When Edward Bollinger retired in 1985 after 34 years as an overseas missionary for the Christian Reformed Church, he figured that investing in a real estate deal offered by his old friend, fellow church member John O. Van Hofwegen, was a sure winner.
"Investing in California apartments sounded solid to me," says the Sacramento resident, now 81. "I invested what I had with him."
Which was $50,000.
After all, Van Hofwegen had once bailed Bollinger out of a financial jam. And now Van Hofwegen's company, Concord-based IRM Corp., was offering what looked like a secure interest rate of 10 percent.
But by 1990 Bollinger suspected something was amiss. He wasn't sure where his money was going. And when he tried to cash out, he managed to get only $10,000.
Years passed. By October 1997, the company, IRM Corp., had collapsed. According to documents filed a year later in the company's Chapter 11 bankruptcy case in Sacramento, 1,500 investors -many of them elderly church members of Dutch descent -- had been left with nothing to show for $180 million invested between 1981 and 1997.
They'd been victimized by "the Ponzi scheme of Ponzi schemes," says Bruce Dravis, a Sacramento attorney working on behalf of investors in the case, which is still working its way through the bankruptcy court.
Between the time IRM Corp. started in 1969 and its collapse 20 years later, it had wracked up $164 million in bank debt. And without enough funds to service its debts to both banks and investors, the company kept raising more money from investors.
"As the amount of investor debt grew, so grew the monthly interest on such debt -- accelerating the need for more investor debt," reads a court document filed by investors. "In other words, a Ponzi scheme."
"There are a lot of people just like me," Bollinger says, lamenting that he didn't heed the advice of his attorney, who smelled a rat way back in 1985.
"He warned me about their investments -- that the way it was set up was very, very dubious," Bollinger says. "I had so much confidence in Van Hofwegen as a person that I was just going to stick with it."
Mixing the money: As IRM took in million after million in investor money, the funds were mixed into four different divisions. Those four entities owned 46 apartment complexes in Northern California, including 21 in Sacramento.
The four funds also owned 10 commercial buildings in Napa, Contra Costa, Solano and San Francisco counties.
Now, consolidation of those four divisions into one company, dubbed Oneco, is being proposed to investors as a way to divvy up what few assets remain.
It is proposed that $15 million be split up among the smallest investors, who would receive 40 cents on the dollar.
A hearing to determine whether to go ahead with the plan is set for Feb. 28 in Sacramento.
"Technically, they will become the owners of Oneco," says Dale Ginter, the lead attorney for the investors. They would be repaid from any operating profits, and by selling off IRM's properties.
Much of the money is simply gone, court documents indicate.
By 1996, when the company was poised to crash, Van Hofwegen, along with his son and two sonsin-law, were collectively being paid an estimated $1.3 million in annual salaries, Ginter says.
The insiders pulled out $20 million over the years, Dravis says, and plowed much of the money back in as their own personal investments.
"They were wonderful money-raisers, but not very good businessmen," he adds. "Running the apartments they held so they made a profit just doesn't seem to have occurred to them."
Feeling bad: Van Hofwegen declined comment. But David Katzen, a Walnut Creek attorney representing Van Hofwegen, his son and two son-in-laws, says he disagrees with the Chapter 11 documents when they characterize the company's downfall as a Ponzi scheme.
He says it wasn't intentional. Issuing new debt to pay off old debt was only a way to cope with a market downturn.
"We don't agree with the (Ponzi) label, but we don't disagree with the investor plan to handle the funds," Katzen says. "So why fight about the label?"
His clients don't intend to get back any of the money they invested in the company. There isn't enough to pay everybody back. "They owe that much, at least.
"These guys feel bad," Katzen says. "They didn't want things to turn out this way for these people or them. It's been a brutal experience for them. When people are throwing rocks at you, it's no fun."
Duck: Longtime Sacramento resident Katherine Greydanus and her husband were members of the Christian Reformed Church until the 1970s. While they were members, the Greydanuses were "gifted" with a $5,000 investment in IRM in the early 1970s. She declined to disclose the donor.
