by HANK SIMS
ON THE EVENING OF THURSDAY, MARCH 4, DEPUTIES FROM THE Humboldt County Sheriff's Office showed up at the Trinidad home of John Russavage, president and CEO of the Redwood Parks Lodge Co., Inc., and served him with a warrant for his arrest, signed by a Del Norte County judge. Russavage, 51, was taken to the Humboldt County Jail, and was later transported to Crescent City and booked on charges of burglary, theft, fraud, conspiracy and financial abuse of an elder.
Del Norte County District Attorney Michael Riese sought two other Humboldt County men on the same charges. Michael Harder of McKinleyville, a member of the Yurok Tribe and a graduate of Humboldt State University's business school, had served for a short period as Redwood Parks Lodge Co.'s chief financial officer and had worked as a financial planner for the Eureka office of Morgan Stanley. Hans Overturf of Bayside, a native of Switzerland and an HSU economics graduate, also worked for Morgan Stanley, but was never employed by Redwood Parks Lodge Co. He currently heads the Arcata branch of Raymond James, another financial services company. Both in their early 30s, they are currently the president and treasurer, respectively, of the Arcata Rotary Club.
Harder and Overturf surrendered themselves in Crescent City before they could be arrested.
The arrests of Russavage, Harder and Overturf were the culmination of an eight-month investigation of Redwood Parks Lodge by the Del Norte County District Attorney's Office. The investigation began when Harder and Overturf's former bosses at Morgan Stanley called a Crescent City attorney to tell him that their employees may have improperly urged an elderly Crescent City couple -- Morgan Stanley clients -- to invest some $730,000 in Redwood Parks Lodge. The DA charges that the well-to-do couple, aged 85 and 83, were suffering from progressive dementia when they made their investments, and the defendants took advantage of their condition to enrich themselves. (The Journal has agreed not to publish the couple's names out of a concern that they might be sought out by future scam artists. The husband died this past Sunday of natural causes, but his wife is still living.)
The bail set for each of the men was $500,000, one of the highest amounts ever in a Del Norte County case. Russavage and Harder both waited in jail for a hearing to get their bail lowered; Overturf took out a bail bond and didn't spend any appreciable time behind bars. All three entered a plea of not guilty.
If the case goes to trial, as appears likely, Riese, who has handled the case personally thus far, will attempt to prove two things. His key contention is that the defendants should have known that the elderly couple were not capable of handling their financial affairs at the time they made their investments. And if an affidavit filed by the DA's investigator is any indication, he will also seek to show that at some point the Redwood Parks Lodge Co. became nothing more than a vehicle for swindling potential investors.
The case may not be a slam-dunk for the DA. In the first place, his charges have mobilized the men's friends and supporters in Humboldt County's legal and business worlds, and these forces may end up overwhelming Riese's tiny, four-attorney office. In the second, the facts Riese is using to make his case may not be as solid as they should be, despite the amount of time his office has put into the investigation.
Other people who met the couple around the time they invested in the company allege that they didn't seem to be suffering from any debilitation, and one of the couple's own relatives has written in support of one of the defendants. And far from being shocked at the company's alleged financial misconduct, most local investors -- who have all invested much less money than the Crescent City couple, on the order of $100,000 total -- are outraged at the Del Norte DA's charges.
"These people are the furthest thing from a crook that there ever was," one investor, Eureka resident Rosemary Hunter, said last week. "It's just ludicrous."
Hunter and others say that Russavage and Harder, who were both executives at the company during the period when the alleged abuse took place, are upstanding entrepreneurs who would never take improper advantage of investors. They suspect that Riese is trying to make a high-profile case merely for political gain.
Look at the evidence from one angle and it appears that at least two of the three defendants may indeed have cynically taken advantage of an infirm, elderly couple with a lot of disposable cash lying around. (The DA acknowledges that Overturf did not profit from the alleged scheme). Look at it from another, though, and Redwood Parks Lodge Co. was doing what any struggling start-up company does -- trying to keep its head above water by getting people with money to believe in it. It's not an enviable business model, but if it wasn't apparent the couple were senile, then it's not a crime, either.
