Hirsch isn't licensed to raise investment funds or sell securities in Arizona, according to the Arizona Corporation Commission. His company, Radical Bunny, came into possession of about $200 million from investors, according to bankruptcy court filings.
Radical Bunny investors — many of them gas station and convenience store owners from India — mortgaged their homes and raided their kids' college accounts, even their retirement funds, to contribute about one-fifth of Mortgages Ltd.'s total capital, or roughly $200 million.
Pastor Stacy Lee at his church, Covenant Christian Center, in Peoria.
For years, Mortgages Ltd. investors received monthly checks with pay stubs like this one. (Click
here for more details.) The interest payments halted in June, and now investors just hope to recoup their capital.
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Hirsch did not return phone calls for this or other stories. He took out a $4 million home-equity loan from a local bank on his Paradise Valley home in November 2007 — about the same time Coles was growing desperate for cash. The home is for sale now.
Whether Hirsch knew Mortgages Ltd. was going to collapse — or whether he genuinely thought Radical Bunny was making a wise investment — remains unknown.
One forensic expert and a number of investors wonder whether Coles was using the money from Hirsch's investors to make interest payments to other investors. Such tactics are often referred to as a Ponzi scheme.
Dr. Paul Wazzan, an economist who specializes in analyzing business records, was hired by Rightpath as an expert witness. He found "serious irregularities" in the handful of Mortgages Ltd. accounts he audited.
"I have also determined that there are important inconsistencies in the allocations of interest and dollar amounts to the Radical Bunny investors," Wazzan wrote in a court opinion.
"Based on the significant irregularities, there is a high likelihood that the remaining loans may also contain further significant irregularities. Further, a full dollar-for-dollar accounting will be necessary to definitively explain the irregularities, the reasons, and the resulting financial consequence," he added.
But former Mortgages Ltd. president Mike Denning says that Coles was not running any kind of Ponzi scheme or fraud.
"[A Ponzi scheme] is just simply not true," Denning says. "I know there's an awful lot of confusion in the Valley about that. There have been firms, like USA Capitol, that were doing that [Ponzi schemes]. That was never done at Mortgages Ltd. in my time there."
Denning says investors have deeds of trust on Arizona real estate, and that even though the values may have decreased, all the investors will be paid something when the properties are sold.
"The thing about all of this that really disturbs me is the feeding frenzy going on. From the borrowers' perspective, here's a company that was cash-strapped, the guy commits suicide — maybe not for business reasons — and then debtors decide, 'Maybe I shouldn't pay my loan,'" Denning says.
Scott Coles' older brother Perry agrees.
"There's not a lot of correct information being put out — a lot of speculation," he says. "He was an upstanding, honest person. I think market conditions created something he couldn't work with. I don't think anyone's going to find any Ponzi scheme. I think everything was done above board."
Sitting at the Ritz-Carlton in July — about a month before he settled with Mortgages Ltd. — attorney Chris Reeder says it seems obvious that Mortgages Ltd. was lying to investors.
"How were the investors getting these monthly checks when we weren't required to make any payments yet? Where did their checks come from? We look forward to getting all those answers," he says.
"They've had a campaign of disinformation. We've issued over 130 subpoenas, and we intend to get to the bottom of this. The drama continues even after Mr. Coles' passing."
Reeder is with the Los Angeles firm Sheppard, Mullin, Richter & Hampton. He is in town for one of many Mortgages Ltd. bankruptcy proceedings, some of which were attended by a crowd of more than 100 investors, builders, and about 20 attorneys.
Reeder claims that Mortgages Ltd. tried to employ the same "loan-sharking" tactics it used on Covenant Christian with his client, Rightpath Limited Development — but on a much bigger scale.
"This deal is the same deal [as Covenant Christian Center]. It's just bigger numbers. Scott was into those little loans. For years he would go beat up on these little guys. Now we know that his practice was to shake down with excessive fees, by wrongfully claiming that he'll declare a borrower in default," Reeder says.
"Every time anyone called him out on it, he settled with them. We feel it's a strong racketeering case. Their liability to our guys alone is $200 million," he adds.
Like a handful of other borrowers from 2007, Reeder's clients weren't given the entire amount of money they borrowed and paid fees for. Mortgages Ltd. promised Rightpath $190 million, but Reeder says the company failed to fund the first installments totaling $120 million.
At least three other builders of large commercial projects say their loans were not entirely funded either — despite Mortgages Ltd.'s public claims, even recently, that the loans were funded.
Developer Rick Burton, one of three principals who own Rightpath, says that in 2007 Mortgages Ltd. went so far as to write a letter to Bank of America, guaranteeing the company had $190 million to loan to Rightpath.
Reeder says that on top of Coles' lying about having the money, he then tried to make money off exorbitant fees. In January 2008, Mortgages Ltd. tried to charge Rightpath a $3 million "fee" for a simple transaction that usually costs about $1,000, Reeder says.
