The money trail

Gary Armitage made a lucrative career out of essentially selling one product -- the promise of risk-free real estate investing.

In Sonoma and Marin -- counties particularly fattened by the decade-long real estate boom -- he found plenty of eager buyers.

During those not-so-distant bubble years, the real estate market created billions of dollars in new wealth for homeowners and other types of real estate investors. The rich got richer, and regular folks giddily found themselves suddenly needing to invest, protect or tap their newfound assets.

Financial advisers such as Armitage and Jeff Guidi, partners in the now-defunct Santa Rosa firm AGA Financial, were happy to oblige them.

Beginning around 1998, the men began selling clients tens of millions of dollars worth of investments in senior care centers, deals put together by a Redding company called Asset Real Estate & Investment Co.

According to numerous clients, Armitage and Guidi touted the investments as a risk-free way to avoid capital-gains taxes, generate generous monthly income and continue to build equity as the value of the properties increased.

While written materials indicated there were significant risks involved, the investors said Armitage frequently told them to dismiss such warnings and that the investments were risk-free.

"I should have known better," said Pat Brown, a 79-year-old Healdsburg resident who fears her $105,000 investment has vanished.

Both AREI and AGA Financial are now closed, their firms are under investigation for fraud, and lawsuits claim the men operated an elaborate scheme to bilk investors out of millions.

Between 1998 and 2007 AREI raised nearly $260 million from investors, primarily to fund purchases of senior care centers around the nation, according to Department of Justice investigators, who raided AREI's offices in June. No criminal charges have been filed.

Much of that money came from unsophisticated investors, many of them seniors, who now claim Armitage betrayed their trust.

They say Armitage put their life savings, including 401(k) retirement accounts, into unsuitable investments, cheated them out of profits, bled their accounts with high fees, and lied about the risks involved in the investments.

"I completely depended on him, and he let us down," said Kathy Adams, a Healdsburg resident who invested more than $600,000.

Armitage convinced Adams, 65, to sell a rental property in Healdsburg and invest the money with him. Instead of the headaches of repairs and finding new renters, Armitage told her that the equity in the home would generate better returns in a senior care center in Arizona.

Even though the rental property was generating $1,350 a month in rent, Adams said he promised she could make more than $3,000 a month with no risk. She agreed, sold the rental property for $503,000 in 2006, and invested the money, plus a $100,000 inheritance, with him.

The pitch for investing in senior centers was an attractive one on many levels.

With the baby-boomer generation getting older, the demand was set to soar for senior care centers, Armitage told clients.

While too expensive for most investors to afford alone, they could still own shares of such properties. Together, shareholders would own the centers as tenants-in-common, sharing in the profits -- and, many would later learn, the losses -- of the operations.

One of the most attractive advantages of such investments was the way they could serve as tax havens for people looking to shield their assets from capital gains taxes. Depending on a number of factors, Adams would have been forced to pay capital gains taxes of between $25,000 and $140,000 if she sold her Healdsburg rental property outright and kept the money.

But Armitage had an elegant solution for clients with such enviable troubles.

Under Section 1031 of the federal tax code, such taxes can be deferred if the property being sold is quickly exchanged for another property of similar type and value.

Such transactions, known as 1031 exchanges, have been around for years, but exploded in popularity as the real estate market boomed and the IRS issued clear guidelines on the practice in 2002, according to Fred Ptucha, a financial adviser with Financial West Group.

In addition to serving as a tax haven, Armitage pitched the investments as strong revenue generators. He claimed high rents and occupancy rates at senior care centers meant investors could expect returns of 8 percent to 12 percent on their money.

Traditional investments with taxable interest, such as CDs and money market funds, paled by comparison, with returns that typically run less than 5 percent.

To sweeten the pot even further, Armitage claimed investors had the opportunity to make even more money when they sold their shares in the centers as they appreciated over time.

So Armitage was selling the equivalent of an investing grand slam: a way to help people avoid paying steep taxes, earn stellar monthly returns and continue to build equity.

All with the promise of no risk.

When handled correctly by reputable advisers, 1031 exchanges are a legitimate and valuable investment tool, Ptucha said.

But the explosion in popularity of 1031 exchanges also brought potential for abuse by unethical brokers putting their desire for commissions ahead of the needs of their clients, Ptucha said.

AREI, for example, turned out to be headed by a man named Jim Koenig, a felon with a history of defrauding investors.

"I think there were many other people, including crooks like Koenig, who saw this as a big way to attach large sums of money," Ptucha said.

Much like the subprime mortgage abuses that continue to devastate banks and roil Wall Street, Ptucha believes the AREI and AGA Financial debacle reflects not only the dishonesty of a few bad actors, but a breakdown of the system.

There are numerous rules about who can invest in what types of securities, and what types of disclosures must be made to investors before they make an investment. These are required to be outlined in detail in a document known as a prospectus.

Some of these documents contained a reference to Koenig's legal troubles, reporting that "a member of management pled guilty to a mail fraud indictment in a criminal proceeding over 16 years ago."

But none of more than a dozen investors interviewed said they ever heard of Koenig's felony record until after it surfaced earlier this year.

Many claimed they where urged by an impatient Armitage or Guidi to hurriedly sign documents they hadn't read. Only later did they realize their signatures declared they had read and understood everything in a prospectus they did not receive until weeks later, if at all.

"Jeff Guidi didn't really explain anything. He'd just shove some papers in front of you and say, 'You can read these later. Just sign here, and sign here and sign here, and you'll get this much money,' " said one investor, who requested anonymity because she is considering legal action.

It was the job of AGA Financial's broker-dealer and clearinghouse, ePlanning Securities of Roseville, to ensure the investments being sold to investors were appropriate, Ptucha explained.

He believes the managers at ePlanning were "asleep at the switch." Ptucha said he didn't know what happened inside ePlanning, but said it appears they failed to enforce rules designed to prevent seniors from placing their life savings in a single investment and unqualified investors from getting in way over their heads.

Like Armitage, Guidi and Koenig, ePlanning did not respond to requests for comment.

Many of the more than 50 different AREI investments were sold as something called "private placements," which are meant to be sold to a limited number of sophisticated investors with the ability to tolerate high risk.

To buy into such funds, investors are supposed to have at least $1 million in assets and $200,000 in income.

But travel agent Leslie Santucci said she didn't have anywhere near that kind of money when Armitage put her $103,000 into an AREI investment that has now evaporated.

Only later did the Healdsburg resident learn that the investments Armitage assured her were perfectly safe were considered high-risk investments only for those who could afford steep losses.

"I'm a single mom renting an apartment. I am not in the same league as those people." Santucci said. "I had no tolerance for risk."

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.