II. Big dreams
There has always been an element of the grandiose in Redwood Parks Lodge Co.'s vision that has made it resemble, in some ways, countless `90s-era fledgling technology companies. Like a relic of the New Economy, it promised to build something ambitious out of some very unpromising raw materials. A few years ago, someone tried to make their billions by FedEx-ing customers cat food ordered over the Internet; in 2002, Russavage and his partners set out to turn an abandoned mill in Orick into a sparkling new resort.
Russavage had quit his job as a senior financial advisor for Merrill Lynch to invest all his efforts into doing just that. In late 2002, he and his wife, Mary Beswick, moved from Palm Springs to Trinidad to get the company off the ground. Their early partners were Lee Miller and Rita Lakin, a Trinidad couple who at the time owned the Lost Whale Bed and Breakfast Inn. The only asset the four partners had, aside from their talents and their dreams, was an option to purchase the 38-acre former mill -- a site known in Orick as the "Geneva Mill" -- located about three miles north of Orick near Rolf's Park Café. [This information has been corrected online since publication]
An early executive summary of the company's business plan lays out the vision for the site: "The final plans currently include state-of-the-art conference facilities, a first-class resort hotel and spa, a family-oriented hotel, youth/senior hostels and restaurants," it reads. "We have plans for retail shops where tourists can purchase gear for outdoor activities such as hiking, camping, kayaking, etc. In total, we plan to have 2,000 or more rooms."
A Journal news item from September 12, 2002 reported that the lodge would be constructed of wood, stone and glass, and would be modeled after those built by the Civilian Conservation Corps in national parks during the Great Depression. The Journal further reported that partners were shooting for a grand opening in 2005.
Two thousand high-end hotel rooms may sound like a few too many for the Orick area, but the company wasn't thinking just of the town's charms. The one word that kept appearing in all promotional literature for the company was "Yosemite." Orick is the gateway to Redwood National and State Parks, the company argued -- the 127th-most visited destination in the national parks system. The town only has a few modest motels where tourists may stay. With a destination resort, like those at Yosemite or Yellowstone, tourism in the parks -- and the economy of the north county -- would explode. [This information has been corrected online since publication]
Even in the early days, the company had its share of setbacks. With financing slow to come and building permits difficult to obtain, the company had to push back its target opening date to some time in the distant future. In recent months, it has focused its immediate attention on two smaller scale projects -- the "Gold Rush Cabin Complex," a dozen or so small vacation rentals near the lodge site, and the "Beach Trails RV Resort and Campground," to be located at the south end of Orick.
Miller and Lakin left the company almost as soon as Russavage and Beswick moved to town, for reasons that they refuse to discuss. According to Victor Schaub, a former Arcata mayor and the legal counsel to the Redwood Parks Lodge Co., the couple signed an agreement not to talk about the details of their split with the company in exchange for an undisclosed settlement. Today, they own and operate two small businesses -- Arcata Music in Sunny Brae and the Life's a Beach shop in Eureka's Old Town. (They sold the Lost Whale Inn in 2003.) [This information has been corrected online since publication]
With Miller and Lakin's departure, Russavage and his wife became the sole major shareholders in Redwood Parks Lodge Co., and Russavage himself took on a greater role in building the company. But even before his old partners bowed out, Russavage was making other acquaintances in the local business community.
III. The victims
Russavage met Mike Harder sometime in late 2002, while Harder was in his second year working as a Morgan Stanley financial advisor. The two hit it off, and soon Harder, who had lived in the Orick/Klamath region much of his life, agreed to help raise funds for Redwood Park Lodge Co.
Harder and his co-worker, Hans Overturf, were by all accounts extremely successful and promising young employees, and they both traveled up and down the coast to meet with wealthy clients who sought their help in managing their investment portfolios. In at least one case, that of the elderly Crescent City couple, they shared responsibilities for particular clients.
