Phyllis Christopher and her former husband spent years pinching pennies so they would be comfortable in retirement. As part of their financial plan, the couple invested their savings -- more than $600,000 -- into a fund run by Bar-K, a Lafayette company.

But when they tried to cash out in 2007, fund manager Walter Ng told them that the funds were not available because of "a minor cash flow problem." Christopher recalls sitting in the investment office and crying upon hearing the news. Her first thought: She would have to sell her house.

John McGuire of Walnut Creek, places his hand on letters and statements from a Lafayette based investment brokers firm as he talks about how he and other
John McGuire of Walnut Creek, places his hand on letters and statements from a Lafayette based investment brokers firm as he talks about how he and other other investors were defrauded out of more than $700 million in Walnut Creek, Calif., on Tuesday, June 10, 2014. McGuire is one of 1,500 investors who say they were defrauded by a fund created by Walter Ng, a well-known Lafayette investment manager, who they say ran a Ponzi scheme. (Doug Duran/Bay Area News Group)

It didn't take long for the "minor cash flow problem" to become a major crisis, not just for the Christophers but for an estimated 1,500 other Bay Area investors who had deposited millions with the company. Today, the 84-year-old Ng, youngest son Kelly, 57, and business associate Bruce Horwitz stand accused in a civil action of conning investors out of more than $700 million in IRA accounts, inheritances and other assets cobbled together over a lifetime -- in what may be one of the biggest Ponzi schemes in California's history.

Investors, most of them residents of Contra Costa and Alameda counties, have lost their savings and their homes. But despite the staggering losses, the managers who ran the fund have never been prosecuted for the alleged theft, leaving investors bitter and angry at a system they say failed them.


Advertisement

"When someone literally steals your money from you, it's a horrible feeling," says the 69-year-old Christopher, who lives in Rossmoor. "It's embarrassing and humiliating. But what is worse is that nothing has been done about it."

Humble beginnings

For decades, Bar-K Inc., one of several LLCs run by the Ngs, offered its clients what seemed like an easy -- and reliable -- return: It collected their cash, lent the money to local homebuyers and developers, and then paid dividends to investors from the loan proceeds. Investors received returns averaging 8 percent annually in exchange for a small fee, according to a class-action lawsuit investors have filed.

Bolstered by Walter Ng's standing as a trustworthy financier, investors flocked to Bar-K. But as the real estate market heated up in the early 2000s, the Ngs grew more ambitious, especially as Walter's older son, Barney, now 60, and Kelly took over the day-to-day operations and Walter spent more time on the golf course.

In 2002 the Ngs, together with Horwitz, a retired Orinda pediatrician, formed a new fund, called R.E. Loans. Rather than staying local, Walter Ng's sons began to lend money to developers for projects in at least 22 states, including condominiums in Atlanta and Las Vegas and a casino in Reno. They appraised the properties themselves, even though neither one was a certified appraiser. Doing so was a conflict of interest, attorneys say, since the Ngs stood to gain from higher appraised values.

In the increasingly profitable real estate market, business was booming. By 2007, R.E. Loans had raised more than $700 million and had more than $55 million in cash on hand, according to the lawsuit.

As a way of thanking investors, the Ngs held annual appreciation dinners. A string quartet entertained guests and Walter, Barney and Kelly Ng made speeches about how well the fund was performing.

"You could meet other investors, so it gave us all a very secure feeling," recalled Christopher, who met the Ngs through her former husband.

Dwight Christopher, 80, now suffers from Parkinson's disease and is worried about how he will afford his medical care after losing a significant portion of his savings.

The end of the party

In early 2007, R.E. Loans ran into trouble: Managers were told the fund was in violation of federal securities laws because more than half its investments were in out-of-state projects. The discovery meant they were prohibited from taking in new funds and had to contact investors, tell them about the violation, and offer to return their money.

Instead of disclosing the violation, the Ngs sent letters assuring clients their investment was safe. They did this even as the real estate market began its meteoric decline and more developers defaulted on their loans.

To stay solvent, the fund needed a new source of cash. On the advice of Greenberg Traurig, a global law firm with offices in Palo Alto and San Francisco, R.E. Loans applied for and received a $50 million loan from Wells Fargo Capital Finance in July 2007. Today, Greenberg is one of the defendants in the class-action lawsuit filed by investors in 2011, claiming the firm facilitated the fraud and delayed action that could have helped investors.

In addition to the bank loan, fund managers also structured a transaction that exchanged investors' equity for promissory notes, essentially trading clients' shares in properties around the country for IOUs. Managers pitched the move as necessary in order to reorganize the fund. Attorneys for investors now say the real intent was to hide their securities violation and conceal the fund's quickly deteriorating financial situation.