They never invested more in IRM, she says, because she figured their investments would be seen by many members of the church, and she didn't feel like being included in church gossip.
"You know, people talk," she says. "I'm the kind of person that likes to keep my business to myself. The people in the church were talking about this company."
So when Greydanus, now in her 70s, found out about the fate of that investment in 1997, she was shocked. She knew many people who lost far more than $5,000.
"Honestly, we feel lucky," she says. "Five thousand dollars is a drop in the bucket compared to the millions some people invested.
"It made some people sick," she adds. "Some had to sell houses. I can now understand why people during the Great Depression committed suicide."
There is a lesson to be learned. "I think the common theory is don't put all your eggs in one basket." But another thought occurs to her. "There, but for the grace of God, go I. Those people should have been honest and told their investors exactly what happened. They would have been better off. So would everybody else."
Clearing the landslide: Just how much investors will recover, be they small or large, remains to be seen. It doesn't look good, according to unaudited financials of the company for the six months ended June 30, 1999.
Revenue from the company's apartments and commercial buildings totaled $19.7 million for the first half of last year. Take away $17 million in costs, and the profit was $2.7 million.
Meanwhile, the company's bank debt is estimated at $164 million.
The total appraised value of all IRM's properties is $275 million. But even if they were all sold to raise that much, after settling debts, only $111 million would be left to spread out among 1,500 investors who are owed $180 million. That's a shortfall of $69 million. And that doesn't factor in the commissions and fees to complete all the transactions.
Local investor Bollinger is still out $40,000, but hopes to recover 40 percent of that, or $16,000. And he was one of the lucky ones.
Some large trust funds for church members in California, Michigan and other Midwest states invested more than $1 million apiece.
But the heartbreaking fact is that most of the investments were the hard-earned cash of by-thebook, conservative church members who were trying to ensure a nest egg for their retirement years. Some elderly, small investors got the news that their money wasn't there for them just when they needed it.
"It was a real shock to me when the whole thing folded," Bollinger says.
Attorney Ginter says the U.S. attorney's office is aware of the case, but won't disclose what action, if any, might be taken. The state Department of Corporations has requested IRM Corp. documents and records. And the company is attempting to settle an allegation by Michigan's Securities and Land Development Bureau that IRM violated securities law there.
So far, no criminal charges have been filed against the four top administrators of the company. They resigned in September 1998 at the request of a court-appointed creditors' committee.
What happened? IRM was started in 1969 by Van Hofwegen. It sought investors for limited partnerships to buy buildings. The company hummed along until 1986, when the tax laws changed.
Prior to that time, investors with equity interest in limited partnerships got big tax breaks. As a result, many such partnerships didn't try to turn an operating profit, but investors gained by tax write-offs for depreciation and losses.
When the law changed to disallow such tax shelters, the only return for investors came if the property generated profits and the general partners opted to distribute cash, or if property was sold. Both events became less likely by mid-1990 when the California real estate market imploded.
"They couldn't get new investors," Dravis says. "So they went out and told (existing investors) they wanted to borrow money with unsecured notes. They would just suck money from investors."
Court records say investors were told that some of their loans to IRM were secured by IRM's entire portfolio, but in reality they were not secured.
"I don't think anybody believes they set out to be crooks," Dravis says. But a disastrous choice was made.
"And that choice," he adds, "was to co-mingle money from all their operations and not tell investors."
Local victims: Of the 1,500 investors in IRM, court records show 15 were from this area. They were mostly married couples, hailing from Sacramento, Woodland, Loomis, Incline Village, Nevada City, Davis, Roseville, Chico and Stockton. IRM typically asked for a minimum of $10,000 to $25,000 per investor.
Von Hofwegen also created a series of trusts for church members who couldn't or wouldn't invest the minimum amount as individuals. In the Sacramento area, there are two Christian Reformed Churches, one on Florin Road, and another, the Korean Christian Reformed Church, on Kiefer Boulevard.
