Scott Coles, the millionaire owner of Mortgages Ltd., leaves behind broke investors, unbuilt buildings and lot of unanswered questions

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Stacy Lee, a middle-aged African-American pastor, is standing in the entryway of the Covenant Christian Center in Peoria. He's wearing a four-button suit with a tie and describing his church's deal with Mortgages Ltd.

"We just wanted to find out what would happen if we got to the end of the loan and needed more time," Lee says of his first meeting with Scott Coles, Mortgages Ltd.'s CEO at the time.

"Scott said, 'I will not increase the principal or interest. I'll rewrite it or extend it. Don't worry. I've got you taken care of. I won't increase the interest rate,'" he recalls.


Scott Coles

The year was 2005, and Lee's deal was not a big one by commercial real estate standards. Still, he wanted Coles' word that the loan could be extended at its fixed payments — should the church fail to secure a long-term lender. Coles gave him that promise, he says.

So after a handshake and a look in the eye, Lee signed a one-year loan for $1 million. He and his congregation used the money to convert an abandoned Luby's Restaurant into the Covenant Christian Center.

For 12 months, the members of the church paid $10,402.66 on time, every month. They poured their sweat equity into the property, too, working evenings and weekends to tear out drywall, retile floors, and fix the outside of the building.

In March 2006, the church was set to transfer the loan to a 15-year mortgage with a conventional lender. Then, at the last minute, the lender pulled out.

Lee immediately called Coles to make sure the loan could be extended at the same rate — as the two had agreed in person. Coles didn't return Lee's messages, Lee says, so the church sent another check for $10,402.66 on its usual payment date.

The check was returned, and Mortgages Ltd. immediately filed a notice to foreclose on the property (worth about $2 million at the time). Records show the church's interest rate then jumped from 10 percent to 67.75 percent APR.

Mortgages Ltd. eventually claimed the church owed more than $2.5 million on its $1 million loan. If Mortgages Ltd. had finished the foreclosure, it could have sold the building for about $2 million, paid investors, and then kept the remainder of about $1 million as profit.

That's exactly what was going to happen. Until attorney Donald Gaffney intervened. Gaffney is a partner at the high-end firm Snell & Wilmer. His billing rates are beyond the price range of most Phoenix residents, Pastor Lee included. When Gaffney heard about the 67 percent interest rate and hidden fees, he offered to represent Lee's church for free.

In the process, Gaffney uncovered a pattern in Mortgages Ltd.'s records. The lender's aggressiveness with Pastor Lee reflected a broader strategy of saying one thing and doing another — with investors and borrowers alike, Gaffney says.

Coles had apparently rigged a system in which he made more money on a foreclosure than on a paid-off loan, by selling defaulted loans to a second group of investors — who then paid off the first investors.

Gaffney learned that Mortgages Ltd. investors had no idea how much extra money Coles was pocketing on defaulted loans — or that Mortgages Ltd. was subjecting investors to higher risks so the company could make extra fees and interest on defaulted loans.

Mortgages Ltd. spent more than $500,000 wrangling with Gaffney about the $1 million loan. They eventually settled the case.

"He promised us one thing and stabbed us in the back, knowing he could get the property, even though we never missed a payment," Lee says of Coles. "Without the help of Don Gaffney we would have lost everything."

Gaffney has experience with fraud in Arizona. He earned his stripes by working as a lead attorney against Charles Keating during the savings and loan crisis of the late 1980s. As Gaffney pried into Mortgages Ltd., he smelled the same sour deceit that he'd unearthed in Keating's business.

So much so that on November 21, 2006, Gaffney wrote a six-page letter to state regulators, warning them about Mortgages Ltd.'s practices. He addressed the letter to Susan Segal, chief counsel at the Arizona Attorney General's Office and mailed a second copy to the Arizona Department of Financial Institutions.

"Mortgages Ltd. appears to be engaged in a serious breach of proper mortgage brokerage practices . . . Based upon inquiries with other attorneys in Phoenix, this scheme may be a pattern of illegal loan activity conducted by Mortgages Ltd." Gaffney wrote.

"We earnestly request the assistance of the State of Arizona in investigating [this company] and their practices," he concluded. He attached 54 pages of financial records and documentation to the letter.