The elderly man whom Harder, Overturf and Russavage allegedly victimized had a long and successful career as an investor and in the construction industry. The DA estimates that the man and his wife had $3 million invested with Morgan Stanley, and according to the DA investigator's report, the couple were extremely close with their financial advisors -- particularly Overturf, whom they considered to be "almost family."
Many of the specifics around the couple's investments in Redwood Parks Lodge Co. are unclear, but the report filed by DA investigator A. C. Field lays out a basic chronology, including the couple's interactions with Harder and Overturf from late 2002 through May 2003, the period when the investments occurred.
By the end of 2002, Harder had received a check for $100,000 from the couple for the purchase of Redwood Parks Lodge Co. stock. After receiving that investment, along with $40,000 from another source, Harder left his job at Morgan Stanley and took the position of chief financial officer at Russavage's company. Harder received a 10 percent finders' fee -- $14,000 -- on the funds he had raised.
The couple would make two more investments in Redwood Parks Lodge Co. over the coming months, and each time, according to the DA's office, both Harder and Overturf would be somehow connected with the transaction. On March 10, 2003, Overturf drove the couple to a meeting of shareholders in the company at Russavage's home, which Harder also attended. At the meeting, Russavage asked if anyone would be interested in purchasing more Redwood Parks Lodge stock -- a few weeks later, the couple bought an additional $30,000 worth. It's not clear if anyone else who attended that meeting also purchased additional stock.
Then, in late May, the couple bought $600,000 worth of Redwood Parks Lodge Co. bonds -- debt that the company was obligated to pay back to the couple in regular monthly installments of $4,000, according to Field. Though it is not clear what led to this investment, it is clear that Overturf and Harder showed up at the couple's home on May 22 carrying with them checks drawn off the couple's Morgan Stanley "margin accounts" -- money borrowed from Morgan Stanley and secured by their other investments. According to the DA investigator's report, the couple told him that they asked Overturf whether he thought it was a good investment, and Overturf told them that it was. They then signed the checks.
Field, who first met the couple only a month after this last investment was made, writes that it was immediately obvious that the couple were not in their right minds. When he first met them, at the office of a Crescent City attorney, Field said that the man could not remember the name of the company he had invested in nor the amount he was supposed to have invested.
Two weeks later, when the couple came to meet with Field in his office in the Del Norte County Courthouse, the husband forgot where he was and wandered out into the parking lot. When Field found him, the man "stated that he had left his wife somewhere" and needed to find her before he could talk with Field any further. Field ushered him back to his office, where the woman was waiting.
Though Overturf said he could not speak to the press because of the pending charges, his attorney, Russ Clanton, said last week that while the events that the DA claims implicate Overturf did occur, the DA has misinterpreted Overturf's role.
"There are areas of dispute in this case," Clanton said. "The question is, did Mr. Overturf recommend this investment to [the alleged victim]? And I think that the definition of what is or is not an investment recommendation is going to be at issue here."
Harder had not secured permanent legal counsel by the end of last week, and did not return repeated messages left at his home.
Several things happened shortly after the couple made the $600,000 bond investment. Russavage used the money to exercise Redwood Parks Lodge Co.'s option on the Orick mill site, and for a price of $530,000 the 38-acre plot that was to become the great lodge was finally in the company's hands.
Overturf was fired from Morgan Stanley in late June after his superiors found out about the Crescent City couple's investments into Redwood Parks Lodge Co. Soon after, they made the phone call that sparked the Del Norte County DA Office's investigation. (Asked to comment on Overturf's firing, a Morgan Stanley spokesperson would say only that the company was cooperating fully with the Del Norte DA's office, and that Redwood Parks Lodge Co. was never an authorized Morgan Stanley investment.)
Finally, sometime in late June or early July, Harder quit his job at Redwood Parks Lodge Co., as it no longer had any money to pay his salary.
