The case against Mile High Capital Group (MHCG) involves a colorful cast of characters, each of whom has an intriguing background of his own. In this installment of Mile High Monday, we introduce you to the key players, including the founder and former CEO of MHCG, Fredric “Rick” Dryer.

Fredric “Rick” Dryer is the creator of and speaker on the popular Right Place Right Time Real Estate Investment Strategies™ seminars, which have drawn tens of thousands of eager real estate investors to venues from Los Angeles, San Diego, and San Francisco to Boston, Philadelphia, and Washington DC. Rick also co-hosted a popular online talk show called Real Estate Wealth: Myths, Facts & Strategies with Gary Eldred, in which Gary and Rick offer listeners advice on how to successfully invest in real estate.

Throughout his 30-year career, Dryer has been involved in several different areas of real estate investing, including government lease-backs, subdivision development, land development, apartment development, and condo conversions. In recent years, he began to focus his interests on long-term investments, specifically the purchase of individual homes (attached and detached) in order to rent them out to establish cash flow while the properties appreciated. Dryer specialized in identifying high-growth areas and developing rental properties on the outer boundaries of these areas where they would be in high demand.

In 2000, Dryer launched MHCG to develop his own rental properties. He soon realized, through his Right Place Right Time seminars, that a market existed for the types of properties he was developing: a market that consisted of investors who wanted to purchase rental properties for current cash flow and the opportunity to cash in on long-term appreciation. By 2002, MHCG started developing properties specifically for the purpose of selling these properties to investors.

According to Dryer, in 2004, he realized that he needed assistance in running MHCG and that his true passions were centered in his Right Place Right Time Seminars and in working directly with investors. To achieve his goals, he decided to bring someone else on board to manage land acquisitions and property development.

Over the past 20-plus years, Dryer has had more than his fair share of run-ins with the law. In 1983, he pleaded no contest to criminal securities law violations in Wisconsin. According to court records, in one case, Dryer formed a limited partnership to buy a plot of land. He then misrepresented the deal to his partners and diverted a substantial amount of the money invested to his own use. He was sentenced in January, 1984 to four years’ probation on one count of fraud and four years probation (two concurrent two-year probationary periods) on two counts of selling non-exempt securities.

Dryer claims that he was the victim of an over-ambitious prosecutor in Wisconsin by the name of Phil Feigin, who happens to resurface in Colorado years later to further haunt Dryer (see below).

Shortly after pleading no contest to security violations in Wisconsin but prior to his sentencing, Dryer moved to Colorado. Within four years (in 1987), he was in legal trouble again. This time, he pleaded no contest to ten counts of securities fraud in Boulder County in connection with the sale of promissory notes. He was sentenced to eight years’ probation and ordered to pay restitution of $89,100.

From 1987 until 2000, Dryer appears to have been free and clear of legal troubles. In 2000, he launched MHCG, and by 2005, he was back in trouble as investors began filing complaints against his company. On August 23, 2006, the legal problems became official when a 2006 Denver County Statutory Grand Jury handed down its indictment of Fredric R. Dryer, Richard J. Darrow, and Jeffrey Dietz on 58 counts, including racketeering, conspiracy to commit securities fraud, securities fraud, conspiracy to commit theft, and theft. Since this time, nine more counts have been added for a total of 67.

Dryer has pleaded not guilty on all counts.

RICHARD J. DARROW

Richard J. Darrow managed MHCG’s sister company RPS (Replacement Property Solutions, Inc.). RPS acted as a “qualified intermediary” for tax-deferred 1031 Exchanges. With a 1031 exchange, you can exchange one investment property for another without having to pay taxes on the capital gains from selling the first property, assuming the properties are of “like kind.” Think of it as a rollover for real estate investments. Although RPS was a separate company, distinct from MHCG, it handled many of the 1031 exchanges for clients who wanted to exchange their current properties for MHCG investment properties.

Darrow has a felony conviction under his belt. In 1999, he pled guilty to fraud and motor vehicle theft, striking a plea bargain in which he agreed to share his knowledge of identity theft with law enforcement. Darrow also shared his knowledge of identity theft with a national audience on a CBS News special called “The Identity Thief Preys on Unsuspecting Victims,” in which Darrow is referred to as an “identity thief extraordinaire.”

Darrow has pleaded not guilty on all counts related to the indictment.

ANDREW MCFAUL

In January of 2005, Andrew McFaul took on the role of COO (chief operating officer) of MHCG. This was only about a year after McFaul had his run-in with the law. In 2002, McFaul was building a home in the Crested Butte area in Gunnison County, Colorado. According to court records, he became upset with the contractor, High Mountain Concepts, and related subcontractors. Out of spite, he took various tools and other implements from the contractor and subcontractors without their knowledge.