"It was a combination of events -- a perfect storm, if you will -- that sunk the company," said Richard Brown, one of the attorneys in a class-action lawsuit. "The first was the inability of the managers to see the risk involved in their type of investments in an economy that suffered a large financial shock. The second was their loose appraisals, and the third was their securities violation because they depended heavily on new money to pay investors their dividends.

"So when the banking markets failed and their stream of money stopped, they were doomed."

After the Wells Fargo loan, things improved temporarily for R.E. Loans, but the company risked not being able to pay dividends to investors, some of whom collected a monthly or an annual payment.

In December 2007, managers created a new investment, called Mortgage Fund '08. Investors flocked again, depositing a total of $40 million in the first three months and another $40 million in the next year, attorneys say. But instead of investing the proceeds, the Ngs used them to pay dividends to R.E. Loans clients, creating a classic Ponzi scheme, attorneys allege.

"There were so many people who didn't want to believe that they had been had. It's incredibly disappointing," said Deborah Kurtin, 65, a Piedmont investor who lost more than $2 million. The money included a settlement the Kurtins received after their son, Jared, was struck and killed by a truck in 2005; the family hoped to use that money to set up a music therapy program in Jared's memory at a local children's hospital.

They received only two checks before being told the fund was insolvent.

By 2009, R.E. Loans and Mortgage Fund '08 had stopped paying dividends. By 2011, both had filed for bankruptcy.

Warnings ignored

Wells Fargo has declined to comment on the case, citing ongoing litigation. Greenberg Traurig issued a statement calling the litigation "meritless" and saying accusations were baseless and defamatory. Walter Ng said he could not comment, and numerous calls and emails to Walter Ng's and Kelly Ng's attorneys were not returned.

In 2009, the FBI began an investigation, then handed its files to the Department of Justice. But when it came time to prosecute, the DOJ brought only one charge against Walter and Kelly Ng: keeping cash withdrawals under $10,000 to avoid detection. Both the FBI and the DOJ have refused to comment on the case.

Kelly Ng was sentenced to 18 months in prison and is now at federal prison in Lompoc. Walter Ng was given five years probation and was ordered to participate in a mental health treatment program and pay a $1,100 fine.

Barney Ng has never been charged in the case.

Last year the Securities and Exchange Commission sued Walter Ng, Kelly Ng, Bruce Horwitz and Mortgage Fund '08, alleging they ran a "multimillion-dollar securities fraud." The agency has reached a settlement with the plaintiffs, but has not yet disclosed the details. But the SEC is a regulatory agency and can only impose fines, not prison sentences.

The minor penalties have bewildered investors.

"Bernie Madoff was sentenced to life in prison, but these guys got a slap on the wrist," said John McGuire, 51, a Walnut Creek investor who lost $300,000. McGuire, who uses a wheelchair, hoped the money would help his family once he could no longer work, and pay for his children's college. Instead, his older son went to a junior college and his mother-in-law, also an investor, was forced to move in with the family.

Investors' attorneys say without a criminal case, a class-action lawsuit against the institutional players -- Greenberg and Wells Fargo -- is the only chance to recoup the lost money. Regardless, it will be a small comfort to investors, most of them in their 70s and 80s, many now wondering how they will support themselves.

"Seven hundred million dollars goes up in smoke and nothing gets done?" said Jerry Clair, a retired banker who said he lost $700,000 to the Ngs. "It's just unreal."

Contact Karina Ioffee at kioffee@bayareanewsgroup.com. Follow her on Twitter @kioffee.

WHERE DiD THE MONEY GO?
Investors claim that Walter Ng's Bar-K investment firm and affiliated funds lost hundreds of millions of their dollars to shaky real estate investments and poor management. Here is a timeline of events as recounted in a class-action suit filed by investors:
1975: Bar-K is created to loan money to local developers. The company draws clients, who are rewarded with an average return of 8 percent.
2002: The Ng family launches R.E. Loans, a high-liquidity fund that promises to let investors cash out any time. The company begins investing in out-of-state real estate projects.
2007: R.E. Loans faces a cash-flow crisis after attorneys tell fund managers that the company's sizable out-of-state real estate portfolio puts it in violation of federal securities law. The company secures a $50 million loan from Wells Fargo Capital Finance, which negotiates a clause calling for it to be first in line for repayment, before investors.
December 2007: Managers launch a new fund, called Mortgage Fund '08, and encourage investors to deposit their money, collecting an estimated $80 million. Walter and Kelly Ng, along with Bruce Horwitz, begin to transfer funds from MF '08 into other accounts.
January 2009: R.E. Loans stops making payments to its investors.
June 2009: Mortgage Fund '08 stops making payments to investors.
2011: Both funds file for bankruptcy.