The true story of a Colorado hard money lender’s experience with a criminal borrower.

Several years ago, Montegra was approached by an apparently wealthy stock and bond dealer in Denver who asked if we could fund a $1,000,000 loan secured by a first mortgage on his Cherry Hills Village home.  Cherry Hills Village has some of the most upscale residences in Denver and this particular home had an appraised value of over $2,000,000.  The borrower said that he had the opportunity to make a great business deal but needed to raise the $1,000,000 amount in the next two weeks and conventional lenders could not react fast enough.  Since one of Montegra’s strengths is our ability to underwrite and close loans quickly, we said we could start our process.

One day later our borrower called and said that he had just received a purchase offer on his house but that that closing would take over a month and he still wanted to raise cash quickly.  He offered Montegra the chance to use $2,000,000 worth of New Jersey Turnpike Authority’s AAA rated revenue bonds as collateral instead of the Cherry Hills home.  Since the New Jersey Bonds were highly regarded by all brokerage firms we consulted, we said we would consider making this loan.  The borrower sent us Xerox copies of 20 $100,000 bonds for our due diligence and told us that he would bring the original bonds to the closing.

Our due diligence with bond dealers confirmed that these bonds were in fact AAA rated and highly marketable.  Colorado law makes it clear that if we took possession of the actual physical bond we would have a perfected collateral interest in them and this seemed like a great deal.  However, true to our company motto of “Mistrust but Verify” we asked a security attorney to do further due diligence on the bonds.  Our attorney called the issuing bank in New Jersey and was stunned to hear from them that although this series of bonds did exist, they had never been issued in actual paper form but only existed in the computer of the bank.  These paper bonds were totally and completely counterfeit and had been manufactured by our prospective borrower!

The bank called the FBI and the FBI contacted Montegra and asked for our help in completing a “sting” operation to put this crook away.  We scheduled a closing with our borrower, and sent him advance copies of all our loan documents for his review.  On the day of closing the FBI brought 4 agents to our office – two of them acted as members of our staff and two waited in the office across the hall.  The borrower came in and spent over an hour reviewing again the documents and asking Montegra to make minor changes. So we sat at the closing table with our FBI “employees” and renegotiated the loan.  Finally the borrower handed us the paper bonds, we handed him our check for $1,000,000 and once he had the check in his hands the FBI jumped up, threw him against the wall, handcuffed him and read him out his rights.  He was one very surprised borrower – to say the least.

As it turned out, the same borrower had pulled the same scam on several other hard money lenders. A lender in Boulder had given him $500,000 using these same counterfeit bonds as collateral, and a national lender in the mid-west was out over $3,000,000 on the same scheme.  Neither of these lenders recovered a penny.  After two years of legal delay as the Montegra borrower’s trial was about to begin he made a plea bargain and got what seemed to us to be a lighter sentence than he deserved.  What is the moral of this story?  Lesson one:  don’t make loans against anything but real property and always get title insurance.  Lesson two:  use your attorneys on all loans. They are there to protect you – and they sure earned their fee in this case!

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.