When the company was flush -- basically, whenever the Crescent City couple made a stock purchase -- the payroll at Redwood Parks Lodge Co. flowed freely. Between late January and late June 2003, Russavage was taking home around $11,000 per month. Harder was getting about $5,000 per month, and Russavage's son, Joseph, brought on board as a staff engineer, was getting about $3,000.
In total, the company paid around $120,000 -- nearly the entire amount of the Crescent City couple's stock investment -- to its three staffers in five months. This was before the company had even bought any of the Orick property it wished to build its various projects on -- before it had any assets at all, except the option to purchase the mill site. That option was set to expire in September. If Russavage and Harder hadn't been able to get the $600,000 bond investment from the Crescent City couple, it is likely that the company would have lost the right to buy its flagship property.
The company had few other sources of funds, despite Russavage and Harder's efforts to sell it to local investors. One person who didn't bite at Russavage's pitch was Eureka businessman Rob Arkley, the founder of Security National Corp. and one of the wealthiest men in the county. According to Arkley, Russavage approached him sometime last year and asked him to invest several million dollars in his company. Arkley said he and his advisors closely went over the finances of the company -- something Russavage was "clearly not accustomed to," Arkley said -- and it didn't take them long to come to the conclusion that the company was a bad investment.
"It was such a clearly non-serious business proposal, it was hard to imagine," Arkley said. "Frankly, he kept going through it and I kept chuckling and laughing."
From financial records obtained by the DA's office, it appears that Arkley's assessment of the company was not uncommon. At different times, the company said that it was interested in raising anywhere from $10 million to $30 million from investors. But a list of Redwood Parks Lodge, Co., shareholders dated Jan. 1, 2004, shows that apart from the $730,000 invested by the Crescent City couple, the company had succeeded in raising only about $250,000 -- much of it from local investors, some from outside the area. (By way of contrast, Eureka's new Redwood Capital Bank raised $12 million in a few days, despite stiff competition in the local banking sector).
A statement of the Redwood Parks Lodge Co.'s cash flows dated March 9 -- a few days after the arrest -- shows that it had only $1,767 left in its accounts.
The fact that the company has foundered, though, doesn't seem to worry local shareholders. Sharon Arnot, wife of the late James Arnot, owner of Humboldt Land Title Co., bought $50,000 in Redwood Parks Lodge stock in 2003, and last week she vehemently defended Russavage against Riese's charges.
"I thought and I still think it's a good investment," she said. "It's a great idea -- it's perfect for the area. The city of Orick and the county of Humboldt would benefit.
"I have great faith in John Russavage. He's a very genuine, honest person. I don't think he's capable of what they've accused him of. But who knows what one will do for political reasons, such as the district attorney."
Hunter, the investor from Eureka, attended two different Redwood Parks Lodge Co. seminars for potential shareholders in the spring of 2003. With her husband and daughter, she ended up buying about $20,000 in company stock. Reached at her home last week, Hunter was furious at Riese and the Del Norte District Attorney's office.
"To see what this has done to these people -- I hope they hurry up and get this [case] on, because I want my pound of flesh," Hunter said. "This is wrong."
Hunter said that several other Humboldt County investors in the project -- including a local physician, Louise Minor -- had met with the Crescent City investors at the Russavage's home, and found the couple to be lively and charming, and apparently in full possession of their mental faculties.
"When they made the investment, they were very sound," Hunter insisted. "He [the man] was the one giving advice. He knew what was being done and how these things happened." Others who met the couple at the same meeting confirmed Hunter's characterization.
And it isn't only investors who are coming to the accused men's defense. In response to a request from his attorney, Overturf's clients, fellow Rotarians and other local friends -- including one of his former instructors and an administrator at his children's school -- filled his file in the Del Norte County Courthouse with letters of support. Perhaps the most interesting letter is a strong statement of confidence in the defendant by Dr. Anthony Whitney, a San Diego physician who happens to be the nephew of the Crescent City couple the DA accuses Overturf of financially abusing.
