MURRIETA -- They thought they were making down payments on a lifetime of financial freedom, but four years later they are struggling just to regain homeownership.
James Duncan promised dozens of clients that ballooning real estate prices and his genius would make them millionaires with no risk, according to allegations made by financial regulators last year.
Instead, the clients ended up with depleted retirement accounts and five-figure credit card balances that rolled over each month. Many lost their homes to foreclosure, and a handful filed for bankruptcy. Dozens reported wrecked credit profiles, with FICO scores falling from the 700s and 800s into the 500s.
At least one couple moved to Texas, no longer able to afford the American dream in California. The wife, former Rialto resident Anna Richter, said her credit score kept her from obtaining a credit card with a limit high enough to rent a car when she flew into town several weeks ago on personal business.
"He's got to be stopped," Richter said of Duncan on Wednesday. "He has to be stopped."
Federal district Judge Virginia Phillips moved in that direction last week, in a case that the U.S. Securities and Exchange Commission brought against Duncan in February 2008.
Phillips ruled that Duncan and two co-defendants, Hendrix Montecastro and Maurice McLeod, violated civil statutes against fraud and unregistered investments. Duncan was the mastermind of the operation, the government said.
None of the three has been charged with any crime, though FBI investigations covering some of the same activities could result in prosecutions, according to a March 2008 filing by an attorney for Duncan and McLeod.
Duncan and Montecastro did not contest the SEC's civil charges. McLeod settled some of the civil charges last year.
Phillips ordered Duncan to "disgorge" $29.5 million plus $843,000 in accumulated interest, which he reaped from Murrieta-area real estate and a web of allegedly phantom investments ranging from Iraqi dinars, surgical centers, wastewater treatment plants and collections on accounts receivable at unnamed companies.
Disgorgement is the surrender of illegally obtained profit to the government. It contrasts with the legal concept of damages, money ordered repaid to aggrieved parties. But any substantial disgorgement would be distributed among Duncan's former clients, said SEC attorney John Bulgozdy.
Montecastro was ordered to disgorge a total of $29.3 million that he made from the real estate side of the operation. The judge levied fines of $130,000 against each of the three men. All were Murrieta residents for much of the last five years.
Most clients say they expect to collect only a fraction of the money they lost.
"I tell the kids 'if God blesses us,'" said Janet Lanuzo, a former Duncan client.
Millions of dollars disappeared into a Maserati, weekends in Las Vegas, and estate homes in the hills of La Cresta and Rancho Santa Fe, according to the clients, the SEC lawsuit, and Phillips' ruling. Duncan alone spent $271,000 on a luxury car and credit card charges in one seven-month period, the commission alleged.
Rich Ackerman, the French Valley attorney representing the Lanuzos and more than three dozen other plaintiffs in a lawsuit against the men in state Superior Court, said he is pushing one of the lenders involved to compensate his clients for what he called the results of its negligence. Typically a client would buy five houses, sometimes within a few days of one another, usually with down payments of 5 percent or less, according to publicly available title reports.
Like hundreds of thousands of other mortgages issued between 2004 and 2006, the applications appear to have received minimal scrutiny. During the housing boom, lenders typically bundled hundreds of mortgages, sold them off to investors, and used the proceeds to make more loans. The defaults would become someone else's problem.
Bulgozdy said a months-long investigation by the SEC identified 196 properties in the scheme, with a total value of $125 million. Most were single-family homes in and around Murrieta, but several were as far away as Oregon and Tucson, Ariz.
Saying that their investment club was a "Christian organization," the three men recruited clients through a network of families, churches and military comrades.
It wasn't clear last week how much money remained.
"If they don't pay, we will evaluate what steps we want to take," Bulgozdy said. "Mr. Duncan, particularly, used third parties in an effort to hide his assets, which is going to make distribution more difficult."
"We do intend to pursue," Bulgozdy added.
The SEC alleged that Montecastro's operation took $60,000 to $110,000 cash from each home purchase by arranging appraisals to be inflated beyond what sellers received. The men would tell their clients that the money was funding the next round of investments. More often, they told the client to stop asking questions, according to the Superior Court lawsuit, which is pending.
Lanuzo and her husband, Steve, said they signed for a dozen single-family homes at Duncan's and Montecastro's urging. They lost all to foreclosure, along with their own home in French Valley. They moved with their four children into a rented house in 2007, and moved again last year.
Janet Lanuzo, a nurse, shifted to part-time work after the birth of their fifth child. Steve Lanuzo continues to work full-time. They said they're rebuilding their savings. Due in part to the massive number of foreclosed homes in the Murrieta area, prices have fallen to a level where the Lanuzos could afford to buy again if the bankruptcy weren't on their credit history, they said.
Richter estimated her losses at $400,000, including $200,000 in equity on their home and $200,000 in other savings. She and her husband emerged from bankruptcy last summer. Low credit score notwithstanding, they bought a house several weeks ago. Richter said they sat across the desk from a banker who planned to keep the mortgage on his own books, in Texas, and explaining their plight to him.
"There is life after James Duncan," Richter said.
Call staff writer Chris Bagley at 760-740-5444. Read his blogs at bizblogs.nctimes.com.
Duncan's Latest Pitch
A federal judge last week ordered James Duncan to disgorge $30 million in a civil fraud case that involved roughly 200 homes, most in Southwest Riverside County. In this video, Duncan tells people they can get rich working online from home. Date stamps by Google.com and Metacafe.com suggest the video was posted in early March.
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