Schlarmann testifies at Heath investment-fraud trial

Larre Schlarmann, who pleaded guilty two years ago to 10 felonies related to investment fraud, took the witness stand today in Corona to testify against his former business partners at Daniel W. Heath & Associates.

Schlarmann, 52, is currently serving a 15-year sentence in state prison for his role in what authorities say was a $190 million Ponzi scheme that preyed on elderly investors.

His 2005 guilty plea left three defendants in the case, who are now on trial. They are Daniel W. Heath, 50; Heath’s father, John, 81; and Denis T. O’Brien, 53.

Schlarmann entered the courtroom of Judge Ronald Taylor at about 9:45 this morning, wearing a shirt and tie with his hands cuffed in front of him. A baliff removed the handcuffs before Schlarmann was sworn in by the court clerk.

Speaking before a courtroom gallery that was largely filled with people who had lost money in the alleged fraud, many of them from Orange County, Schlarmann, under questioning from prosecutor Mike Quesnel, explained the history of his business dealings with Daniel Heath.

The two met in the early 1980s, when both were living in Chino and attending the same church, Schlarmann said. At the time, Schlarmann said, he was working in the grocery business, while Heath was working for Arrowhead Water Co. as a delivery driver and salesman.

About 1985, Heath went to work selling insurance for the International Order of Foresters, a fraternal organization, Schlarmann said. At about the same time, Heath loaned Schlarmann roughly $1,500 to set up shop as a mortgage broker in Chino. Schlarmann later moved his business to Big Bear.

In Big Bear, Schlarmann found himself trying to arrange financing for the owner of a small resort who wanted to expand into an adjacent property. Heath helped Schlarmann raise the money by arranging for some of his Foresters clients to make loans to the project, Schlarmann said.

Later, the resort property went into foreclosure, leading one of the investors to sue Heath and Foresters, Schlarmann said. When Foresters found out that Heath had been directing its members into outside investments, Heath’s employment with Foresters ended, Schlarmann said.

Heath nevertheless continued to raise money for investors to finish work on the resort property and operate it after it was foreclosed on. The property became known as Big Bear Manor and was owned by Heath and Schlarmann.

Big Bear Manor lost money for virtually the entire time that Heath and Schlarmann owned it, which was about 13 years, Schlarmann said. Heath continued to raise money from investors to cover the operating losses of the resort, Schlarmann said.

In 2004, when Heath’s offices in Brea and Hemet were raided and shut down by state and federal investigators, the resort probably owed more than $3 million to Heath’s investors, much of which was in the form of unsecured loans, Schlarmann said. Those investments were never “safe and secure,” Schlarmann said.

Prosecutors have previously shown the jury marketing materials that Heath gave to investors, which promised safe and secure returns to senior citizens.

After Heath’s firm was shut down, a court appointed receiver sold Big Bear Manor for about $1.2 million to Schlarmann’s brother, Schlarmann said.

The trial, which is starting its second week, is expected to last eight to 12 weeks. Schlarmann will continue testifying this afternoon.