Without admitting or denying guilt, Homestead Northwest founder James Wynstra has agreed to pay a civil fine of $100,000 in connection with the collapse of the Lynden company and the losses of hundreds of local investors estimated at $65 million.
The fine assessed by the Washington Department of Financial Institutions was disclosed in documents made public Friday, March 8.
Attorney Lawrence Engel, who represents Wynstra, said Wynstra had no comment.
The agreement between Wynstra and the department ends a legal case that began in April 2011, when the agency filed legal documents accusing Wynstra and a Homestead employee, Rita Lahman, of fraud and sale of unregistered securities.
Lahman has agreed to pay a $2,500 fine - also without admitting guilt.
Homestead's financial problems surfaced in April 2009, after the company stopped making payments to investors who had been promised returns of 8 percent or more on their loans to the company.
Wynstra and his company used loans from individual investors to help finance a variety of real estate developments in Whatcom County and elsewhere over many years. He was widely known and respected in the close-knit Lynden community. Among other things, he played a key role in developing Lynden's Dutch-themed commercial architecture. He also built Lynden's Homestead Golf & Country Club.
According to the department report on the company issued in 2011, the investors relied on more than Wynstra's good name. They also received deeds of trust - the legal equivalent of a mortgage - that were supposed to provide pieces of real estate as collateral to guarantee the safety of their money.
But when the real estate boom went bust in 2007 and investors tried to withdraw money or enforce their deeds of trust, they discovered that Wynstra had issued duplicate deeds of trust on many properties. In some cases, the properties pledged to investors had also been used to secure bank loans.
Suzanne Sarason, the department's chief of enforcement, acknowledged that Wynstra might not wind up paying a penny of the $100,000 fine. The consent order between Wynstra and the state says payment of the fine is deferred until Homestead's investors are repaid in full for their losses.
That day may never come. The Homestead companies are winding their way through a complex bankruptcy liquidation process in federal court in Seattle and, by all indications, sale of the few remaining assets will leave investors with pennies on the dollar.
"If there is any money, obviously it should go to the investors," Sarason said.
But Wynstra will be required to pay $5,000 in investigative costs to the state, at $100 a month.
The consent order with the department also requires Wynstra and Lahman to "cease and desist" from violations of state securities law.
Why was Wynstra allowed to make a deal that did not require him to admit guilt?
"That's typically what happens in a consent order," Sarason said.
State investigators preferred to strike a deal to end the matter, given the fact that Wynstra does not appear to have any money to pay penalties, she said.
Why did it take so many years to get to this point?
Sarason said the case was complex, and state investigators were waiting to see if the bankruptcy process would disclose any significant amount of assets.
The bankruptcy case could drag on for years, according to attorneys involved.
Virginia Burdette, the bankruptcy trustee working to recover assets for creditors, recently asked the bankruptcy judge to combine the bankruptcy cases of four Homestead-related companies into a single case, because Wynstra moved money from one company to the next without attempting to keep their financial affairs or their creditors separate.
"The testimony of Mr. Wynstra was clear that money was transferred from entity to entity depending on which entity had liabilities that needed to be paid, without any consideration as to whom the monies actually belonged," Burdette's attorney, Denice Moewes, said in a court filing.
Sarason said the Homestead case shows why investors should check with state regulators to make sure a company complies with state law before they invest.
"We didn't hear from people until so many years after their investments were made," she said. "We only hear about it once they are no longer happy. That took a long time with this."