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Lundy assured his friend that this would be a safe investment, in part because his loans would be piggybacked onto larger loans from institutional investors, a lending practice commonly known as "second" financing.
Property owners like McConville can take out any number of loans using their property as collateral, but the loans should add up to only a percentage — usually 70 to 90 percent — of the assessed value of that property. The higher the appraisal, the bigger the loan. Should borrowers start defaulting on payments, first lenders are paid first, second lenders second, and so on (based on the sequence their loans are filed with the county). All the lenders have the right to initiate a foreclosure.
Second financing is risky because in the event of a foreclosure, if the property has fallen sufficiently in value, there will be no money left to pay the second. It's called being "wiped out," and it's happening to a lot of people these days.
But Narraway trusted that the lenders on which he was piggybacking his loans had done their due diligence to check for indications of fraud before shelling out. His best friend Lundy already had $400,000 of his own invested with McConville's companies, and had recruited three other friends and clients to do the same. Plus, all of the loans would be insured by title companies, which would be liable if any forgery was later found on the title documents.
Narraway said his first mistake was relying on others to research McConville and his companies. If he had done it himself, he might have come across McConville's 1998 criminal conviction in Alameda County for reportedly siphoning insurance payments into his own bank account after a fire destroyed a hotel he owned in Richmond, instead of paying off debts he owed. One trip to the Alameda County Clerk-Recorder's Office would have revealed that McConville owed what is now roughly $1.3 million in state taxes.
In December 2003, Narraway loaned $300,000 to one of McConville's companies, secured by a multiplex in Oakland. County records indicate that in 2004, Narraway made two more loans to McConville's companies, one for $345,000 secured by a property in San Francisco, and another for $130,000 secured by one in Pleasant Hill. In 2005, he loaned $350,000, which was secured by a house in Fremont.
In October 2005, after Narraway made his final $750,000 loan to Emerald, he had $1.875 million invested with McConville, secured by five Bay Area properties. Narraway expected to see $180,000 per year in payments from McConville's companies, which included the 10 percent interest on each loan.
Narraway's final loan was secured by a 41-unit rental building in Bay Point. County records show that Emerald already had a $2.75 million loan from LaSalle Bank (later bought by Wells Fargo) secured by the same property, which according to a 2006 loan application was appraised at $6.5 million and brought in $62,000 per month in rent at full capacity.
For more than three years, Narraway received regular checks, and thought he was on his way to retirement. Then, last October, Narraway said the checks stopped coming. He went to Lundy, who said that McConville promised it was just a hiccup. Narraway didn't realize it at the time, but other investors were trying to reach McConville for the same reason. They wanted to know what happened to their checks, especially if McConville was still collecting rent on the properties.
Two months and no checks later, Narraway decided to do some of his own digging. He drove from his home in San Francisco to the Contra Costa County Clerk-Recorder's Office and looked up the deeds related to the properties that, in essence, represented his life savings.
Narraway says that in the first 15 minutes of his research, he found a document stating that the Pleasant Hill property that had been acting as collateral for Narraway's $130,000 loan to Emerald had been sold to someone named Marcus Campagna in March 2008. He says he was never told about the sale, and was never paid back his $130,000. Narraway figured that if Emerald no longer owned the property that was supposedly acting as collateral for his loan, the company might have little incentive to pay it back.
After sitting down with Lundy and a lawyer to look over the documents, Narraway learned that it indeed appeared the Pleasant Hill property had been sold without his knowing. He called the new owner to ask what was going on. Narraway says that Campagna told him that he had no idea there were any other claims on the property. It was, Narraway said, his "Oh my God" moment.
Narraway tried to contact Independent Closings, the escrow service paid to handle paperwork for the real estate transaction, to ask how a loan for $130,000 could go unnoticed at the closing of the sale, but his e-mails were not returned. Representatives from Independent Closings also have not returned calls from SF Weekly.
It soon dawned on Narraway that if McConville had sold one property and left him unprotected, it may have happened to others. Sure enough, a little more digging revealed more unpleasant surprises.
Narraway found that the title documents for the Bay Point property had not been signed by McConville, but were instead signed by someone named Jack Thomas, who claimed to be CEO of Emerald Park House Corporation. Narraway had never heard of Thomas; his name did not appear on any of the California Secretary of State's filings as being an officer for Emerald with legal capacity to sign. A phone call to Thomas revealed that he was a foreman who had worked on McConville's properties. Thomas said he had been promised a kickback from McConville for signing — $20,000 for anything over $1 million, $10,000 for anything under.
Thomas subsequently wrote a statement that Narraway included in the packet he sent to Wells Fargo before the foreclosure sale. "I believe I was duped into signing the documents by McConville," it reads, "and now insist the contract be deemed void."