Unbeknownst to the contractor and subcontractor, McFaul had a secret room built into his house, a panic room of sorts, in which he hid the tools and other implements he had taken. When law enforcement officers searched the premises, they discovered not only the stolen property, but also two “short shotguns.” This resulted in an additional charge of possession of illegal weapons. McFaul’s attorney negotiated a plea agreement in which McFaul was required to pay restitution to the victims of the theft in the amount of $36,393.00 and perform 192 hours of public service.

According to his petition to plead guilty, McFaul states that he completed school through the 12th grade plus two years of college. Given his criminal record and somewhat limited education, one may wonder what qualifications Dryer thought McFaul had to justify hiring McFaul, placing him in the position of COO, and later allegedly selling the company to him. Was McFaul really qualified? Did Dryer simply make a poor business decision? Or was Dryer intentionally placing McFaul in a position in which he could make McFaul the “fall guy?” What did Dryer know about McFaul or what didn’t he know about him that may have prevented the losses incurred by trusting investors?

JEFFREY DIETZ

Jeffrey Dietz is more than just the person who took over as CEO and Executive Vice President of MHCG after Dryer resigned as CEO in 2005. Dietz is also McFaul’s brother-in-law.

According to McFaul and Dietz, Dryer was the sole person responsible for the fraud [the fraud, that is, that is alleged to have occurred at MHCG]–Dryer handed responsibility over to the two men just as the problems started becoming apparent in order to set them up as the fall guys. According to Dryer, MHCG was in fine shape until McFaul and Dietz took over–through their mismanagement, duplexes failed to be built and delivered to investors as promised. Dryer’s job at this time was primarily devoted to promotion and sales. McFaul and Dietz were responsible for making sure the product was delivered.

Dietz has struck a plea bargain with the Denver district attorney in exchange for cooperating with authorities in the case against Dryer.

PHIL FEIGIN

Phil Feigin is currently Andrew McFaul’s attorney. If the name sounds familiar, it should. This is the same Phil Feigin who prosecuted Rick Dryer in Wisconsin. When MHCG started having legal problems, McFaul did a little research and found that Feigin had moved from Wisconsin to Colorado. McFaul then placed Feigin on retainer to represent him in the case.

NICK SABARDIN

Nick Sabardin is the president of Convergent Acquisitions & Development, Inc., a Charlotte, North Carolina-based company that develops and sells rental properties to real estate investors (much like MHCG). Sabardin graduated from the prestigious Sorbonne University in Paris, France, before spending several years as a business consultant to some of France’s largest corporations. He completed his education by earning an MBA here in the United States, with an emphasis on technology and marketing. He flew as an Airline Transport Pilot under the US Airways colors for five years after graduation, and eventually fell in love with the Charlotte area. He is an experienced real estate investor.

Dryer currently serves as a consultant for Convergent and other companies in North Carolina. Sabardin is one of Dryer’s most avid advocates. He believes that the evidence will show that Dryer is completely innocent and that McFaul and Dietz ran MHCG into the ground. Following Dryer’s investment strategies, Sabardin is committed to building a company that achieves what MHCG failed to achieve; that is, develop and manage rental properties for investors that provide current cash flow along with opportunities for future investment returns as the properties appreciate.

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Editor’s Note: The following commentary is provided by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Mr. Rubinoff’s opinions are his and his alone and do not necessarily reflect the views of Flipping Frenzy’s proprietor or editors.
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As we look forward to a new year and reflect back on the one just past, we must ask ourselves, “What ever happened to our American way of life?”

The email headline for Originator Times on the December 26, read: “Mass Layoffs, Rampant Fraud, and More - The Top Stories of 2007.” Indeed, a very frightening headline.

The “Mass Layoffs” referred to put many innocent, hard working people out of work. (Read my November 21st guest blog entry, “Homeowners Aren’t the Only Ones Hurt by the Mortgage Meltdown” here on Flipping Frenzy). These are just some of the casualties of this crisis. This fraud for greed is what has hurt so many honest, hard working Americans.

“Rampant Fraud” as the Originator Times headline reads, oozed from every level of our society–from the naive to the highly educated to knowledgeable corporate executives. The extent of the fraud committed has no equal in our history. It was truly “Greed Gone Wild,” an epic we will be watching for years to come.

I believe we are winning the war on fraud. I still believe that the majority of us in the real estate industry are good, hard working, honest people. But for those relative few who have harmed the whole, I advocate the best way to fight this is to make the guilty pay stiff penalties and then publicize it, as the Originator Times does in the following article:

ABN AMRO To Pay $41 Million For HUD Fraud

Office of the Comptroller of the Currency announced a more than $41 million settlement against mortgage giant ABN AMRO Mortgage Group for falsifying documents in tens of thousands of loans insured by the Federal Housing Administration (FHA). This landmark agreement represents that largest monetary settlement of an enforcement action in FHA’s history.

