State unravels Greenleaf Cos. 'investment scheme'

A Springfield attorney representing Greenleaf Cos. LLC said back-to-back actions taken by two state agencies last week against his client likely could have been resolved short of the heavy-handed response that began Dec. 9 with a search warrant.

On that day, Springfield Police officers entered the South Campbell Avenue offices of Greenleaf and sister company The Real Estate Co. with guns drawn and screaming at employees, attorney Jason Coatney said.

"That's traumatic," he added.

Investigators with the Missouri Attorney General's Office would spend the rest of the day collecting evidence from the companies' Kickapoo Corners office.

Authorities seized more than 80 boxes containing financial records, real estate documents and credit applications as well as cell phones, compact discs and DVDs, according to court documents.

Exactly a week later, Missouri Securities Commissioner Matt Kitzi signed a cease and desist order prohibiting Springfield-based Greenleaf and its owners from selling securities in the Show-Me State.

Company officials also agreed to the conditions of a preliminary injunction drawn up by the Attorney General's office and filed in Greene County Circuit Court.

Under the injunction, Springfield-based Greenleaf is required to "clearly and conspicuously" disclose the details of its investment program and spell out risks to investors and customers alike. Coatney said Greenleaf, a company that's been corresponding with state officials for almost two years, was amenable to the stipulations.

"It basically boiled down to disclosure issues ... and they weren't unreasonable requests," he said.

In a Dec. 16 news release, Missouri Secretary of State Robin Carnahan described Greenleaf's five-year operation as an "investment scheme" and accused owners Scott Dasal and Eric Gagnepain of failing to provide "material information" to investors.

High risks

Greenleaf has been under fire in recent weeks as a flood of news media reports have shed light on the company's unusual business model, which hinges on investors with good credit in Missouri and other states who purchase new homes primarily in southwest Missouri and northwest Arkansas.

As first reported by Springfield Business Journal in May 2007, The Real Estate Co. then marketed the homes to third-party buyers with tarnished credit who sign a contract for deed.

In the contract, a buyer agrees to make monthly principal, interest, tax and insurance payments to Greenleaf for three years before obtaining a conventional loan to purchase the home. At that time, the property investor typically receives $10,000 each for their participation.

Payments from buyers are processed by New Mexico-based Westar Escrow Servicing and then pooled by Greenleaf, which then cuts monthly checks to investors, who, in turn, use the money to cover their mortgages.

But many investors stopped receiving checks in April, when company officials said the money was needed to keep the business afloat amid a rash of customer nonpayment.

Several third-party buyers who contracted to buy homes from Greenleaf, though, have said they were making payments to the company when they learned lenders were foreclosing on their homes through no fault of their own.

According to information compiled by the Securities Division of the Missouri Secretary of State's Office, Greenleaf enlisted investors via untitled agreements, contracts for deed and "private placement memorandums."

Greenleaf obtained exemptions from the Securities and Exchange Commission in June 2007 to execute the memos with "nonaccredited" investors, but the company has been recruiting investors since at least 2003, records show.

Between May 11, 2004, and Sept. 24, 2007, the company executed untitled agreements with 66 Missouri investors representing a total investment of about $15 million, according to the division. Another 30 Missouri residents who signed contracts for deed invested a total of about $7.4 million between Nov. 7, 2006, and Jan. 31, 2007. And at least 23 Missourians signed private-placement memos as Greenleaf investors.

Those memos did not include cash-flow statements or balance sheets or explain how the purchase prices of homes were determined, according to the division. One of Greenleaf's PPMs obtained by SBJ includes an explicit warning to investors.

"Participation in the investment program offered hereby is speculative and involves a high degree of risk," it reads in bold type.

Investors who signed untitled agreements or contracts for deed received no information about the company's financial condition, its contracts with third-party buyers or the investment risks, according to state officials.

Months of tracking

Records show that the Missouri Real Estate Commission alerted the Securities Division about Greenleaf's investment activities in February 2007. Division officials made contact with Greenleaf the following month and continued their correspondence with the company for 21 months before pursuing a cease and desist order. That order accused Greenleaf of violating state laws by selling unregistered securities.

"We have to get documentation from them, talk to investors, talk to other people who had experiences with the company to gather facts for the investigation and the subsequent petition and cease and desist order that might come out of it," said Secretary of State spokesman Ryan Hobart.

Coatney said Greenleaf officials were surprised at the outcome of their long-running dialogue with the Securities Division, and he suggested that recent media attention likely played a role.

"(Greenleaf) engaged attorneys in St. Louis specifically for the securities issue and engaged in quite a discussion with the division," he said. "This was a novel business model, and they wanted to know what the division's view was on it."

The cease and desist order stopped short of assessing civil penalties of up to $10,000 per violation against Greenleaf owners Dasal and Gagnepain, and Coatney is hopeful the state won't hit his client with fines.

Hobart said Greenleaf officials have 30 days from the order's issue date to request a hearing before Securities Commissioner Kitzi to argue against the imposition of penalties.

Nixa couple Tim and Marcie Thompson said action taken by state agencies against Greenleaf amounts to a "slap on the wrist." In November 2007, the Thompsons signed a contract for deed with Greenleaf for a 4,000-square-foot house in 14 Park Place subdivision that went into foreclosure earlier this year. In December, they filed a lawsuit against Greenleaf, its owners and affiliates in U.S. District Court alleging fraud and misrepresentation.

"The thing that was frustrating was that it took this many people going to court and going to the authorities and going to the media in order to get Greenleaf to turn their habits around," Tim Thompson said. "I think that - if the authorities hadn't come in - they never would have changed their business practices."[[In-content Ad]]