certificates of deposit mature, Vargas sent Mile High a $19,000 deposit.

“This wasn’t a get-rich-quick thing,” Vargas said. “I was doing it for the long term.”

At the end of October, Colorado regulators took action against Mile High, alleging in a complaint that it was issuing securities without having registered with the state. The company agreed to be placed in receivership.

Last month, the state had Mile High file for bankruptcy protection. Receivers listed $13 million in debt and a possible $5 million in assets.

The receiver said it was possible that other developers could take over four of the company’s 40 projects and provide duplexes to about 500 investors.

Noone, the lawyer for the receiver, said negotiations underway could provide for the completion of an additional 16 developments. That could allow some of the investors, he said, to be made whole.

Colorado Securities Commissioner Fred Joseph offered less hope. He said his experience of what investors get back in investment schemes “is not very much -- pennies on the dollar.”

Joseph wasn’t surprised that the scam revolved around real estate. It depends, he said, “what the thing of the day is. It can be wireless cables , it can be oil and gas.” Investors can get fleeced when they latch onto the latest boom, he warned.

Some of the fleeced refuse to be disillusioned.

Silicon Valley jeweler Geoffrey Stern figures he’s lost forever his down payment on two duplexes, as well as money spent traveling to Denver in October. Mile High had promised to reimburse him for the trip.

“I was so naive,” he said. “I made an emotional decision, not a logical one.”

His interest in real estate is unabated, however. He recently bought a share of a house in Los Altos Hills, Calif. The partnership is going to renovate the house and sell it.

“It’s a calculated risk,” Stern acknowledged. “But I feel really good about it.”