Wednesday, March 5, 2008

Feature | House of Cards? Anxious investors fear “Free Capitalist” Rick Koerber’s real estate investment empire is folding, Posted by Robert Paisola

Feature | House of Cards? Anxious investors fear “Free Capitalist” Rick Koerber’s real estate investment empire is folding

By Eric S. Peterson
Posted 03/06/2008

An episode of the Free Capitalist radio show returned from commercial break last August with music dramatic enough to bolster an epic battle scene from Braveheart. “Wow, that’s some great welcome-back music,” said show host Rick Koerber.
“I know; I feel like Luke Skywalker in Star Wars,” said co-host David Kirby, as Koerber slipped into an impression of dueling light sabers. The two men rolled along, Kirby laughing at Koerber’s antics. Then suddenly, like a switch had been flipped, Koerber soberly interjected: “Yes [but for us], this isn’t the music of victory. This is to announce the battle has begun.”

The Free Capitalist show broadcasts from a Provo studio and has been carried on KTKK (K-Talk) 630 AM radio for four years. During the duration of that run, Koerber has all but trademarked his own brand of capitalism as a cure-all for our politically troubled times. On the show, Koerber also has pitched his numerous other business interests, including his American Founders University. Koerber has taught thousands of students a process he calls “equity milling”—a real-estate investment strategy that, as some have practiced, has led to multistate securities-fraud charges against and investigations of more than a dozen Free Capitalist followers.

The fast-talking host’s radio rants bounce from pure dollars-and-cents business gab to apocalyptic diatribes about a socialist world takeover. In the course of a two-hour show, Koerber is as likely to reference Ronald Reagan and Ayn Rand as he is The Book of Mormon and the film The Matrix.

“Living in financial fear is like living in the matrix,” Koerber says. “I don’t live in the matrix, but I do visit there often to try and save people who were once like me.”

Last Aug. 31, Koerber, 35, brazenly challenged on the air the “commie-czars” of the Utah Securities Division. “They told me I couldn’t pay my investors!” Koerber shouted of his alleged encounter with securities investigators. Former Utah Securities Division director Wayne Klein would neither confirm nor deny for City Weekly that Koerber was or is under investigation.

“I’ll tell you why there’s more fraud in Utah than any other state in the union,” Koerber said on the show. “It’s because [investigators] go after people like Rick Koerber without facts!”

Koerber hasn’t been charged with any securities violations himself. But, if he is merely a real estate guru whose “13 Principles of Prosperity” have been lost on some wayward students now charged with securities fraud, it begs the question: What has this champion of capitalism done to keep followers from perverting his business philosophy? And, if business associates like recently charged Paul Bouchard—who is alleged to have bilked investors of $11 million meant to be paid from Koerber’s company—what has Koerber done to help make those investors whole again?

Helping prevent fraud and repair its consequences from within the industry is difficult, especially when you’re busy waging war on state regulators.

“I think you’re the wrongdoer,” Koerber continued on the radio show, invoking a rhetorical state regulator. “I think when you look in the mirror, you’re the evil you despise, because nobody in my circle is complaining.”

Even still, dozens of investors from connected companies have pleaded with Koerber for relief. And troubled investors have filed lawsuits in Utah and Colorado against Koerber and his companies.

Principle 5: People Are Assets

“Rick Koerber doesn’t care about anyone but Rick Koerber,” says Steve Skuba. Those are strong words for a man who never directly invested in Koerber’s Founders Capital LLC.

After 16 years as a beat cop in San Diego, Skuba moved to St. George in 2005 and started in real estate. Business acquaintances told him about a firm called SGS Capital. “I was very naïve about it,” Skuba says. “It was the first time I ever invested anything with anyone.”

Ultimately, Skuba pulled $200,000 equity from his home and invested it with SGS. Skuba says SGS representatives told him they would invest the money directly into Koerber’s Founders Capital. According to a Utah Securities Division order to show cause from October 2007, SGS allegedly gave the money to Hunters Capital, which then moved it to Founders.

At 3 percent monthly interest, Skuba was, for a time, earning $6,000 a month in interest payments. Koerber says he’s never taught people to use money from their own homes for investment. But, at the time, the risky move paid off for Skuba.