What happened next is exactly nothing.

For another year and a half, Mortgages Ltd. continued to do business, attracting more investor dollars and loaning those dollars to increasingly larger and riskier projects.

The fierceness with which Mortgages Ltd. squeezed its borrowers was matched only by the fervor with which it pursued investors. The company bragged that it was SEC-licensed and was a licensed commercial mortgage broker in Arizona. Both claims were true, but neither had anything to do with the safety of its investments.

The company's Web site and its salesmen boasted "licensed securities" credentials, which gave many investors the impression that they were buying an SEC-monitored investment. In fact, the investments themselves weren't monitored by the SEC or anyone else (though the sales of the investments were).

Despite Gaffney's warning, state regulators did not investigate Mortgages Ltd.'s dealings with borrowers or investors, at least not publicly. The Arizona Attorney General did not open a public criminal investigation, either.

Arizona Attorney General spokesman Steve Wilson confirmed that Susan Segal did receive "one or more letters" about Mortgages Ltd. prior to the company's collapse.

"Her response was that we handle consumer fraud. We didn't see any indication of that. She referred them to the Arizona Department of Financial Institutions," he said.

Segal said that the letter was examined by a panel of lawyers who specialize in consumer fraud, adding, "They have also kept the file open."

While Coles' company managed to fly under the radar of regulators, he and the Mortgages Ltd. name were on the radar screens of anyone and everyone in Phoenix's money circles.

Coles was swimming in cash, and ostentatiously so. He morphed into a veritable Bruce Wayne, hosting parties at his multiple mansions, entertaining celebrities and athletes, driving $150,000 cars, and running the black-tie circuit like a regular Rockefeller (see "The Rise and Fall of Scott Coles," July 31).

By early this year, Mortgages Ltd. had collected between $950 million and $1 billion from investors, primarily in the greater Phoenix area, but financial insiders were whispering that the company was broke.

On June 2, Scott Coles killed himself. Since then, the question has evolved from "Will Mortgages Ltd.'s house of cards collapse?" to "Will there be any cards left to pick up?"

The company filed for Chapter 11 bankruptcy on June 23, leaving about 2,700 Phoenix-area investors wondering about their retirement money, kids' college funds, even their home equity. (Many took out 6 percent home-equity loans to invest in Mortgages Ltd. at 10 percent).

Speculation about fraud at Mortgages Ltd. spread like wildfire. The leadership that tried to hold the company together after Coles' death didn't help. They made a number of suspicious moves that raised even more concern — attempting to wrest ownership of the company and allegedly backdating transactions that were "authorized" by Coles but not filed with the county recorder until weeks after his death. (Some deals involving Coles' family members were dated as far back as January, but filed with the county recorder after Coles' death and without his signature.)

Phoenix's gossip circles buzzed with whispers of a Ponzi scheme, offshore bank accounts, a South American hideaway, a supposed FBI investigation, and an investigation by the SEC.

One Arizona politician even told New Times that Coles had been served a grand jury subpoena the day he killed himself, but there's no way to verify that because the subpoena, if it exists, is not public record.

Disgruntled borrowers lined up to claim a chunk of the company's remaining assets, each saying that Mortgages Ltd. promised loans, collected millions in fees, and then failed to deliver their loans. Attorneys began digging up all the dirt they could find on Mortgages Ltd.

"We feel this is one of the strongest RICO cases there ever was," said attorney Chris Reeder, who represents borrower Rightpath Limited Development. Reeder, the most outspoken of the borrowers' attorneys, said Mortgages Ltd. used a pattern of lying to investors and borrowers. In court filings, he accused the company of "loan sharking, fraud, and racketeering."

Reeder issued 130 subpoenas and planned to reveal fraud and deceit in court. Then, about three weeks ago, Reeder stopped his attacks.

That's not because he stopped finding dirt, he says. It's because Mortgages Ltd. settled its lawsuits with his client. A new team of leadership at Mortgages Ltd. effectively and legally ended Reeder's assault, by giving his client a desirable settlement on its $190 million loan.

"The Rightpath people were making great fuss. As soon as the depositions got under way, there was an immediate settlement," a government regulator familiar with the situation told New Times.

