The Securities and Exchange Commission has opened an investigation into an Orange County real estate lending company that is owned by the husband of a California state assemblywoman.
In an e-mail to his firm’s roughly 3,000 investors, Point Center Financial Inc. President Dan J. Harkey disclosed that the SEC had subpoenaed records from the firm last week.
In an interview, Harkey said the SEC was seeking thousands of pages of documents in connection with a $25-million investment pool that funded construction loans. He predicted the SEC would find no irregularities in his company’s loan pool, noting that the California Department of Real Estate took no action after a similar review.
Harkey said it would take weeks to compile the records the SEC requested.
Officials with the Securities and Exchange Commission in Los Angeles would neither confirm nor deny any inquiry into Point Center.
More than 50 Point Center investors filed a lawsuit against Harkey last week, accusing him of placing their money in risky construction loans and funneling profits to his wife’s political campaigns.
In the interview, Harkey acknowledged that many of his investors had lost money but blamed it on the real estate downturn, which has caused widespread losses. About 60% of the company’s loans are in default and interest payments to many investors have been reduced or suspended as a result, Harkey said.
Through a spokesman, Assemblywoman Diane Harkey (R-Dana Point) said she had no affiliation with Point Center and contributed her own money -- about $1.1 million -- to her campaigns. Before her career in politics, she worked as an executive at Security Pacific National Bank and Bank of America Corp., her husband said.
Aliso Viejo-based Point Center specializes in hard-money loans, which are short-term, high-interest offerings to developers who often can’t obtain funding from banks. Hard-money lenders require a large equity stake in the property for loans they issue, using first trust deeds to recover investments if borrowers default.
Harkey said he amassed $500 million in capital from current investors, although he acknowledged that failed loans and the real estate slump had significantly diminished the value of those investments.
The lawsuit said that Harkey charged millions of dollars in loan fees to borrowers and management fees to investors, and claimed he used inflated appraisals that made the loans appear safer than they were. Harkey said he was careful to disclose the risky nature of real estate to investors, advising them that it was possible to lose some or all of their money. He called the SEC investigation routine and said he and his company would be cleared.
“They’re compliance people. I have no problem with it,” Harkey said. “My disclosure packages are so big I called them ‘the phone book.’ If the allegation is failure to disclose, they picked the wrong guy.”
An SEC subpoena is not undertaken lightly, said Cliff Hyatt, a former SEC enforcement attorney now at law firm Pillsbury Winthrop Shaw Pittman in Los Angeles.
“It’s not routine. It’s part of a formal investigation by the SEC,” Hyatt said.
Investigations involving complicated investments and thousands of pages of records can take months, if not years, Hyatt said.
“The first thing they want to look at in these things is what’s going on with the money? Is the money being used in accordance with representations by Point Center?” Hyatt said. “One of the things the SEC is particularly attuned to right now is the possibility of a Ponzi scheme. The second thing is whether the disclosures are adequate.”
Lloyd Charton, lead plaintiff in the lawsuit, said a number of appraisals were inflated, giving him and other investors false confidence that their money was safe. He said he welcomed new scrutiny from SEC regulators.
“We are thankful that someone will come in and shine sunlight into Mr. Harkey’s activities,” Charton said.