“Mortgage giant,” ABN AMRO falsified documents. But who are the people who knowingly allowed this practice to occur? Whoever they are, they must be held accountable for their actions as individuals. Where was senior level management? Twenty-eight thousand loans are in question here, and the article speaks only of several underwriters and a handful of others. Fraud of this magnitude could not have happened without upper management’s knowledge and direction.

ABN AMRO Holding N.V. is the parent company of the ABN AMRO consolidated group of companies. It provides a range of financial services on a worldwide basis, including consumer, commercial and investment banking. Its group structure comprises: seven Client business… (more information about ABN can be found by clicking here).

ABN AMRO is truly a giant. Its stock stayed constant even with this announcement. I have heard no mention of any actions taken against senior management, but surely they must have been well aware of what was going on.

Keith E. Gottfried, HUD’s General Counsel said, “This action demonstrates our steadfast and enduring commitment to making sure HUD’s programs are administered in accordance with the letter and intent of the law and are free from fraud and abuse.”

A settlement so insignificant to such a large corporation with no consequences for breaking the “letter and intent of the law” by any individual has no meaning.

In another Originator Times story, entitled “Originator Allegedly Takes ABN AMRO For Over $2 Million,” the pot seemingly calls the kettle black. Here, ABN reportedly takes action against 149 properties, making the perpetrators pay back the money they scammed, and rightfully so. But this is just a civil suit, not a criminal suit. I believe that the perpetrators should also be held accountable for the crime they committed. In the same way, the executives at ABN AMRO who facilitated fraud against HUD should also pay a price for their criminal actions.

There is no excuse for fraud of any kind or to any extent. We must fight this problem from the top down. While other individuals are being criminally charged and convicted and receiving sentences of 20 years and even “life,” the ABN AMROs of the world get off clean. Is defrauding the government (HUD) and all taxpayers a lesser crime than defrauding individuals? Greed has overtaken our sense of responsibility at all levels–even government.

As the New Year unfolds, we will see more stories of fraud from the past but fewer in the future. With the spotlight on fraud in real estate and the continuing effort to prevent it, the mortgage industry will cleanse itself. The programs allowing the fraud are no longer available, and lenders are raising their standards on underwriting loans and requiring underwriters to do their job and not turn a blind eye. Our focus now should be on fixing this huge problem we have and restoring the great American middle class.

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• Officials Falling Behind on Mortgage Fraud Cases (The New York Times): The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said. Reports of suspected mortgage fraud have doubled since 2005 and increased eightfold since 2002. Banks filed 47,717 reports this year, up from 21,994 two years ago, according to statistics from the Federal Bureau of Investigation and the Financial Crimes Enforcement Network of the Treasury Department. In 2002, banks filed 5,623 reports.
• Legislature must place legal curbs on ‘rescue’ practice: The bank was threatening to foreclose on Lonnie Davis’ El Cerrito home. One day, the 76-year-old retired school custodian got a postcard in the mail from someone offering 11th-hour help. But what seemed like a life preserver would drag Davis and his wife, Dorothy, to rock bottom faster than a pair of cement boots. Lonnie Davis not only lost the home where he had lived more than half of his life, the person he trusted to help him wound up being the new owner. The Davises were victims of a legal but deceptive mortgage lending practice euphemistically referred to as a “foreclosure rescue.” The “rescuer” takes advantage of a person’s desperation and financial naivete to convince him to sign over his deed. The “rescuer” offers to pay the distressed homeowner’s delinquent payments, which allow him to stay in his house, then gives him a new loan. A lot of people don’t realize that they will no longer own the property. Once the title has been transferred, the rescuer takes money out of the house by refinancing. Real estate fraud investigators call that “equity stripping.”
• When Receiving Cash Back at Closing is Legal: As real estate brokers, we are often told that “As long as the information is presented on the HUD statement, the transaction is legal.” What happens in almost all situations such as the scenario presented here, is that the professionals involved create two HUD statements-one for the closing and another that is sent to the bank or they camouflage the $80,000 junior lien or a recently created obligation of the seller. In other words, all is not being fully disclosed.
• Parent Company of Mercantile Bank takes Real Estate Fraud-related hit in Florida: The holding company of Mercantile Bank in Florida expects a $32 million provision for credit losses in the current fourth quarter, in part because of loan problems in Florida. That’s up substantially from the $10.5 million provision in the third quarter of 2007 and $8.8 million provision in the fourth quarter of 2006. The company also said it has revised downward its expected recovery of loans in a real estate fraud scheme in North Carolina.
• Minnesota man sentenced in mortgage-fraud scheme: The crime of mortgage fraud continues to be a priority with the United State’s Attorney’s Office as the first defendant in the LHS mortgage fraud case–involving a Prior Lake woman, a Credit River Township man and a Minneapolis man–was sentenced in federal court today in Minneapolis. Mario Augustin Lewis, 37, of Minneapolis was sentenced to serve four-and-a-half years in prison and ordered to pay $437,814.41 in restitution.
• Long Beach Mortgage Rep Faces Five Years in Prison: John Ngo, 27, of Dublin, California, pleaded guilty before United States District Judge William B. Shubb to lying under oath before a federal Grand Jury in connection with an on-going mortgage fraud investigation. The case is the product of an extensive investigation by the Federal Bureau of Investigation and Internal Revenue Service-Criminal Investigation. Several other individuals have been indicted in connection with this investigation and those charges remain pending.
• New Year, New Consumer Scams: It has been a tough year for consumers. With housing prices falling and the subprime-mortgage mess raging on, we won’t blame you if you’re looking forward to a fresh start in 2008. Better watch out: The financial woes and natural disasters of 2007 have armed scammers with plenty of new tricks — or resourceful spins on old ones — aimed at separating you from your cash. Here the five most treacherous scams to watch out for in 2008.

