Nevada officials rapped in loan case

Wednesday, July 1, 1998 | 11:02 a.m.

State legislators chastised Nevada's Financial Institutions Division and Attorney General's office for taking a year to close a Las Vegas mortgage company that allegedly misappropriated millions of dollars from investors.

Hardballs were hurled Tuesday by the six-member Legislative Commission's Subcommittee to Investigate Regulation of Mortgage Investments as they quizzed state officials about the handling of the Harley L. Harmon Mortgage Co. case.

The company operated by Harmon, a former state assemblyman, was stripped of its business license last December but not before jeopardizing $22.7 million in mortgage loan investments. The case sparked the investigation by the subcommittee, which held its first hearing in a video conference between the Grant Sawyer State Office Building and Carson City.

Harmon collected money from as many as 600 investors, who were lured by promises of up to 15 percent interest annually. The money, spread out over more than 40 loans, was to be borrowed and repaid by developers of residential and commercial properties. But few investors ever made money through Harmon. Many, in fact, never saw any interest and lost their principal.

Investors, including prominent community leaders and socialites, thought they would be repaid by holding the first trust deeds on the loans. But they accused Harmon of paying others ahead of them, leaving little to no return on their investments.

On the hot seat Tuesday were financial institutions Commissioner L. Scott Walshaw, his deputy, Burns Baker, and senior deputy attorney general Doug Walther. They said it took so long to revoke Harmon's license because they had difficulties obtaining company records and wanted an ironclad case. They argued that it would have been unfair to suspend the company had they determined later that there was no wrongdoing.

But lawmakers, led by subcommittee chairman and Assemblyman David Goldwater, D-Las Vegas, argued that the company could have been shut down months earlier. Baker conceded that "we were being spoon-fed the information" from Harmon, allowing the company to control the pace of the investigation.

"As elected officials, we can't allow our institutions to be spoon-fed," Goldwater said.

One by one, fellow lawmakers weighed in. State Sen. Bill O'Donnell, R-Las Vegas, said he was perplexed by the length of the Harmon probe.

"You knew prior to July that there were serious abuses," O'Donnell said.

Sen. Randolph Townsend, R-Reno, and his subcommittee colleagues were perturbed that Walshaw's office knew for months prior to the license revocation that Harmon was using proceeds from some investors to pay off others.

"There had to be a time in your stomach, in your heart when you say, 'I want to err on the side of the public interest,'" Townsend said.

The state revoked the company's license after uncovering misconduct in the handling of four separate construction project loans.

But the lawmakers criticized the length of the probe because the state didn't concede that Harmon was under investigation until the Sun reported on the case last November. Several individuals invested tens of thousands of dollars with the company last year without knowing about the state investigation.

Goldwater said there should have been a point where the state felt confident enough about its case to warn consumers.

"That's a judgment call," Walshaw replied. "We could have gone out with a press release but chose not to."

Investor Dan Gray of Henderson testified that Baker, in a Feb. 21, 1997, memorandum to Walshaw, recommended immediate suspension of Harmon's license at that time. But Gray complained both that Baker's recommendation was ignored and that his own concerns were downplayed by the financial institutions division.

"It's like date rape," Gray said of his ordeal. "We trusted this person (Harmon), and he took advantage of us."

Metro police continues to investigate Harmon for possible fraud. Walther revealed that his office has been assisting the law enforcement effort by providing access to its files on the case.

But many investors are unhappy with Walther's recommendation that all investors be thrown into a single pool to share any Harmon assets that are liquidated. That will help some investors who had virtually no chance of recovering money, but hurt others who were in a better position to get a return on their investment.

A court-appointed receiver is expected to update investors on the progress of the liquidation effort in August.

The legislative subcommittee also will conduct another hearing next month. The subcommittee is expected to recommend that the 1999 Legislature adopt stronger consumer protection laws for investors who deal with mortgage companies.