“It helped a lot to pay the mortgage, it really helped with my daughter,” Skuba says. His 19 year-old daughter was diagnosed at 18 months of age with a brain tumor on her left frontal lobe and has been gripped daily with violent seizures ever since. She requires constant care, Skuba says, and lives in a costly California school.

Skuba felt he had finally caught a lucky break—until Dec. 4, 2007. On that day, Paul Bouchard of Hunters Capital pleaded no contest to two second-degree felony charges filed by the Utah Attorney General’s Office, which charged him with taking $11 million from 140 investors.

According to a Utah Securities Division document on the case, SGS couldn’t pay back Skuba’s $200,000 investment because his money went from SGS to Hunters Capital. Hunters alleges the money had been invested with Koerber’s Founder’s Capital, though Koerber says he was unaware of how Hunters had raised its investments.

Koerber said that such indirect investments did not obligate him to compensate Skuba. Frustrated, Skuba says he never realized the money passed hands with Hunters Capital. He pleaded with Koerber to help him out.

“I didn’t want my credit to be ruined,” Skuba says, adding that he begged Koerber to buy his home so he could avoid foreclosure.

Koerber reluctantly agreed and last October began negotiating terms to purchase Skuba’s home. But Skuba says Koerber avoided finalizing the deal for several months. Finally, Koerber made Skuba an ultimatum: He would buy the house if Skuba signed a “hold harmless” agreement, waiving his rights to pursue legal action against Koerber.

Skuba signed—a costly mistake, he now says, as Koerber reneged on his promise to buy the home. Koerber disputes that; he told City Weekly the deal was only “recently finalized,” and that he would indeed buy the home. “We’ve got an excellent track record on the homes we buy,” Koerber says.

Ten minutes after City Weekly spoke with Koerber on Feb. 22, Skuba called the paper to say that, after spending months of trying to reach Koerber to complete the deal, Koerber had just phoned him to discuss the house purchase. Koerber also told Skuba he would investigate a legal option to buy the promissory note for the money SGS Capital owed Skuba.

Koerber then phoned City Weekly back to report that, after checking, he had discovered Skuba didn’t want to sell the house. Koerber said he had recorded the phone conversation as proof.

Skuba, dumbfounded that Koerber would record their conversation, alleges he didn’t want to sell the house under one option discussed, which would have kept him from recouping his remaining equity. Skuba worried he would still be vulnerable to foreclosure.

“[Skuba] gets pretty emotional,” Koerber responds. “I think that gets in the way of his judgment. But you know I’m just trying to help the guy out.”

Koerber’s Castle

The FranklinSquires building in Provo seems almost an abandoned castle. The once teeming 50,000-square-foot office now holds but a small skeleton crew filling one area.

Inside a room that resembles the Oval Office, Koerber sits behind an oversize mahogany desk. An oil painting of signers of the Declaration of Independence hangs over a gas fireplace. Behind Koerber’s desk, the custom flag of his Free Capitalist Project stands ceremoniously next to the U.S. flag.

“I’m no Ponzi scheme,” Koerber says. “If I was, why haven’t I skipped town for Cabo? I’m still here, coming every day and kicking butt.”

Koerber turns to a wall of his office dominated by six large flat-screen computer monitors, then pulls up a taped phone conversation between a caller and a Utah securities regulator. Besides recording his discussions with investors like Steve Skuba, Koerber says he has spent the past two years documenting his encounters with securities regulators with recordings of private meetings and phone calls. He plays a static-ridden audio file on which a caller learns from an alleged securities regulator that Koerber’s investment model “is based on fraud; the whole model is based on fraud.”

Koerber says his “equity milling” has only drawn suspicion from regulators because others have commandeered his concept and turned it fraudulent. “Unfortunately, what most people understand as equity milling is somebody’s ripped-off version of my model,” he says.

“I got started in the real estate business with no money or credit, so my whole model is based on how you make money in real estate without money or credit.”

Banking on Broke

Koerber, who today banks on his “principles of prosperity,” once declared bankruptcy with debts of nearly $1 million. For Koerber, that’s a selling point.

Koerber alleges to have ridden the dot-com bubble in the mid-’90s with his Wyoming-based Internet company When the bubble burst, so did his business and, with wife Michelle, Koerber filed for Chapter 7 bankruptcy in 2001.