When real estate values plummeted in California in the early 1990s, occupancy levels at apartment buildings went down and rent increases stopped. Sinking property values made selling off properties for cash a bad idea.
IRM, however, chose not to put its insolvent properties into bankruptcy to reorganize its debt.
"From approximately 1990 or 1991, and continuing through October 1997," court documents say, "the IRM entities as a group avoided defaulting on their debt obligations only by systematically obtaining new money from investors and using that new money to repay earlier investors. Such an operation is commonly known as a `Ponzi,' or `pyramid' scheme."
Court records show investors pumped money into the company all the way through to October 1997, when the company collapsed. From 1990 to 1997, the company raised an average of at least $14 million per year, or about $112 million, from two of its entities.
The company funneled cash from IRM through and between its three other units to keep up with its debt, but eventually it couldn't continue.
In October 1997, the company stopped paying bank mortgages on 27 of its properties, and started paying investors, court documents say. But payments to investors didn't last.
Soon IRM sent a notice to investors saying it was suspending their payments. "Investors have received no payments since that time," say court records.
What the books showed: Van Hofwegen continued running the company. In July 1998, 24 investors sued, forcing the company into Chapter 11 debt reorganization a month later. A month after that, the Van Hofwegen regime resigned, and the office of the U.S. trustee appointed a committee to figure out a way to return as much money as possible to investors, and how to divide remaining assets among investors.
The committee dug up some revealing discoveries and allegations:
- IRM formed 55 limited partnerships between 1981 and 1997, each generally owning a single property. Some of the socalled equity partnerships were purchasing properties that were already owned by other partnerships, at prices established by IRM, documents say.
"IRM typically `sold' the properties from one equity partnership to another at ever-higher prices, and then described the increases in later partnership offerings as evidence of the high returns earlier investors had enjoyed," the committee found.
Prior to that, the company had formed 200 other limited partnerships, which were found to have purchased 60 percent of the IRM partnerships formed later. Many of the investors in the prior debt and equity partnerships that had been terminated, reinvested in new IRM investments.
- Investment funds were said to be used for specific equity partnerships, "but in fact the cash was frequently diverted to ... other IRM entities."
- Despite having 150 separate legal entities, IRM conducted a "single real estate and capital financing operation, in which money from individual partnerships was siphoned through a series of bank `clearing accounts' to whichever IRM entity IRM management directed."
The human side of it: A Roseville woman, now in her 70s, was willing to tell her IRM story as long as her name wasn't used. After listening to the story, that didn't seem like too much to ask.
She had worked in a Bay Area real estate office for 12 years. Her husband owned a service station in Lafayette until he retired in 1985 after a heart attack. They lived in Napa from 1990 to 1997 and were members of the Christian Reformed Church.
In 1995 and 1996, the couple invested $45,000 with IRM. That money didn't come easy. They'd saved it for retirement after working for more than 40 years. "We never lived high -- we always saved," she says. "Unfortunately, we thought we wouldn't have enough to live on."
The decision to invest with IRM wasn't mutual.
"My husband was very confident that this was a good thing to do," she recalls. "I argued with him."
She pointed out that the notes from IRM were not secured -- and her real estate experience told her that was a big red flag. "It was a risk. I knew it. I just could not argue any longer."
As her husband became increasingly ill, they moved to Roseville in 1997 to be closer to a daughter. Within a month, her husband had to be admitted into a rest home.
It was then that she got a letter saying that their $45,000 investment had essentially vaporized.
Last year, her husband passed away.
She feels embarrassed about what happened. And while she doesn't believe in revenge, she does believe in justice. Whoever's responsible "should be punished so they don't do it again," she says.
These days she pays her expenses with Social Security. But she has cancer. She goes to Kaiser on her own to get treatment. She doesn't get help from her two grown children. "They have their own families," she says.
Now, she's skeptical about getting even 40 percent of her money back. And she can't hold back her tears.
"I'm all by myself," she says. "As I get sicker, I'll need to have more help. This is what I always look at."