I was discussing the mortgage meltdown with a colleague the other day, when we encountered an interesting question: Who do mortgage originators (brokers and loan officers) represent? Do they represent themselves, the lenders whose products they sell, or the borrowers?

As a REALTOR, my relationship with my clients is clearly delineated. I have a fiduciary responsibility to the buyer or the seller I represent. (The term “fiduciary” simply means that I must represent my client’s best interests.) In a case of dual representation, Realtors are expected to treat both parties fairly and equitably.

A professional’s responsibility varies according to the profession and the specific role the person plays. A stock broker, for example, is supposed to sell investments to clients that are in the clients’ best interests. Someone who sells cars, however, is responsible for acting on behalf of the dealership, not the person who’s buying the car. Condemning a car salesperson for trying to sell the buyer additional optional features the buyer didn’t really need would be insane.

In real estate transactions, fiduciary responsibility is not always so clearly defined, and I believe this is at the root of many problems in the industry. For example, is an appraiser (paid by the buyer) responsible to the buyer or to the bank who uses the appraisal to deny or approve a loan? In the best of all possible worlds, the appraiser’s job is to provide an accurate appraisal of a home’s value, but in the real world, this doesn’t always happen. At the direction of a homeowner, loan officer, or real estate agent, the appraiser may inflate the appraisal, fooling the lender into approving a loan it would otherwise deny.

The fiduciary responsibility of mortgage brokers and loan officers is even fuzzier. Like a car dealer, a loan officer is merely selling a product supplied by the lender. Like an investment broker, however, the loan officer has some responsibility not to saddle the borrower with an overly risky loan. As you can see, the role that the broker or loan officer plays between the lender and borrower is clouded in ambiguity.

I believe that this ambiguity led to many of the problems leading up to the mortgage meltdown. In some cases, loan officers were overly ambitious in representing the borrower’s interests, which resulted in mortgage fraud. In other cases, loan officers who were overly eager to sell the lenders’ products pushed risky loan products (subprime mortgages) on unwary borrowers. Ironically, by acting solely on the behalf of either the borrower or the lender, these loan officers served neither party. Both lenders and borrowers got stuck with bad loans.

Some states have passed legislation that gives mortgage brokers and loan officers fiduciary responsibility to borrowers, but that addresses only one half of the equation. Brokers and loan officers also have to protect the interests of lenders.

I don’t intend to make mortgage brokers and loan officers the scapegoats in the mortgage meltdown. There’s plenty of blame to go around. Real estate agents, appraisers, title companies, Wall Street, the Federal Reserve, legislators, politicians, and homeowners all share the blame. Unfortunately, mortgage brokers and loan officers play the role of gatekeepers and are saddled with an inordinate amount of responsibility. They must serve two masters in a way that is in the best interest of both parties.

Perhaps mortgage brokers and loan officers need to stop thinking about their vendors and their clients and think in more abstract terms. Instead of selling products from lenders or representing borrowers as clients, maybe they need to be committed to making good loans. In many ways, the relationship needs to be governed by the same rules that apply to dual representation in the real estate industry — if it’s not a good deal for everyone involved, then it’s not a good deal. As an added incentive, perhaps brokers and loan officers should have their compensation tied to the success of the loan rather than receiving a commission on each sale.

Has anyone ever heard of Armando Montelongo? For the uninitiated, along with his wife–Veronica Montelongo–and a few helpers, Armando Montelongo’s work as a real estate investor / flipper is featured on the A&E Television Network’s reality show, “Flip This House,” which can been seen on Saturday evenings at 9:00 p.m. Eastern/8:00 p.m. Central on A&E. According to the A&E website, “Flip This House” is an hour-long “docu-soap” that follows the sometimes painful efforts of three real estate developers in New Haven, CT; San Antonio, TX; and Atlanta,GA, where “…each boasts a team of characters that buys homes, renovates them, then flips them for a profit.”