That bankruptcy is an integral part of his success story, the punch line of his motivational speech to budding investors. In his recently published Free Capitalist Project Primer, Koerber describes the chronology that led him from bankruptcy, bitter disenchantment with moneymaking, to re-emerging from financial ruin as a born-again capitalist:

“Four years ago, I was working as a telemarketer and giving plasma twice a week (along with my wife) just to have enough money to pay the bills. Three years ago, I surprisingly discovered a path to earn sufficient income, to ensure that I would almost certainly never need another paycheck again. Two years ago, I successfully generated over $1 million in revenue—enough to pay back all those debts I had previously been legally discharged from paying (plus an additional 6 percent for good measure). One year ago, I just completed my best business year ever with over $110 million in revenue!”

Koerber champions the surprise path that led him from economic ashes to grand wealth as open to anyone willing to “turn their brain on.” There’s a price: A yearlong real-estate investment course costs about $7,500.

On his Website, he testifies of his rollicking success in Wyoming as one unforged in “principles.” Subsequently, he collapsed under the stress of the bursting dot-com bubble, which led to his bankruptcy. Crushed by debt and shame, Koerber gave up the entrepreneur’s life and started selling office copiers.

In the darkness of his plasma-donating, office-supply-hawking doldrums, Koerber engrossed himself in the ancient classics and books about the founding fathers. The old Rick Koerber, living in the matrix of scarcity, soon converted into the Free Capitalist. He followed in the footsteps of revolutionary heroes like George Washington and John Adams.

By investing in real estate.

A Sure Bet

Koerber’s “equity mill,” as he describes it, involves two of his real-estate holding companies, Hill Erickson and New Castle Holdings. These companies work together under the watch of Koerber’s parent company, FranklinSquires Investments. Koerber’s school, American Founders University, also plays a role. Certain graduates of the school help Hill Erickson find “distressed properties”—homes that have been priced below market value—to invite a quick sale. Students who find these properties get nominal finders' fees from Hill Erickson. They get a title, too: “Real estate acquisition specialists.”

Hill Erickson then uses its capital to buy the property. Meanwhile, other Koerber graduates are ready to purchase the property back from Hill Erickson at ideal market value. These students are part of a “preferred buyers” program, Koerber says.

For example, Hill Erickson buys a distressed property listed at $500,000. Under better market conditions, it might go for $600,000. Then, a “preferred” buyer steps in and buys the property back from Hill Erickson, for the increased value.

This may seem like a raw deal for the preferred buyer. But that is when Koerber’s other company—New Castle Holdings—buys a lease option from the preferred buyer and seeks renters for the property.

“It doesn’t remove the [preferred buyer] from liability, but there is a cash flow of a couple hundred bucks a month,” Koerber says. That’s on top of the cash from the lease option of “good and valuable consideration”—a sort of down payment on the lease, which could be tens of thousands of dollars or more, depending on the sale.

“If New Castle defaults, worst case scenario is you got a house that you can still sell,” Koerber says, adding that buyers “prefer” this arrangement. “Our preferred buyers are usually high-end professionals: doctors, lawyers with good credit.”

Usually, but not always. In 2004, when real estate agent George Bible came across a “preferred buyer” from Koerber’s school, he soon realized he wasn’t so lucky.

In less than a month and a half during the fall of 2004, Bible stood to earn more money in commissions than most real-estate agents would clear in a year—more than $130,000 from seven properties. He says now a thought lingered in the back of his mind—if something is too good to be true, it probably is.

In Bible’s Orem realty office, he has kept a file for four years labeled “FranklinSquires.” He considers it insurance against the day he might be called to account for the period between late September and November 2004, when Koerber’s real-estate investment company, FranklinSquires, enlisted him to find and close on residential homes.

“I have no quarrels with anyone making money. I love making money,” says Bible, sitting back in his chair, smoothing out his cash-patterned tie. “But, at the same time, I have no interest in being involved in something that’s going to harm people in the long term.”

In the summer of 2004, Bible helped find a home for Gabriel Joseph, former vice president of FranklinSquires Investments. Bible impressed Joseph with his efficiency, and Joseph hired him to find investment properties.

The money Bible stood to acquire off fast turnarounds on the seven properties gnawed at him. He began more closely investigating the transactions. One of the homes— a ’70s vintage in Alpine—listed for $730,000. Bible says Joseph had arranged for a simultaneous close, which involves the property being simultaneously sold again to another buyer. (Such closings have since been outlawed in Utah without full disclosure to all parties involved.)