"I am pleased to write a letter of character reference for Hans Overturf," Whitney writes. "I had the pleasure of meeting Hans Overturf through my uncle approximately two years ago. Since then, I have met or spoken with Hans on several occasions. I have always found Hans to be pleasant, professional and trustworthy. I have appreciated his wise counsel."
Whitney -- who due to his medical training would presumably be familiar with the state of his aunt's and uncle's health -- may only be seeking to exonerate Overturf with this letter. Or he may believe that the DA's case is unfounded. Reached at his office last week, he declined to comment further.
DA Mike Riese isn't disturbed by the criticism leveled at his case. "Some people will say things when they don't have all the facts," he said last week. He declined to answer his critics directly -- "I won't try my case in the media, I'll try it in a court of law," he said.
Schaub said Riese has been trying the case in the media from the moment charges were filed. For instance, the DA ordered up a splashy arrest at Russavage's home when a simple phone call requesting that he turn himself in would have sufficed, he said. As he railed against Riese, portraying him as a headline-hungry prosecutor salivating at the prospect of taking down a company he doesn't understand, Schaub last week all but accused the DA of suffering from an acute case of Gallegos-envy.
"His statements in court made it very clear that he is on a mission to close down the company," Schaub said. "He thinks it's a bad deal, but no one asked him to invest. He purports to be acting on behalf of the victims, but he's victimizing other people."
Early in their illness, sufferers from progressive dementia have their good moments and their bad, Schaub said, and there's no reason to assume that the defendants would have been aware of the Crescent City couple's condition.
"The whole thing hinges on whether John and Mike and Hans were aware that the alleged victims were suffering from progressive dementia," he said. "There's a reason why they call it progressive dementia." (Riese said that the couple's family doctor would testify for the prosecution when the case goes to trial.)
But above all, Schaub said, he has a hard time seeing how the alleged victims were victimized. He said that despite the company's low cash balance, all scheduled monthly payments to the couple were current. If anything threatened repayments on the bonds, Schaub said, it was the DA's allegedly frivolous charges, which hurt the company's ability to raise cash. Schaub said the company was only two days away from getting a Small Business Administration loan that would have allowed it to completely refurbish the Gold Rush Cabin Complex when the arrests came down. The creditor has since withdrawn its offer, he said.
[LEFT: The "Gold Rush Cabin Complex": Some work had been done on these dilapidated structures, but that has come to a halt.]
Schaub also said that the company would be initiating its own investigation into management at the Eureka Morgan Stanley office, which he believes may have initiated the whole matter simply out of "professional rivalry" aimed at Harder and Overturf, their young, successful colleagues. (Morgan Stanley declined to comment.)
Russavage has been working pro bono for the company in recent months, according to Schaub. Since Harder left, the company has brought several prominent Orick residents -- including Phil Nesset and Joseph and Donna Hufford -- on to either its board of directors or its staff. They, too, are donating their work to the company, or working in exchange for stock. Through Schaub, Russavage told the Journal that he has invested $100,000 of his own money into Redwood Parks Lodge. After the salary he received in the first half of 2003, this would leave him with a net cash loss of some $40,000 since starting the company. (Russavage and his wife still own the vast bulk of Redwood Park Lodge Co. shares, though.)
Since his departure from the company, Harder has been supporting himself and his family by working as a commercial fisherman, Schaub said. As he has not been able to afford his own attorney, shareholders in Redwood Parks Lodge Co. have donated to his defense.
Overturf is reportedly doing very well for himself as manager of the Arcata Raymond James office, though his friends worry that the charges against him -- even if they are proven false -- will harm his reputation.
Only time -- and a jury of 12 of their peers -- will tell whether the defendants are guilty of defrauding two helpless old folks, or if the management of Redwood Parks Lodge Co. is guilty of nothing more than taking an ambitious idea and all but running it into the ground. The first pre-trial hearing is scheduled for May 5 in the Del Norte County Courthouse.
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