"Mortgages Ltd. executives have a right to do that, but it's called containment. They don't want a lot of documents in the public arena that demonstrate wrongdoing because they know there are multiple agencies watching the documents being produced," he added.

With Reeder pacified, much of the controversy around Mortgages Ltd. has died down. One story in the local news media even concluded that the company's collapse was simply the result of a falling real estate market. But a number of similar lenders, operating in the same market, have not lost their investors' money or filed for bankruptcy.

A growing pile of evidence — largely unreported by the local news media — also indicates that Mortgages Ltd. may have been dishonest with borrowers and investors, even if regulators eventually conclude it operated by the letter of the law.

"This is one of the most complicated cases I've ever seen, and I've been practicing bankruptcy over 20 years. The transactions and the deals and the way things are structured are very, very complicated," says Mortgages Ltd.'s newest attorney, Carolyn Johnsen.

Johnsen says the company has made a significant turnaround under the leadership of its new CEO, Richard Feldheim. She adds that allegations of fraud and deceit are bogus.

"Those claims have no merit at all," she says. "I've looked at a lot of documentation here in the company . . . I think this is a company that is just trying to do a straight-up, straightforward business."

For his part, Reeder still stands by the pattern of deceit he was documenting before he landed his clients their sweet settlement. (In the settlement, Mortgages Ltd. acknowledges the loan was not fully funded and gives Rightpath more time and better terms under which to repay the loan.)

"We always felt very good about our case, and it got progressively stronger. When you see the settlement terms, you will see why we settled," Reeder wrote in an e-mail after the settlement.

The question a number of Phoenix attorneys and investment brokers are asking now is this: In the same city where Charles Keating lived, and just 10 years after the Baptist Foundation defrauded investors of $590 million, where were state regulators when Arizona residents were pouring their millions into Mortgages Ltd.?

"There's a whole bunch of us saying, 'Didn't the regulators think this felt like the late '80s in Arizona again?'" says a senior investment broker at a large brokerage firm in Phoenix.

She says she steered her clients away from Mortgages Ltd. in recent years, but that one of her clients still had $800,000 invested when the company filed for bankruptcy.

"The letters he was sending to investors were misleading," she says. "I have been really curious how any regulator in this town could go down there and look at the books and not know that they're broke. Too often, the regulators get involved after every cent is gone."

The simple answer to how Mortgages Ltd. got away with it is that no single state or federal agency is required to monitor local investment pools such as Mortgages Ltd.

One regulatory agency was responsible for monitoring loans with borrowers.

Another two regulators were responsible for monitoring dealings with investors.

But no single regulator examined the big picture, including what was done with investors' money. And the one agency with the power to take such a global look — the Arizona Corporation Commission's Securities Division — apparently didn't.

(Attorney Donald Gaffney did not send his 2006 letters to the Securities Division because he had documented fraud with loan borrowers, not loan investors.)

In effect, the bulk of Mortgages Ltd.'s business was not regulated at all — even as the company grew to be a juggernaut among Phoenix's aristocracy.

All three of those regulatory bodies are now investigating or examining Mortgages Ltd. Regulators who spoke with New Times said unofficially that their separate investigations are complex. It could take months for any one regulator to build a strong case for fraud, if evidence for such a case exists.

Now that Coles is dead, the Attorney General's Office doesn't have one palpable defendant to prosecute criminally, even if it does find criminal behavior.

By most accounts, Coles was a financial genius. He may have been too smart for his investors' own good, knowing exactly how to abide by the letter of the law while still misleading some borrowers and investors.

Take the Covenant Community Church loan, for example. Though Mortgages Ltd. allegedly took advantage of a borrower and charged unspecified fees (totaling charges of $2.5 million on a $1 million loan), it did not obviously break Arizona law. In this state, a mortgage broker can lend at 200,000 percent interest, so long as the borrower agrees to it.

"If agreed on, any rate is allowed, more or less," says Jack Hudock, spokesman for the Arizona Department of Financial Institutions (ADFI), which is responsible for monitoring Mortgages Ltd.'s dealings with borrowers — like the Covenant Christian Center.

The loan paperwork Covenant signed didn't show one default interest rate. Instead, it listed one rate on one page and an additional rate on a second page. Combined, the rates equaled 67.75 percent APR — a rate that would be considered criminal usury in some other states.