The second buyer was a secretary from Springville. She had been recruited into the “preferred buyers” program and had used her credit score in securing the loan to purchase the property. The home Joseph was going to buy for $730,000 would be sold immediately to the secretary—who earned a little over $38,000 annually—for $1.2 million.

Bible found out that the secretary regularly earned $3,200 per month—roughly the same amount she would be spending on house payments for a home she was not even living in.

Although Joseph and Koerber assured him the transaction was legal, Bible decided to walk away from it and the $130,000-plus in commissions.

If New Castle Holdings kept up with payments, Bible estimated the secretary might have banked an additional $3,000 to $4,000 annually—but if, for some reason, FranklinSquires couldn’t make payments, she would be left holding the bag. “She would likely go bankrupt or foreclosed on, or both.”

If the home wasn’t appraised at fair market value, if the value was inflated, the house wouldn’t sell on the open market. “If it’s artificially inflated by asking for 14 different appraisals and you go with the one that’s more than double what the others said, then you’ve got a problem,” Bible says.

Under good market conditions, it’s possible to cycle through appraisals until the buyer finds one offering a bloated value—equity pay dirt. But, if foreclosure occurs, the preferred buyer’s credit gets ruined. And the home gets dumped back on the market—pulling down property values in the surrounding area.

Such “straw buyer” deals can throw off the housing market and force banks to tighten loan requirements. That leaves some lower-income buyers no choice but to seek predatory subprime lenders.

“If it looks too good to be true, it probably is,” Bible says. “And, if anyone ever tells you that you can make a profit using your credit score, you should ask why aren’t they using their credit score then? The answer is because they’re skimming [the equity], and you’re going to pay the bill.”

Principles, Principals and the Paper Trail
For Koerber, buying properties with his company Hill Erickson was problematic. “It was a big cash drain, but it made big cash,” Koerber says. He decided to loan money to Hill Erickson from his parent company FranklinSquires, and pay himself and his fellow Squires principals 5 percent monthly interest on the money loaned to Hill Erickson.

The cash flow made bank for Koerber and his partners, enough so that a colleague asked to get in on the action. Koerber found the only way to do this was to form another company, Founders Capital.

Founders also started loaning money to Hill Erickson and in turn, people started approaching Founders looking to invest. Koerber says he only allowed a small number of “accredited” investors to invest with Founders. According to Utah securities law, securities sold to accredited investors don’t have to meet the same legal disclosure standards that securities sold to other investors might. Accredited investors get more leeway because they have to be wealthy. An individual accredited investor, for example, must have a yearly income of at least $200,000.

That would be an investor like Paul Bouchard.

While Koerber insists Bouchard was simply an investor in Founders Capital, their business connections were closer than others—just down the hall, in fact. According to a January 2008 Utah Securities Division order to show cause, yet another company—Innovator Mortgage—had been employing Bouchard as a licensed mortgage lender. Innovator shared office space with Koerber’s FranklinSquires.

“We just rented space to them; it’s not like there were kickbacks or any kind of informal relationship like that,” Koerber says. Innovator also advertised on the Free Capitalist radio show. Koerber says unbeknownst to him, one of Koerber’s employees started soliciting for investments in Bouchard’s Hunters Capital.

The Securities Division document identifies former FranklinSquires accountant Rachelle Taylor as a sales representatives for Bouchard’s Hunters Capital. Taylor, with 10 others (including Free Capitalist radio producer Israel Curtis) were allegedly soliciting loans for Hunters Capital.

“It created a huge chain of people borrowing money and saying it was going to Founders and FranklinSquires,” Koerber says. Even though Hunters was accredited, the capital it allegedly raised came from more than 140 unaccredited investors, like those whom Skuba invested with. The money, however, still went to Founder’s Capital.

Koerber says he warned Bouchard he would cut him off from investing with Founders if he misrepresented their association. Despite assurances from Bouchard, the money raising continued, Koerber says.

Connections crept closer to Koerber in recent securities complaints from Idaho, where securities officials have filed civil complaints against companies Home Sweet Financial, LLC, and Streamline Financial, LLC. These companies allegedly issued unregistered securities totaling $3 million. The Idaho Department of Finance and Securities alleges the companies raised illicit funds and passed the money to yet another company—Annuit Coeptis—which, in turn, sent the money to Founders Capital.

