State criticized in Harmon case

A senior deputy attorney general said Monday that the state acted prudently before closing Harley L. Harmon Mortgage Co., but lawmakers suggested the probe went too long, costing investors millions of dollars.

The exchange between Doug Walther and the Legislature's Subcommittee to Investigate Regulation of Mortgage Investments was an extension of his testimony before the same body on June 30.

The subcommittee, meeting at the Grant Sawyer State Office Building, is considering potential new laws to prevent situations such as the Harmon case.

The Las Vegas company run by former Assemblyman Harley Harmon lost its state business license last December because it allegedly mishandled investments in mortgage loans. Hundreds of people invested a total of about $22.7 million with the company with promises of receiving up to 15 percent annually in interest. But few received returns on their investments and many of the loans went into default. Many people accused Harmon of using their money to pay investors in other loans.

Walther conceded that the state knew as early as March 1997 that Harmon's company kept incomplete files, paid some investors ahead of others and didn't have enough money to complete certain loans. But he said those "red flags" also raised numerous questions that needed to be answered before the state could take the drastic action of revoking the company's license.

"We wanted to thoroughly investigate this matter to ensure that the result would be complete and final," Walther said. "We didn't want to be embroiled in litigation."

But during the nearly yearlong probe, the company continued to handle more than $3 million in new investments or in funds that were transferred to other loans, all without public knowledge of the investigation. Assemblyman David Goldwater, D-Las Vegas, chairman of the subcommittee, argued that the state had enough information to close down the company in March 1997 instead of waiting nine months.

"We would have never had those huge investor losses," Goldwater said. "The general attitude is that we are erring on the side of the business, the licensee, and not the investors. That's the attitude we have to change."

The controversy over the length of the probe also has produced political fallout. Republican Scott Scherer, the former assemblyman who is challenging Democratic Attorney General Frankie Sue Del Papa this fall, has gained the favor of several investors by criticizing the probe.

Scherer, a former deputy attorney general, said he would have recommended to the state Financial Institutions Division that it give Harmon only a week or two to produce requested files before initiating license-revocation proceedings.

"If they (Harmon) had excuses, I would have said, 'fine, document your excuses,'" Scherer said. "A lot of times it comes down to how aggressive attorneys are willing to be to take an enforcement action. There was a lot of evidence that there were serious problems with this company."

Several investors remain peeved that no criminal action has been taken against Harmon. Assistant Attorney General Brooke Nielsen, who appeared with Walther, said there are many areas of consumer fraud where their office has direct jurisdiction to act. However, Nielsen said, the attorney general's office acts only in an advisory capacity to the financial institutions division. Walther added that any criminal proceedings would have to be initiated by the district attorney.

It was reported in February that Metro Police had launched a criminal investigation against Harmon, but Lt. Steve Franks of the financial-crimes unit was unavailable for comment Monday on the status of the case. Clark County District Attorney Stewart Bell said he had not yet received any request from Metro to prosecute Harmon.

The legislative subcommittee will meet at least once more this year before making recommendations to the 1999 Legislature. Meanwhile, Clark County District Judge Stephen Huffaker is scheduled on Sept. 8 to consider ways to return funds to investors through real estate assets that are being liquidated as a result of the defaulted mortgage loans.

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