ADFI confirmed that it received Gaffney's letter about Covenant back in 2006, but Hudock said state law keeps him from saying much more, other than confirming that the ADFI is now examining Mortgages Ltd.'s records — almost two years later.

"An examination is just a compliance exam . . . to ensure they were conducting business in accordance with state law," Hudock says. (ADFI is not in any way responsible for Mortgages Ltd.'s dealings with investors, Hudock adds.)

Mortgages Ltd.'s apparent compliance with the letter of the law on the Covenant loan is one example of how Coles knew how to appease regulators by dotting every "i" and crossing every "t."

Similarly, Mortgages Ltd.'s investors told New Times that they were misled about the company's status as a "licensed securities broker." That title gave some investors the impression that their investments were being monitored by the U.S. Securities and Exchange Commission.

"We thought this was the most conservative kind of investment we could make," says investor Sydney Madson, who put much of her retirement into Mortgages Ltd.

In reality, the licensing means only that Mortgages Ltd. Securities is qualified to sell securities. Securities law is a highly specialized niche. So much so that each of the five securities lawyers New Times contacted in Phoenix were all somehow connected to Mortgages Ltd.'s legal proceedings.

One of those attorneys, whose interests are on Mortgages Ltd.'s part, agreed to speak without being named. But even he acknowledged that Coles touted his securities licensing in a way that could have misled investors like Madson.

"It was correct and truthful, but I can see how the public could be easily misled into thinking it was something it wasn't. He used it as a selling point, implying that somehow the investments were safer," he says.

"They said 'Look at us; we're legitimate; we're registered. No one else is.' Well, being registered . . . applied to how they offered and sold their securities. It had nothing to do with whether it was a good investment."

However, the attorney added, "There's absolutely nothing illegal or improper about it."

Phoenix attorney Robert Mitchell, of Mitchell & Forest, says the Securities Division of Arizona's Corporation Commission is the one state regulator that could have forced Mortgages Ltd.'s books open before its bankruptcy.

However, Mitchell says that the Securities Division is not required to investigate a company like Mortgages Ltd. The wording in the law is that the Securities Division "may" investigate a company.

"Thus, the Securities Division's investigation power is discretionary. The Securities Division is not required to investigate, let alone audit, a company suspected of violating the statutes," Mitchell wrote in an e-mail to New Times.

For such reasons, he suggests, state laws may need to give more teeth to regulators.

"It is just an unfortunate reality of the limited financial and other resources of these agencies that they are not going to detect in advance of harm all of the fraudulent investment schemes that take place in the marketplace," Mitchell wrote.

"Sometimes, they are very effective in detecting and preventing investment frauds from spreading and harming the public. Other times, they are too late, especially when the schemes involve purported prominent and successful appearing members of the local business community."

Rebecca Wilder, spokeswoman for the Arizona Corporation Commission, said she could not comment about whether the Securities Division received letters warning it about Mortgages Ltd.'s practices.

"If a business is violating Arizona Securities law — if we are in some way alerted to it, if we find out about it — we would likely look into it," Wilder said.

"Clearly, the very fact that we exist means that there are people out there violating securities laws and doing things they shouldn't be doing," she added.

"If you're saying a government entity should not have let that happen, I think you're going a little far with it. It's not like the government is looking over businesses' shoulders," Wilder said.

The investment broker whose client lost $800,000 in Mortgages Ltd. disagrees. She says that looking over the shoulders of businesses is exactly what the securities division is supposed to do, particularly when one of the largest local investments is involved.

"Put yourselves in the shoes of the investor. The Securities label was part of their Web site. There's this sense that this covers everything," she says.

"If things are being arranged to create the image that the investor thinks they're licensed with the state of Arizona and all the regulators are looking over their shoulders, well, then the regulators can't just cop out and say, 'Oh, we weren't looking.'"

Complex as Mortgages Ltd.'s business and bankruptcy are, the charges of deception fall into two very simple categories: misleading borrowers and misleading investors.

Over-emphasizing what it meant to be SEC-monitored wasn't the only way Mortgages Ltd. misled investors. In a November 7, 2007 letter on "Mortgages Ltd. Securities" letterhead, Coles assured his investors that all was well with the company.

