Authorities charged the former chief executive officer of a chain of retirement centers with operating a massive Ponzi scheme that conned more than 1,000 investors out of $130 million in one of the largest frauds in Oregon history. Jon Harder, 47, was charged last week with fifty-six counts of money laundering, mail and wire fraud, criminal forfeiture and aiding and abetting. If convicted of all charges, Harder could face a maximum prison sentence of hundreds of years in federal prison.
Harder was the founder and president of Sunwest Management ("Sunwest") and Canyon Creek Development, Inc. ("Canyon Creek"). Founded in 1992 in Salem, Oregon, Sunwest began raising money from investors in early 2001 through numerous offerings in over 100 retirement homes. These offerings, known as "tenancy-in-common" interests, offered investors the ability to purchase a minimum $100,000 interest in a retirement home and receive a 10% return funded by the receipt of rental income. Sunwest usually targeted under-performing retirement homes, seeking to streamline operations and bring the business to profitability. Investors were told in offering documents that their investment was backed by a personal guarantee by Harder and Darryl Fisher, who served as Sunwest's COO. Based on these and other representations, Sunwest raised more than $430 million from investors from 2001 to 2008.
From 2001 to July 2008, Sunwest made regular interest payments to investors, giving the impression that the operation was wildly successful. However, unbeknownst to investors, many of the retirement homes sold to investors were not operating profitably. Indeed, by commingling funds from the homes' operations and incoming funds from investors, Harder was able to support company operations, including the payment of interest to investors. While nearly 60% of homes experienced negative cash flow by September 2007, the constant stream of incoming funds from new investors helped continue an otherwise unsustainable operation.
As the performance of the operation was inextricably linked to the performance of the real estate market, the nationwide credit crisis beginning in 2007 quickly took its toll on Sunwest. When Sunwest began to default on an increasing number of retirement homes, creditors began to step up pressure. When incoming cashflows were no longer able to satisfy investor obligations in late 2008, the scheme collapsed. From October 2008 to January 2009, approximately twenty-five receivers were appointed for individual facilities, sixty-nine facilities went into foreclosure, and thirty-two facilities were placed into bankruptcy. On December 31, 2008, Harder himself filed for personal bankruptcy.
Several months after the collapse, the Securities and Exchange Commission ("SEC") charged Harder with multiple violations of federal securities laws, alleging that he operated Sunwest as a giant Ponzi scheme and made numerous misrepresentations to induce over 1,000 people to invest. According to the SEC, Harder and his wife operated Sunwest “as if it was their personal checkbook....to support their lavish lifestyle.” A court-appointed receiver estimated that this lifestyle included the acquisition of 18 pieces of property and the purchase of numerous luxury cars, including a Mercedes, a Land Rover, two BMWs, a Cadillac Escalade and a Lexus.
A team of consultants, accountants, and lawyers took over Sunwest in an effort to turn around the company that has resulted in the recovery of at least 60% of investor losses - an effort that earned the group a "Turnaround of the Year" award in 2011 from an industry group. The amount was particularly noteworthy considering investors were initially estimated to recover no more than 6% of losses. This recovery was also funded in part by a $30 million settlement by a law firm used by Sunwest to prepare documents related to the investments. The SEC case remains ongoing.
In the 30-page indictment, authorities are seeking a money judgment of $130 million, as well as forfeiture of various real estate and other assets held by Harder. In a court appearance last Friday, Harder entered a plea of not guilty and was released on bond. A trial could come as early as November.
A copy of the SEC complaint is here.