Court documents portray tangled web of fraud at Legacy Estates

The failed Legacy Estates project in the Barefoot Resort neighborhood here had ties to a multistate real estate fraud scheme that ensnared hundreds of investors and cost banks and others hundreds of millions of dollars, according to court documents in criminal cases and several lawsuits and bankruptcies filed in three states.

Those court documents link Legacy Estates developer Ron LeGrand – a self-proclaimed real estate guru known for his get-rich-quick seminars – to Total Realty Management Inc., a Woodbridge, Va., company accused of helping investors throughout Virginia and the Carolinas defraud banks in property-flipping deals at several proposed developments in those states.

The allegations in court documents outline a widespread and sophisticated fraud scheme in which LeGrand and Ken Gwynn – a sales agent for Legacy Estates and other LeGrand projects – used inflated appraisals to sell Legacy Estates lots at prices that far exceeded their actual values. LeGrand then used money from those sales to repay a loan he had received from TRM co-founders Mark Jalajel and Mark Dain in an alleged W.Va.-based fraud scheme called Mountain Country Partners.

The money used to pay TRM was funneled through a local real estate firm during property closings conducted by lawyer Chad Hatley, according to HUD-1 closing documents and bank records. Hatley – who has been suspended from his law practice until at least September for misconduct unrelated to the real estate closings – has not been named as a defendant in any Legacy Estates lawsuit and is not accused of any wrongdoing related to those transactions. He could not be reached for comment last week.

Myrtle Beach lawyer Robert “Shep” Guyton was the other local lawyer who conducted real estate closings for Legacy Estates. It is not clear whether any funds from Guyton’s closings were sent to TRM because his HUD-1 documents are not included in court filings. Guyton – who also handled other legal matters for LeGrand’s projects here, including the failed Esperanza development and a defunct restaurant at Barefoot Landing – has not been named as a defendant in any lawsuit and is not accused of any wrongdoing related to the real estate transactions. He did not return a telephone call seeking comments.

Investors in Mountain Country Partners – an oil and gas company – lost $9.5 million, according to a federal Securities and Exchange Commission complaint filed last year against LeGrand and a business partner. LeGrand – who did not return a telephone call seeking comment – agreed to pay a civil penalty of $150,000 in that case but did not admit to any wrongdoing.

Gwynn, LeGrand’s partner in the Legacy Estates development, could not be reached for comment. Gwynn and LeGrand have denied any wrongdoing in court documents.

$5.6 million in wire transfers

Some of the Legacy Estates closing documents show six-figure commissions on the lot sales were paid to Gabriel Financial Real Estate Services Inc., a local real estate firm owned by Timothy Gabriel. Those commissions were then wired to a company called Carolina Waters, which was owned by Dain and Jalajel.

Bank records show at least $5.6 million was wired from Gabriel to Carolina Waters during a four-month period starting in January 2008. Carolina Waters was forced into bankruptcy two years later by three people who had invested in the company. At the time of its bankruptcy, Carolina Waters owed creditors more than $33.7 million although its assets –if any – are unclear.

Gabriel told The Sun News that Carolina Waters hired his company to be the referral agent for Legacy Estates, which also went by the names Villa D’Este and Tuscan Sands at Barefoot Resort. Gabriel said he was not aware of any allegations of mortgage fraud against Dain, Jalajel or others at the time.

“They were in Virginia and they were looking for a local representative to handle their transactions,” Gabriel said, adding that his company received a flat fee of $1,000 per transaction and then wired the rest of the money to Carolina Waters. Gabriel estimates his company participated in about 30 closings for Carolina Waters.

“I called the [S.C.] Real Estate Commission before I got involved to make sure it was legal and they said there was no problem,” he said.

Gabriel Financial Real Estate has not been named as a defendant in any legal action related to the transactions and has not been accused of any wrongdoing.

Carolina Waters and TRM essentially were the same company, according to court documents which show TRM started conducting all of its business under the Carolina Waters name beginning in August 2007.

Jeff Sherman, a lawyer representing the bankruptcy trustee in the Carolina Waters and TRM cases, said Dain and Jalajel hired Gabriel Financial because their companies were not licensed to sell real estate in South Carolina and they did not want their companies’ names on closing documents. Conducting sales through Gabriel Financial Real Estate Services also hid TRM’s involvement in the transactions from creditors and bank officers reviewing closing documents, Sherman said.

“It’s guesswork, but we think about $300 million passed through TRM and Carolina Waters” during the height of the real estate boom, he said. “Even now, we’re trying to piece together what was going on.”

Sham sales, inflated prices

LeGrand needed the Legacy Estates lots to sell for more than $209,000 apiece so he could both pay off the loan from TRM and make a profit on the development, court records show.

John Forest – a Fairfax, Va., lawyer who sued LeGrand last year – alleges in court filings that LeGrand devised a scheme to inflate the value of Legacy Estates lots through a sham transfer of one lot to a trust he controlled for a purported price of $505,000. When the Legacy Estates project eventually failed in 2009, that trust transferred the lot back into LeGrand’s name.

LeGrand’s company also initiated a lot sale to Herndon, Va., resident Lauren Wingate for $505,000, according to closing documents and court records. Wingate immediately was refunded $101,000 of that cost, court records show, but that refund was not reflected in filings with the Horry County Register of Deeds office.

Those two lot sales provided “comparables” that appraisers used to value other Legacy Estates lots at inflated prices, Forest said in the lawsuit filed in Virginia.

LeGrand and Gwynn recruited Legacy Estates buyers at LeGrand’s real estate seminars, according to lawsuits. Most of the mortgages on those lots had interest-only payments for a year or two followed by a balloon payment of the balance. LeGrand, Gwynn and others promised buyers that they would be able to flip their lots for a profit before the balloon payments came due, according to court documents.