The Montelongos head up the San Antonio contingent, and like other reality TV personalities, Armando Montelongo appears to be looking to leverage his new found fame via the Internet. Some Internet marketing “gurus” even refer to him as “Armando Montelongo, the Internet millionaire,” but you need to take such endorsements with a grain of salt. Internet endorsements are often indirectly paid for through “affiliate” marketing; that is, one business financially rewards another for delivering paying customers.

I recently received the following report from a Flipping Frenzy reader who claims that Armando Montelongo’s company is essentially ripping him off:

“I answered a radio ad for free dvd for flipping houses. It was Armando Montelongo’s Flip and Grow Rich. I gave them my credit card# for shipping. They sent a package of books and cds and dvds. All of which I had 30 days to return. I called and got a Return Authorization Number. I also got a receipt post card from the Post Office. Yet 3 months later I am seeing charges of $86.55 on my credit card statement. I have called them to no avail.“

It doesn’t take much looking around to find Armando Montelongo. Each of these sites…

• BuyFlipItNow.com
• ArmandoMontelongo.com
• Armando-Montelongo.com
• iBuyHousesFlorida.us
• MontelongoHouseBuyers.com

… eventually leads to the same pitch (captured below, sans video):

Opening shot: Montelongo drives a beautiful Mercedes Benz automobile toward the camera–presumably the car is his own, secured via all the money he makes flipping houses and teach others how to do the same. Notice that he’s driving through an industrial office park–again, presumably he has an office here, and you’ll be able to afford one here too if you follow his advice.

Scene continues: Armando Montelongo exits his car…

… and says the following, word-for-word:

“Hi, I’m Armando Montelongo from America’s #1 Hit real estate reality Show, Flip This House San Antonio. Right now I am filming my third season of Flip This House, and guess what, I’m looking for a new eager intern to teach my multi-million dollar real estate secrets to. So if you’re excited and you want to learn about real estate from the absolute best, for totally free, and get an amazing education at no expense to you, simply fill out the form below and I’ll be contacting you to see if you can qualify to be my new eager intern. Fill out the form below, and you could be my new real estate millionaire.”

Taking a look at each of Armando Montelongo’s sites, it’s easy to see why someone may choose to question his tactics:

• Nowhere on any of his sites is there a telephone number
• Many of his sites are packed with Google AdWords–a common tactic used by so-called Internet marketing gurus to generate additional revenue
• There is no mention anywhere of a money-back guarantee for any of his courses, products or services
• His video states he is looking for an intern but there’s no application, job description, or even a hint about who might qualify

On the surface, it would appear Armando Montelongo is preying on the get rich quick hopes of what low level Internet marketers call the “business opportunity” consumer. We’ve all seen “Biz Opp” advertisements, haven’t we? They can be found in the classified section of newspapers and on Craigslist, and they look an awful lot like these:

• Earn $5,000 a WeekWorking From Home!
• Get Real Results Fast! $250,000 1st Year! Not a Trick!
• $$ Make $2000+ per week… EVERY WEEK! $$
• Hottest Opportunity Ever (No Cold Calling)!!
• Get 100 Internet sites for $8,995. Retire Early! Call 1-800-XXX-XXXX.

To be fair, I sell my own real estate investment training via books, including Flipping Houses For Dummies (published by Wiley Publishing), Protect Yourself from Real Estate and Mortgage Fraud (published by Kaplan), Foreclosure Investing For Dummies(published by Wiley Publishing), and Mortgage Myths: 77 Secrets That Will Save You Thousands on Home Financing (published by John Wiley & Sons). The big difference may be that I present real estate investing in a more realistic light. I am always careful to warn prospective investors that investing in real estate requires hard work and carries real risks (and who knows, maybe Armando Montelongo does the exact same thing, but when he uses language like “…you could be my new real estate millionaire,” one seriously has to wonder). Some people–especially those looking to get rich quick–just don’t have the mindset, resources, and support network in place to be successful at flipping houses.

Like Mr. Montelongo, I too have had my fair share of real estate failures, and I’m not one to hide or run away from them either. I tip my hat to Armando for telling it like it is (this statement can be found online via another one of his promotional videos):

When you see me on television, you get to see my successes. What you don’t see is all of the failures that I have had before I started flipping houses. It’s very easy to share your success, but much harder to share your failures with the world. However, I believe in being dirt honest and by doing so, I believe that sharing my failures will actually help you be more successful.

To be clear, I am not saying that Armando Montelongo is a person of questionable character or a real estate guru. I don’t know him personally, nor have I purchased any of his products or thoroughly reviewed his system. Who knows–perhaps he received some poor advice on positioning himself online. Maybe he himself got taken in by an Internet marketing guru who told him that this is how it’s done online. I can only ask the question: Is Armando Montelongo a real estate guru? Is the experience of the Flipping Frenzy reader mentioned above a universal one or an isolated incident?

