Kelly Gearhart wins appeal, new sentencing hearing

Kelly Gearhart


Former North County developer Kelly Gearhart will receive a new sentencing and restitution hearing after the Ninth U.S. Circuit Court of Appeals ruled that Judge Otis Wright II erred in sentencing Gearhart to 14 years in federal prison. In 2014, Gearhart pleaded guilty to real estate fraud.

In July 2015, Judge Wright sentenced Gearhart to 14 years each on two counts of wire fraud and one count of money laundering to be served concurrently.

The appellate court determined Judge Wright erred in sentencing Gearhart to 14 years for money laundering even though, by statute, the maximum term is 10 years. The appellate court also determined Judge Wright did not devote enough time on issues related to enhancements and a currently sealed restitution amount.

Even though Gearhart will receive a new hearing, he is not guaranteed his sentence or restitution requirements will be lowered. During the new hearing, Judge Wright has the option of sentencing Gearhart to consecutive jail terms and to expand victims to include those who invested on projects other than Vista del Hombre in Paso Robles.

Gearhart and James Miller, the former president of Hurst Financial, defrauded more than 1,200 investors of more than $100 million in an alleged Ponzi scheme, which was first uncovered by CalCoastNews.

Gearhart bilked investors who put money into Central Coast real estate projects and then siphoned off the monies for other purposes. In July 2012, Gearhart was indicted by a federal grand jury on 16 charges of mail fraud, wire fraud, and money laundering.

If convicted on all charges, Gearhart faced up to 300 years in federal prison.

In 2014, Gearhart, now 57, pleaded guilty to knowingly and intentionally making misrepresentations and omissions relating to real estate projects to get people and businesses to trust him with their money. As part of the plea agreement, Gearhart was charged with three of the original 16 felony counts which reduced the maximum sentence allowable by law to 50 years in federal prison.

Even though Gearhart defrauded hundreds of victims, the prosecution based its case on Gearhart’s largest development, his Vista del Hombre project in Paso Robles.

“The bulk of the government’s case focuses on Vista Del Hombre because there is the strongest evidence of fraud,” prosecutors said in sentencing hearing documents. “There are, however, other projects and victims at issue in this case.”

As the result of the appeal, prosecutors can expand the case to include other projects in which fraud has been alleged in determining restitution amounts and the number of victims.

During Gearhart’s July 2015 trial, the prosecution said that Gearhart falsely re-conveyed loans in order to secure a loan from Heritage Oaks Bank, making both Heritage Oaks Bank and San Luis Trust Bank victims. By doing so, Gearhart allegedly stole the investors’ security interest by using the lots as collateral for the bank loan without the bank’s knowledge of the prior loans.

However, Gearhart’s attorney Firdaus Dordi argued that officers at the bank were aware of the prior loans. Judge Wright sentenced Gearhart without determining if the banks were victims or complicit.

The appellate court determined Judge Wright should have determined whether the two banks were victims of Gearhart’s scheme.

“If Heritage Oaks Bank and San Luis Trust Bank were not victims, Gearhart’s guidelines calculation would change with respect to the total loss amount as well as the enhancement for gross receipt of more than $1 million from financial institutions,” the order says. “Thus, the district court was required to make a specific factual finding as to this matter.”

Kelly Gearhart and James Miller

During his 2015 trial, Gearhart claimed that Hurst Financial principals James Miller and Courtney Brard made the false promises to the investors. Gearhart claimed he was a victim of Miller and Brard’s fraud because they only paid him a fraction of the total funds raised for Vista del Hombre.

The appellate court determined Judge Wright erred in failing to determine what roles Miller and Gearhart played in the fraud.

“Resolving the exact amounts that each individual investor loaned Gearhart may not materially change the sentencing determination because even if these disputes were resolved in favor of Gearhart, the amount of losses would still result in a Guidelines loss figure in excess of the $7,000,000 threshold,” the appellate court says in its opinion. “But the scope of the joint undertaking between Gearhart and Miller is directly relevant to whether all of the Hurst investors should be considered victims. Accordingly, we remand for the district court to make a specific factual finding as to the scope of the joint undertaking.”

In addition to asking for a new sentencing hearing, Gearhart’s attorney also argued for Judge Wright to be replaced.

The court denied Gearhart’s request to have his case assigned to a new judge, according to the Aug. 25 opinion.

“Finally, we deny Gearhart’s request for reassignment, as this case does not present the ‘rare and extraordinary circumstances’ needed to justify relief,” according to the opinion signed by Ninth Circuit Judges Consuelo Maria Callahan and John B. Owens, along with District Judge David A. Faber of the Southern District of West Virginia.