January 8, 2010 in City

Out-of-state investors bring suit alleging fraud

Spokane couple accused of real estate scheme
By The Spokesman-Review
 

A group of California investors has accused a pair of Spokane real estate developers of using a sophisticated scheme that tricked them out of tens of thousands of dollars and left them on the hook for millions more in bank loans.

The investors sued developers Gregory and Kimberly Jeffreys, of Spokane Valley, and named Brian and Kim Main in the lawsuit as co-conspirators for their role as Realtors.

The suit alleges three separate Airway Heights real estate deals were fraudulent, with the Jeffreyses using inflated appraisals and withholding information to lure investors during the height of the real estate boom several years ago.

Contacted on Thursday, Kim Jeffreys said she and her husband had been advised by their attorney not to speak about the suit. The Mains could not be reached for comment.

“It’s one of the most complex scams I’ve ever seen,” said Spokane attorney Bob Dunn, who has been hired by the investors. “In many ways it’s brilliant … too bad it’s a fraud.”

One deal outlined in the lawsuit states that the Jeffreyses formed a company called Sundevil Investments LLC to buy 39 acres near Airway Heights. The Jeffreyses paid $4,000 in earnest money on the $300,000 parcel, effectively tying it up for 45 days.

They then worked with an appraiser, who assigned a $4.2 million value to the property.

Dunn said the “ginned-up appraisal” induced about 10 investors to buy membership interests in Sundevil LLC with the idea that the property would be purchased and flipped for a profit. Those investors weren’t told that the Jeffreyses already had agreed to buy the property for a much lower price.

So Sundevil borrowed $1.8 million from Spokane-based RiverBank to buy the property. The Jeffreyses pocketed $830,000 from the bank loan and collected a note from the investor group for another $800,000.

The investors who bought into Sundevil signed personal guarantees on the bank loan. According to their complaint filed in Spokane County Superior Court, they thought the Jeffreyses were their partners and had also signed a personal guarantee on the bank loan. But they hadn’t.

Now that real estate prices have fallen and bankers are reworking their loan portfolios to more accurately reflect the true value of land and projects, the investors are worried they’ll be forced to repay the bank loan. There are at least three such real estate transactions with the same group of investors, Dunn said.

“Frankly, I think there could be many, many more out there,” he said. The technique used could have been replicated in other markets during the real estate bubble. “We think this could be happening to many other investors with other developers and not just in Spokane.”

The suit alleges fraud, conspiracy, breach of fiduciary duties and fair dealings, intentional misrepresentation, securities violations, promoter liability, negligence and rescission. It does not specify damages.

Dunn said his clients would be satisfied to get their money back and to be freed from their personal guarantees on the bank loans.

He has not yet brought the matter to the attention of state financial regulators or criminal fraud investigators, he said.

The suit also lists many unnamed defendants, possibly including the appraiser, Dunn said.


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