If you or someone you know has ordered or purchased products or services from Armando Montelongo, please leave a comment to let us know about your experience.

Despite all the chaos associated with Real Estate and Mortgage Fraud, I hope everyone reading this message is able to have a safe and happy holiday season.

From Ralph R. Roberts, CRS, GRI and the many people who make FlippingFrenzy.com possible.

On August 23, 2006, Chief Judge of the Denver County Statutory Grand Jury issued a 58 count indictment charging Fredric R. (”Rick”) Dryer, Richard J. Darrow, and Jeffrey Dietz with 58 counts, including racketeering, securities fraud, and theft. Later, additional counts were added. The December 14, 2006 version of the indictment contains an additional 8 counts, primarily addressing losses of investors who filed claims after the original indictment. Since that date, one additional count has been added for a total of 67.

[I invite you to read the indictment–from Colorado’s Department of Regulatory Agencies (DORA)–by clicking and downloading the following file: Mile High Capital Group Indictment.pdf.]

According to the first count, Dryer, Darrow, and Dietz are charged with racketeering–operating an illegal business for personal profit. The businesses named in the indictment are Mile High Capital Group, Ltd and Replacement Property Solutions, Inc. According to the indictment, Dryer, Darrow, and Dietz, “did unlawfully, feloniously, and knowingly conduct or participate, directly and indirectly, in the enterprise through a pattern of racketeering activity….”

The second and third counts are related to conspiracy to commit a crime, in this case, two crimes–securities fraud and theft. On both counts, the indictment charges that Dryer, Darrow, and Dietz, with the intent to promote or facilitate the commission of the crime… unlawfully and feloniously agreed with each other and persons known or unknown to the Grand Jury that one or more of them would engage in conduct which constituted that crime or an attempt to commit that crime, or agreed to aid the other person or persons in planning or commission or attempted commission of that crime, and an overt act in pursuance of the conspiracy was committed by one or more of the conspirators.

Pages 9 to 12 of the indictment are of particular interest, because they contain the facts of the case supporting counts 1-3.

The remaining 63 counts describe specific cases in which investors have filed claims of being cheated out of $15,000 or more by Mile High Capital Group and RPS.

Some visitors to FlippingFrenzy.com have expressed curiosity about why I have chosen to investigate this case and present my findings on Mile High Monday. After all, the state of Colorado has already performed a thorough investigation and decided that the evidence is sufficient to indict Dryer, Darrow, and Dietz. Hundreds of victims are already well aware that they have lost money and are convinced that they have been scammed. And the media, particularly the L.A. Times and the Denver Business Journal, have already reported extensively on the case. So, what reason could I possibly have for doing my own independent investigation?

Truth be told, this case was not even on my radar when the indictment was issued. I knew of Rick Dryer and his Right Place Right Time investment seminars but had never met him until we did the radio spot together. Once I began looking into his background and after talking with Convergent Acquisitions and Development president Nick Sabardin, I found the case to be fascinating and decided to present it to FlippingFrenzy.com readers.

Sabardin is convinced that Dryer has been railroaded, and he would like to see Dryer’s name cleared. At this point, I have an open but skeptical mind, and I want to independently examine the evidence for myself before passing judgment. Not all people who are indicted are guilty. I thought that this would be a fascinating case study for my readership, however it turns out.

Another reason I am calling attention to this case is because of Dryer’s association with Convergent Acquisitions and Development. If Dryer is guilty of the charges filed against him, then investors in Convergent Acquisitions and Development should know about it. Likewise, if Dryer if free of guilt, this should clear the minds of prospective investors and make them more confident of doing business with Convergent.

Unfortunately, hundreds of people collectively lost millions of dollars, but I want to make sure the truth is told, and I think readers will find the story and the characters involved fascinating.

