In the crazy days of the real estate boom, investors flocked to a condominium complex in Clearwater that promised to make millions.
Out-of-town investors paid as much as $700,000 for condos a few hundred yards away from strip malls on U.S. 19, with views of Tampa Bay and the Bayside Bridge. They believed a water park and shopping complex soon would be built, transforming the project into a high-class resort.
That was more than five years ago, at the height of the housing bubble, so it's not hard to guess what happened next. The real estate market collapsed, and suddenly $600,000 condos could not be sold for $200,000. And then: foreclosures, bankruptcies, heartache, sour grapes. Just like everywhere else in Florida.
Except for one thing.
Investors in the Cay Club say it wasn't just the superheated real estate market that burned them. They say it was fraud.
In lawsuits, they point to insider deals in which related companies sold units to company officials at huge markups, which led to higher appraisals. They point to an appraiser who told them their condos were worth $500,000 to $700,000, but who turned in his license last year amid an investigation.
At a time when real estate prices really did seem crazy, they say, it was harder to spot the fakes.
"They paid two-and-a-half times to three times what the units were actually worth at the peak, based on an effort to inflate artificially the prices that were supported by fraudulent appraisals," said Bruce Barnes, a Safety Harbor attorney for investors.
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Laurie McNulty, a pharmacist from Charleston, S.C., says she always had the same reaction when watching news reports about investment scams: "Who would fall for that?"
But her investment in the Cay Club of Clearwater seemed solid. For one thing, a trusted friend of her husband's, a former American Airlines pilot he knew through work, strongly recommended the opportunity.
At first, McNulty wasn't too sure — buying a condo for $669,000 in a part of the complex called Grand Venezia seemed out of the question. That was way beyond her income level.
But then she heard more about how the deal was supposed to work, and became intrigued.
Here is how the plan was presented: A select group of investors would be allowed to buy "hotel condos" in Clearwater, the Florida Keys, Orlando, Manatee County or Las Vegas. Some of these were existing condos being transformed into upscale, classy resorts.
The renovations would take some time, and it would be hard to rent out these condos for profit during the remodeling. But to make up for that, investors would get a "lease-back" for 15 percent of their purchase price.
For McNulty, this meant that after agreeing to buy the condo, the Cay Club would give her $100,000. She could use this money to pay mortgage costs and taxes for about two years. All of a sudden the finances made more sense — especially after the $100,000 check really did arrive. When she received it, "my husband and I were jumping up and down like kids," she said.
There was another thing that made McNulty feel better about the investment.
Though she didn't think she would qualify for a $669,000 mortgage, the Cay Club referred her to a loan officer from Fifth Third Bank named Roger Windey. He told her she did qualify, according to court papers. And, the suit says, a licensed appraiser named Joseph Goenner gave her more good news: The condo appraised at $700,000.
A $700,000 value for a two-bedroom condo off U.S. 19 might have raised eyebrows to a local investor, even then. But McNulty, like others, was from out of state.
"Living so far away, I wasn't so certain what the prices were," McNulty said. "But I believed the appraisal."
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Now, she says in a lawsuit, the appraisal was a fraud.
When professionals appraise the value of a home, they rely heavily on the sale prices of other nearby homes. The appraisal on her home relied on three "comparable" condo sales.
But the sales figures that went into this appraisal were fishy, according to the suit McNulty later filed against Fifth Third Bank and Cay Club officials.
One of these sales, a condo that supposedly went for $649,900 never actually took place, the lawsuit states. A Cay Club-related company bought another condo for $490,000 and sold it a month later to a Cay Club official for $859,000. Another comparable was a condo on Clearwater Beach — in a much different neighborhood, farther away than most comparables.
And there was another fact, which McNulty did not learn until later: A Cay Club-related company had bought her condo for $251,900 on the same day she purchased it for $669,000.
Not only that, the lawsuit states, but Fifth Third also "grossly inflated McNulty's income" to help her qualify for the mortgage.
Windey, the former Fifth Third loan officer, said in a telephone interview that he had done nothing wrong. "At the time … properties were appraising for significantly higher," he said.
He said everything was done with a licensed real estate appraiser. On many properties this was Goenner of Naples, who did not return phone calls. But Goenner voluntarily turned in his license to the Florida Real Estate Appraisal Board last year, after having been accused of multiple violations.
In one case, he was accused of appraising a Cay Club property for $745,000, even though it sold twice in August 2005 — once for a comparable amount, $728,700 and once for far less: $251,900.
"The timing and amounts of the prior sales should have aroused suspicion that the transactions were not at fair market value," according to a state complaint.
McNulty's lawsuit claims all this was a scheme. It says Cay Club actually was involved in a "fraudulent flipping scheme wherein it was selling condominium units at some three times what they were actually worth in late 2004 and into 2005."
In many cases, the high prices were used in the appraisals of other units that sold to investors, the lawsuit says. But the low prices generally were not.
McNulty says she feels "just deceived, deceived with a phony appraisal."
She said it's "disgusting" that "this has happened, and no apology from the bank."
Asked about the case, Fifth Third vice president Debra DeCourcy said the company does not comment on lawsuits.
One of the top officials of Cay Club, David Schwarz, has settled with McNulty and denies wrongdoing through his attorney, Bart Valdes. "Our position was the complete opposite — there was no fraud," he said.
McNulty's $669,000 condo eventually was foreclosed on and later sold for $175,000.
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Barnes said "some investors have been forced into bankruptcy or the verge of bankruptcy. Most victims' credit has been ruined."
David Clark, a California pilot who invested in two Clearwater condos and several others at Cay Club developments elsewhere, said he and family members are out more than $1 million.
"I'll never get the sleep back that I lost. There's daily reminders. My children were robbed of better colleges," he said in a telephone interview. After a pause, he added, "Every day, I worry that I'm going to lose the house I'm in right now.
"It's been horrible."
Curtis Krueger can be reached at (727) 893-8232.