Annuit Coeptis would pay Streamline and Home Sweet Financial 3 percent interest each month on the money and would in turn pay investors 1.5 to 2 percent monthly. The founder of Annuit Coeptis is former FranklinSquires Vice President Gabriel Joseph.

Joseph no longer works for FranklinSquires, Koerber says. And while Joseph was his right-hand man and a frequent radio show guest, Koerber denies any involvement with Joseph’s alleged fraud in Idaho. “Annuit Coeptis is a completely separate business from FranklinSquires,” Koerber says.

Not Everyone is Buying It

On Feb. 18, Marietta and Dennis Baca filed suit in Denver against Koerber and Joseph, claiming the men pulled them into a scheme that has taken all their assets—a modest retirement, Social Security and a small pension Marietta earned after working at a Safeway store for 22 years.

Marietta, 63, and Dennis, 62, live in Aurora, a Denver suburb. “They’re a real nice couple,” says Miles Gersh, the Bacas’ Denver attorney. According to the lawsuit, Koerber and Joseph pitched a lavish lifestyle to the Bacas, persuading them to take $170,000 from home equity. Marietta also put her 401(k) earnings and costly credit-card advances into Founders, according to the suit.

“It’s a scheme,” alleges Gersh. “A lot of things represented were false, and many things that were true were omitted.”

As in the Idaho case, Gersh says Annuit Coeptis passed investments from the Bacas to Founders Capital, for fat interest payments. “The defendants were engaged in a wide-ranging Ponzi scheme in which defendants induced students of their real-estate instruction programs to use their home equity to invest in [promissory] “notes,” then used funds provided by investors in the notes to pay the interest or principal of the notes sold to earlier investors,” the lawsuit alleges.

While the suit claims that a member of Annuit Coeptis convinced the Bacas to invest, the suit describes Koerber as a “control” person. “It’s for individuals who are effectively in charge of management positions,” Gersh says. “[Koerber] might not have a formal position in the company that our clients invested with, but we don’t think that’s accidental.”

Now You See Them, Now You Don’t …

As of Feb. 11, Koerber had radically downsized FranklinSquires. Amid controversial transactions and alleged meddling in his affairs by state securities, Koerber writes on the FranklinSquires Website:

“I would rather wind up the affairs of FranklinSquires, New Castle and Hill Erickson, pay all our creditors—and refocus my energy and the energy of those who are interested in working with me on something where we can make a more powerful difference in the world.”

Last November, Koerber says, he circulated a letter offering a unique financial opportunity. After Founders Capital had been delinquent on interest payments, Koerber’s lawyers offered major creditors the opportunity to convert the debt Founders Capital owed them into company equity. “We offered everyone the option to swap for equity or get all of their principal back plus 12 percent interest,” Koerber says. “No one opted to take the principal back.”

But at least one company wanted its money back rather than “equity.” Koerber offered Vonco, a Utah County real-estate investment firm, that invitation. His companies owed Vonco $3 million.

The offer to exchange debt for a stake in a company that couldn’t pay its investors raised a red flag, says Vonco’s attorney Reid Lambert.

On Feb. 8, Vonco filed suit in Utah County 4th District Court against Koerber’s companies, seeking a lien on one of Koerber’s properties as compensation for delinquent interest payments. While they were interested in getting their principal back, the amount owed to them by Koerber's companies was far greater than just the offered principal plus 12 percent interest. Vonco's lawyers tried to contact FranklinSquires but received no response.

The following week, FranklinSquires had stripped down its operations. “There was never any disclosure they planned to shut down the company,” Lambert says.

Anxious investors are asking how Koerber, in the middle of drastic downsizing and legal trouble, will carry on.

While you may not be able to catch Koerber on K-Talk (he’s moved to Provo station KHQN 1480), it’s not too late to turn your brain on, according to the Free Capitalist Website. Koerber recently advertised a “unique” one-day, $1,000 seminar on Feb. 27, offering to teach the “almost ancient product” of creating wealth—through life insurance.

You, too, can discover “how life insurance can be the most powerful tool to generate substantial wealth quickly”—and if you’re not completely satisfied, every penny will be returned to you, guaranteed.

No comments:

The Mortgage Fraud Video Archives