• Fraud Seen as a Driver In Wave of Foreclosures: Skyrocketing foreclosures are a testament to how easy it was to borrow from mortgage lenders in recent years. It may also have been easy to steal from them, to judge from a multimillion-dollar fraud scheme that federal prosecutors unraveled here in Atlanta. The criminals obtained $6.8 million in mortgages from Bear Stearns Cos., including a $1.8 million mortgage to Calvin Wright, a New Yorker who told the investment bank that he and his wife earned more than $50,000 a month as the top officers of a marketing firm. Mr. Wright submitted statements showing assets of $3 million, a federal indictment alleged. In fact, Mr. Wright was a phone technician earning only $105,000 a year, with assets of only $35,000, and his wife was a homemaker. The palm-tree-lined mansion they purchased with Bear Stearns’s $1.8 million recently sold out of foreclosure for just $1.1 million. Bear Stearns, meanwhile, posted the first quarterly loss in its 84-year history as it wrote down $1.9 billion of mortgage assets yesterday.
• No solutions for borrowers who are ‘upside down’: Martinez said struggling borrowers have flocked to his office asking for help. Martinez started as an insurance adjuster/investigator more than a decade ago, but began investigating real estate fraud two years ago and suddenly found himself bombarded with cases.
• Fraud and bubbles: Like a horse and carriage: Here’s what’s interesting: It seems likely that a big part of the run-up in housing values may also have been a result of fraud. Demand was inflated by fraudsters making bids on homes that they couldn’t afford — and lenders who were lending based on fraudulent misrepresentations. How big of a role did mortgage fraud play in inflating home prices? It’s impossible to know but now that the frauds are being exposed, we’re seeing home prices dropping precipitously. And without mortgage fraud, there are fewer people with the resources to scoop up homes.
• Realtors reassure peninsula buyers: Kenai Peninsula real estate agents reacted Wednesday with strong words and public assurances in the wake of U.S. Grand Jury fraud indictments handed down Dec. 13 against nine individuals and one corporation in the Anchorage real estate market. According to U.S. Attorney Nelson P. Cohen, the accused allegedly engaged in “a widespread, three-year scheme” cheating 13 banks and home loan mortgage companies. In all, 57 different loan transactions netted more than $1.7 million in profits and cost financial institutions over $1 million to date.
• $3 million bond set for Evergreen president: Bond was set at $3 million cash this morning for Evergreen Corporation President David B. Willan. Willan, 37, was among 17 people named on Thursday in a 147-count Summit County indictment in connection with a two-year investigation into Akron-area mortgage fraud.

  

  Willan, who appeared before Common Pleas Magistrate John H. Shoemaker, was charged with a first-degree felony for engaging in a pattern of corrupt activity, aggravated theft, mortgage fraud, money laundering and other alleged offenses. Authorities said Willan was being held at the the county jail this afternoon in lieu of the $3 million cash bond.

• The Real Mortgage Fraud: Nothing is more fun than doing noble deeds with someone else’s money, and right now, Democrats are getting ready for a rollicking good time. Contemplating the subprime mortgage problem, with numerous borrowers unable to pay their debts, the party’s presidential candidates and congressional leaders have a simple solution: Fleece the lenders.
• Realtor gets 20 months in prison for mortgage fraud: A Rockford Realtor was sentenced to 20 months in prison this afternoon for his role in falsifying documents to help Hispanic families qualify for loans backed by the Federal Housing Authority. Cesar Arenas was the fourth person sentenced in the five-person mortgage-fraud ring that operated from 2001 through 2003 and the second to receive prison time. Rhonda Torossian, the loan officer in the scheme, was sentenced Monday to 20 months in federal prison.
• Guest Opinion: More must be spent to stop mortgage fraud: The Arizona Department of Financial Institutions investigates mortgage fraud cases before referring them to the Arizona Attorney General’s Office for prosecution. The department relies on money from a revolving fund to initiate and fund its investigations, but that money has an annual cap of only $50,000. This amount is inadequate and has not been raised in at least 10 years.
• Banks in England crack down on mortgage fraud: Banks are seeking to crack down on mortgage fraud as evidence mounts of a rise in the number of fraudulent borrowers. Abbey and Lloyds TSB are among the banks reporting a surge in the volume of potentially fraudulent mortgage applications. The Council for Mortgage Lenders is also cracking down, working with police to investigate the possibility that organised criminals are operating in the market. “We are identifying two or three times as many cases of possible fraud as we did in the first part of this year,” said Steve Williams, risk director at Abbey.

In response to my recent blog posting, “High Profile Realtor Caught in the Crosshairs of Cash-Back-at-Closing,” a newly licensed associate broker from Washington state e-mailed me asking whether a cash back at closing deal could ever be legal. His question applied to the following scenario:

1. The seller is facing foreclosure and his highly motivated to sell.
2. The buyer has good credit, a suitable down payment, and a desire to make a deal.
3. The home is listed and has been appraised at $480,000.
4. The seller is willing to discount the home by $80,000. (The seller loses some equity in the home but dodges the foreclosure bullet and saves part of his credit in the process.)
5. Instead of purchasing the home for $80,000 less, the buyer agrees to pay the full price of $480,000 with the agreement that the seller will pay back an “incentive” at closing of $80,000. This would give the buyer the necessary funds to fix up the property.
6. The buyer delivers a real cash down payment that is proven to be in his bank account prior to the purchase, as per the bank’s requirements.
7. The bank has approved the loan based on its own appraiser’s evaluation and receives a suitable down payment of 5-20% depending on the loan requirements.

The broker then followed up with a couple excellent questions: “How can this be inappropriate or wrong if the seller takes a loss but is happy with the deal? Where is the harm if all is fully disclosed, and the bank is not put at any risk?”