When lots were sold, the buyers typically received checks from TRM to cover the interest-only payments on their mortgages, court records show. Those payments – ranging from $95,000 to $100,000 per lot – from TRM to the buyers were not recorded on HUD-1 statements or in deed filings. That made it appear to banks and others as if the lots were being sold for a higher price than what the buyer really paid.

LeGrand, during testimony in August in another lawsuit filed against him, said banks “were fully aware” that buyers were receiving payments from the seller to cover their interest payments, calling it “pretty standard at that time.”

Forest called the practice “amazingly unusual,” but said buyers didn’t know there was anything wrong with the payments because the seller advertised them as purchase incentives.

LeGrand also denied during testimony that there was any wrongdoing associated with the lot transfer to his trust – “The bank hired the appraisal … I had nothing to do with it indicating what value it was,” he said – and testified that he was not involved in the property sale to Wingate.

Banks stuck with devalued lots

Richard Neely – a Charleston, W.Va. lawyer who filed a pending lawsuit against LeGrand alleging fraud, extortion and racketeering – told jurors in a hearing that “Legacy is a company that has been aligned with fraud from the very beginning.”

Among the alleged fraud is falsified down payments shown on HUD-1 statements in Legacy Estates sales. Those closing documents indicate buyers put at least 10 percent of their own money into the lot purchases, but Forest said in court documents that none of those payments were made.

In addition to the undisclosed seller contributions and inflated appraisals, loan applications sent to banks included falsified information about the buyers’ incomes and misrepresentations about the condition of the properties being sold.

Flagstar Bank, which sued LeGrand and others over alleged fraud at Legacy Estates, said in court documents that it did not learn about the falsified statements until after the properties went into foreclosure.

However, Michael McCracken – a former TRM employee who was convicted last year of bank fraud – said during his sentencing hearing that buyers and banks were in on the fraud scheme from the beginning.

“At the time I was involved in this mortgage fraud scheme, I had convinced myself that we were not hurting or fooling anyone since the purchasers knew their applications were overstated – that we overstated their incomes,” McCracken said. “The salespeople knew it and the bank loan officers knew it … Every single one that we worked with.”

McCracken, who admitted to defrauding banks out of more than $9 million, was sentenced to 40 months in prison. At least three other former TRM employees have been convicted of bank fraud, receiving prison sentences ranging from one year to five years. Dain and Jalajel have not been indicted, although criminal investigations into TRM’s activities are ongoing.

Sales contracts for the Legacy Estates lots also did not inform buyers of their right to rescind their contracts within seven days or if they did not receive a property report outlining the development’s advertising and promotional plan, as required by the federal Interstate Land Sales Act. Those reports were supposed to be furnished to buyers before they closed on their purchases, but no buyers ever received a report, court documents show.

The alleged fraud mirrors what happened at the Craven’s Grant development in Georgetown – another project sold by TRM. Banks lost $10 million at Craven’s Grant, a project along Winyah Bay that remains undeveloped except for roads, utilities and a clubhouse that sits in the middle of 292 proposed home sites.

Like Craven’s Grant, the Legacy Estates buyers were not able to flip their undeveloped lots for profits, and the properties went into foreclosure. Flagstar Bank said in court documents that lots once appraised for as much $750,000 now are worth as little as $20,000 to $30,000.

Most recently, Loris-based Horry County State Bank last month forced Legacy Estates SC Group into bankruptcy liquidation, citing $1 million in losses on foreclosed Legacy Estates lots. Richard Gleissner, a lawyer representing Legacy Development, said most of the group’s creditors are secured by the lots that were put up as collateral for mortgage loans. Those lots have devalued to the point that creditors likely will accept pennies on the dollar, if they recover any losses at all.

“We don’t have any idea what the value of those lots is because the real estate market in Myrtle Beach has taken such a hit,” Gleissner told The Sun News.

Who is financially responsible?

The former TRM employees already convicted of bank fraud have been ordered to pay millions of dollars in restitution, but most of them have little or no money and it is doubtful banks will ever recover their losses through the criminal courts where defendants have been ordered to pay as little as $100 per month.

“What we’re trying to do now is find the money so creditors with legitimate claims can be paid,” said Sherman, the lawyer representing the TRM and Carolina Waters bankruptcy trustee. “It’s a very slow process. The people who know anything are all pleading the fifth.”

A lawsuit stemming from the TRM bankruptcy cases illustrates how difficult it will be to hold anyone financially responsible for the millions of dollars that have been lost. When the trustee sued a North Carolina lawyer who handled most of the closings for TRM’s numerous projects for malpractice, the lawyer claimed he was protected by the principle of “in pari delicto” – a Latin phrase meaning “of equal fault.”

In other words, since the bankruptcy trustee represented the estate of a group accused of fraud he could not try to recover money from an alleged participant in that fraud. A judge agreed and dismissed the lawsuit against the North Carolina lawyer, and a federal appeals court upheld that ruling in September.

“That prevents us from suing any of the participants for perpetrating a fraud on the victims,” Sherman said. “Who has the right to recover the money? We’re trying to figure out a way to skin that cat.”

In the meantime, weeds –and foreclosure lawsuits – continue to overtake the Legacy Estates lots where upscale homes were supposed to be developed. Two spec homes were built when the project was being marketed, but no further development has taken place.

There have been recent moves to develop some of the vacant property by a group not associated with LeGrand or Gwynn. Home builder D.R. Horton wants to build nine homes on lots it owns at the Legacy site and hopes to construct a dozen more in the future. The new development, which would adopt the Tuscan Sands name, is going through the approval process with the city of North Myrtle Beach.