"Our investors have NEVER lost any of their principal," he wrote.

He then assured them that their loans were safer than "sub-prime lending" loans. "Our borrowers are bankable, and their projects represent the best collateral available when the loans were made."

Coles wrote that the company was making "bankable" loans, even while his loan officers thought those projects not bankable and were poor investments, two former employees have told New Times.

Real estate experts familiar with the projects Mortgages Ltd. was funding say the projects have far less value than even sub-prime loans.

One week after the company assured investors that all was well, Mortgages Ltd. vice president Phillip Sollomi, Jr. wrote a letter on November 15, 2007, to a wealthy borrower, pleading to borrow $2 million so the company could fund another borrower's loan.

Then, in December, Coles gave himself a loan for $6 million from the company, ADFI records show. About one month later, Coles — apparently desperate for cash — charged another borrower a $3 million "customary loan fee" for a simple transaction.

As Mortgages Ltd. ran out of money, it was unable to fund loans to a number of borrowers. The company upped the ante on its fundraising from investors as a result. Coles apparently grew increasingly dependent on Radical Bunny, an LLC owned by his longtime friend and accountant Tom Hirsch.

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.

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.

Large loans like Rightpath's usually come in multiple installments of smaller amounts. "Each installment had a six-month extension subject to customary loan fee. We've done these kinds of projects before and expected the customary loan fee to be about $1,000," Reeder says.

"Well, the extension comes up, and he charges a $3 million loan fee. That's tantamount to loan sharking. It was the sledgehammer that broke the camel's back."

"One thing a commercial lender is prohibited from doing by the state is failure to fund a commitment. There's extensive documentation from multiple borrowers where Mortgages Ltd. didn't fund the commitment," says Don Gaffney, the attorney who took on Scott Coles.

Little did Gaffney know, but when he represented the Covenant Christian Center pro bono in 2006, he was getting a jump on one of the biggest investor-driven bankruptcy cases in Arizona history.

He now represents Grace Communities, a developer that was using a Mortgages Ltd. loan to remodel the Hotel Monroe in downtown Phoenix. Like Rightpath Limited Development, Grace Communities says its loan was never fully funded.

They're not alone. Charles Lamar and his son Justin are principals with KML Development. The group had planned two high-rises, one in Tempe and one in Phoenix. Mosaic was going to be a 21-story, mixed-use condo tower in Tempe, with a Whole Foods grocery store at ground level.

On a recent Tuesday, Charles and Justin are sitting in the vacant Mosaic showroom in downtown Phoenix. The showroom has model kitchens and living rooms — all featuring the high-end flooring, cabinets and countertops that were going to be available at Mosaic.

The lights are off in the showroom, though, because Mosaic won't be rising from the ground in Tempe anytime soon.

Mortgages Ltd. executives signed a $130 million loan with KML and then showed up for the groundbreaking in Tempe — in October 2007. Two months later — and just $30 million into the loan — Mortgages Ltd. ran out of money.

Today, Mosaic is little more than a $30 million hole in the ground. If Mortgages Ltd. had funded the loan, it would be a 21-story concrete and steel skeleton, with money in the bank to put skin on the bones.

Lamar isn't one to speak negatively — about Coles or Mortgages Ltd. He chooses his words carefully and seems sincere when he says that bad things happen and he wants to work with the company to find an agreeable business resolution.

"As Mortgages Ltd. peaked, they aggressively started pursuing these construction loans. Most of the developers were led to believe that money was there and available. Obviously, when the money stopped, there were a lot of developers left without the funds that they were promised," Lamar says.

"In a perfect world, if the money kept coming in to him, I guess we wouldn't be having this talk. Unfortunately, things changed and everyone became aware very quickly that Mortgages Ltd. did not have the money."

Lamar says that up until the bankruptcy, Mortgages Ltd. was still charging interest payments and increasing KML's balance — even though it hadn't funded the entire loan.

"They were just collecting new money from investors, to give to old investors. The balance is growing and growing while we're just at a standstill," he says.

"We're looking at this as there are a lot of victims. We're not looking to exploit or take an opportunity to go beyond a reasonable solution. We're not trying to be opportunistic. That's not us. It's not our style.