Consumers and professionals often justify such deals by claiming that the true market value of the home shows that the bank is receiving sufficient collateral. However, the true market value of the home is the lesser of the appraised price or the actual price paid for the property. In this case, the true market value of the property is not $480,000. It is actually the price the seller is willing to accept–$400,000. Presenting to the bank that the actual sales price is $480,000 is misleading and constitutes fraud.

As real estate brokers, we are often told that “As long as the information is presented on the HUD statement, the transaction is legal.” What happens in almost all situations such as the scenario presented here, is that the professionals involved create two HUD statements–one for the closing and another that is sent to the bank or they camouflage the $80,000 junior lien or a recently created obligation of the seller. In other words, all is not being fully disclosed.

This is obviously a deceptive practice designed to mislead the bank into approving a loan it would otherwise reject. If you have to create two HUD statements–one for the closing table and one for the lender or one that is camouflaged in some way to justify a transaction, then what you are doing is illegal. If the HUD was a person then it could be accused or indicted as a co-conspirator.

I know of only a handful of situations in which receiving cash back at closing is legal:

• You refinance your mortgage to cash out some or all of the equity in your home.
• Your agent agrees to refund a portion of his or her commission at closing.
• The buyer makes a deposit into the escrow fund, obtains a 100% loan, and then receives a credit back. This isn’t considered cash back at closing, because it is the buyer’s own money.

Other than scenarios such as these, cash back at closing deals are unethical and illegal.

Now you might argue that illegal acts such as these are victimless crimes, but they do have the potential of causing harm. Consider the following:

• The buyer’s mortgage payment is higher than it needs to be, making it more difficult for the buyer to afford and more likely that the buyer will ultimately default on the mortgage.
• The bank approves a loan for $80,000 more than the true market value of the home. If the bank must foreclose on the home in the future, it may not be able to sell the home for enough money to cover the remaining balance of the debt.
• The inflated sales price influences the prices of homes in the same area, making housing in the area less affordable and boosting property taxes.

As you can see, there are good reasons behind the rules and regulations that govern real estate transactions. When we begin to bend those rules under the false assumption that nobody is getting hurt, we compromise the very integrity of the real estate industry and damage the industry on which we make a living.

Rick Dryer is more than your average real estate investment guru. A typical real estate investment guru sells training in an attempt to teach people how to build wealth by investing in real estate. Dryer not only provided training, but he also built investment opportunities for his clients. In fact, his credentials in this regard were strong, because his intellectual property evolved from his real life business.

In 2002, Dryer launched Mile High Capital Group, LLC (MHCG)–a builder and developer of single-family homes, at the time specializing in mountain building. It was only in late 2002, when Dryer was approached by out of state investment clubs looking for a reputable Colorado builder/developer that the business model changed. Dryer didn’t think mountain properties were suitable for income property, so he began to research what would work.

Over the next two years, MHCG evolved into a builder of just such properties. Its reputation grew. Infinity Broadcasting sent its program directors to ask MHCG to sponsor its Rich Dad Poor Dad Real Estate Workshops, with Dryer as the main speaker with Robert Kiyosaki. Dryer’s research and experience evolved into what was to become his Right Place Right Time Real Estate Investment Strategies syllabus.

MHCG grew with Dryer’s reputation. The company planned to develop subdivisions around the country on the edges of high-growth areas where demand for rental properties was expected to be high. MHCG would then sell the rental properties to investors. The plan was to make it easy for real estate investors to purchase revenue-generating properties.

(Above: Gary Eldred, Ph.D, and Rick Dryer)

As far as real estate investment gurus go, Dryer had a track record and reputation that was good and getting better. Typical real estate investment gurus charge thousands of dollars for information that’s worth no more than about $50. They pitch risk-free, get-rich-quick schemes. They encourage people who are in no position to invest in real estate to become full-time investors. Most of these gurus are not successful real estate investors themselves–if they could make millions in real estate, they would not be spending their time pushing seminars.

Dryer is different. His “Right Place Right Time Real Estate Investment Strategies” are well known in the industry, and he has a very public record of accurate predictions about emerging markets and trends. He became a popular and frequent speaker at Robert Kiyosaki’s “Rich Dad Poor Dad” real estate investor workshops around the country before starting his own workshops. He knows his stuff and is careful to remind people that investing in real estate carries risk. Dryer seems like the real thing, and MHCG seemed like a legitimate company offering genuine real estate investment opportunities.

Through his seminars, Dryer promoted MHCG to attendees, and they were eager to buy these rental properties. The risk seemed negligible. After all, Dryer had a proven system in place for identifying areas where rental properties would soon be in high demand. His system was so successful, in fact, that many celebrities had bought into the program–celebrities with big names, such as:

• Gary Eldred, PhD, author of Investing in Real Estate and professor of Trump University
• Richard Florida, PhD author of The Rise of the Creative Class and professor in the School of Public Policy at George Mason University
• Richard Karlgaard Publisher of Forbes magazine and author of Life 2.0
• Dan McCabe, Esq