"It's important that all those investors know there's someone out there who's thinking of them. In the court, it's portrayed as us and them. From our perspective, it's not. I care deeply for Barbara Porter [an investor mentioned in "The Rise and Fall of Scott Coles," July 31] and people like that. It just breaks my heart to see that. It motivates me all the more to want to find a way to help."

Perhaps no one understands Mortgages Ltd.'s rise and fall better than David Crantz, the president and CEO of Landmarc Capital & Investment Company in Scottsdale.

Crantz runs the closest thing in Arizona to a company that parallels Mortgages Ltd. Crantz's company specializes in the same short-term construction bridge, or "hard-money," loans as Mortgages Ltd.

Like Coles, Crantz grew up in Phoenix and learned the business of bridge-lending from his dad. In fact, Crantz's dad and Scott Coles' dad (Chuck Coles, who founded Mortgages Ltd. and passed away in 1998) knew each other well — as did their sons. Their companies even rely on many of the same investors and developers.

"They're not gonna know [everything Scott did] for a couple years. But it's very, very obvious to professionals in my industry what he did over there," Crantz says.

"It's black and white. He over-lent on properties, period. I know this for good reason because one of his major borrowers came to my company to borrow money from us. We would never lend him money. I knew [Mortgages Ltd.] had a lot of money out. I used to see the deals come across my desk. We'd see how upside down these were."

The biggest difference between Mortgages Ltd. and Landmarc Capital came in recent years, Crantz says — when Coles decided to take on $100 million loans. Crantz opted to stick with smaller, safer loans, most less than $5 million. Crantz says smaller loans are safer for investors because one loan can default without upsetting the entire portfolio.

"We share the same investors," Crantz says of Mortgages Ltd. "I just got off the phone with a client who has $5 million with me and had $5 million with Scott at Mortgages Ltd. The man just had open-heart surgery, and I am scared for his health [because his $5 million at Mortgages Ltd. was borrowed money]. People got wiped out. I mean wiped out. It was just greed and irresponsibility."

Crantz says the collapse of Mortgages Ltd. may seem complicated to outsiders, but it's incredibly simple to insiders: Mortgages Ltd. lent more money than properties were worth. It also lent more money that it had to give.

"[In late 2007] I went to one of my associates and said, 'I want to verify if these rumors are true.' He showed me properties and showed me what he owed Mortgages Ltd. He was upside-down $4 or $5 million minimum on these properties."

Crantz says a number of Mortgages Ltd. investors attempted to retrieve their money from Coles — with no luck.

"We've had a tremendous amount of investors for the past two years who were trying to get their money out of Mortgages Ltd. to bring over here. And they couldn't get their money out and were getting very scared, asking 'What's going on? What's going on?'"

As a longtime friend and colleague of both Chuck and Scott Coles, Crantz thinks Scott Coles' excessive lifestyle ultimately led to the demise of Mortgages Ltd.

"When you have people throwing money at you, and you create a lifestyle, and you have an ego like that and you've gotta be a big shot, there's not enough business in this town to support that kind of hard-money lending. It's impossible."

Looking forward, Crantz says Phoenix needs to close the coffin on Mortgages Ltd. and learn from Coles' mistakes.

"I don't know if you can call it a true Ponzi scheme. What you can call it is over-lending to have a ridiculous, obnoxious lifestyle. Using other people's money to create some Hollywood lifestyle that movie stars don't even live. That's what happened."

Don Gaffney sees Mortgages Ltd. as one more disaster in a state where defrauding investors seems all too common.

"It's a classic re-learning of what we saw with savings and loan," Gaffney says. "A group that sought out a niche where there was very little regulation. As long as the tide is high and the grass is green, who cares? But the downturn shows they didn't have regulations, reserves, or safeguards."

Walking into the children's room and nursery at the Covenant Christian Center, Pastor Stacy Lee says it's even simpler: Mortgages Ltd. — specifically, Scott Coles — said one thing, and did another.

"When we're in his office he picks up the phone and says, 'I'm sitting here with this pastor and his wife. They're good people. I want you to get the additional monies for them,'" Lee says.

"Meanwhile, that was just surface. Soon, he turns around and stabs us in the back."

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