business

On a spring day four years ago, a tense excitement spread through a small conference room in Eagan.

Ted Waitt, the marketing visionary and self-made billionaire who founded computer-maker Gateway Inc. on his father's farm in Iowa, had arrived in a limousine at the corporate headquarters of Lakeland Construction Finance LLC, then one of Minnesota's largest lenders to residential builders and developers.

Clad in jeans and a tie-less dress shirt, Waitt spoke glowingly of Lakeland's management team and its growth plans. Though his talk lasted only 20 minutes, he was the star of the show -- the business genius many bankers had come to see.

Waitt promoted Lakeland and bankrolled its rapid growth. Now, his investment firm stands accused of profiting as the lender collapsed.

When Lakeland's money ran out, more than 20 subdivisions on the outskirts of the Twin Cities and St. Cloud stood unfinished and abandoned. Hundreds of families that built in places like Summit Hills in Dassel, Minn., now live in half-finished suburban ghost towns, surrounded by overgrown weeds and partially paved streets.

Lakeland's demise stands as one of the worst chapters in Minnesota's housing bust. It left local governments on the hook for millions of dollars to complete roads and utilities.

Bankers who once believed in Waitt are now suing his investment company, alleging it raked in payments from Lakeland, starving it of cash when it was needed most. Lakeland, unable to pay $425 million owed the Bank of Scotland, is being liquidated by a court-appointed receiver who has accused Waitt's company of fraud.

Waitt did not return repeated telephone calls, and an official with his investment company, Avalon Capital Group of La Jolla, Calif., refused to comment. In court papers, Avalon has denied wrongdoing. Waitt, who was not sued personally, isn't required to reply in court.

Lakeland prospered during the housing boom, but took risks that in hindsight seem reckless. It lent money to builders without getting appraisals and rolled over unpaid debts, hoping for a future payday. It had a maverick culture that may have appealed to Waitt's risk-taking zeal, according to people who know him.

"If he had a choice between doing business with a Goldman Sachs banker with 20 years of experience and some scrappy guy with no education, he'd take the scrappy guy all day long," said Eric Haskel, a former portfolio manager at Waitt's investment firm. "Ted operated by gut feel."

From farm to Forbes

A decade ago, Waitt was 37, and worth $4.6 billion.

The cattle broker's son had come a long way from an old farmhouse near Sioux City, Iowa, where he and friend Mike Hammond got started in the technology business by repairing Texas Instruments computers. He got a loan to start Gateway using his grandmother's $10,000 bank CD as collateral.

Joan Waitt, Ted's mother, who still lives in Sioux City, recalls being angry when she discovered that her son, the youngest of four children, had dropped out of the University of Iowa. But he never liked books and was not one to sit still, she said.

"Even when he was a toddler, we had to fence off an entire area of the yard because he kept climbing out of his playpen," Joan Waitt said. "Teddy was always a busy bee. He eats fast. He walks fast. He bicycles fast."

Gateway, with its cow-spotted boxes and creative advertising, made big profits. Waitt became a fixture on the Forbes list of 400 richest Americans and moved to La Jolla, Calif.

His billion-dollar investment firm, Avalon, operated out of a small office overlooking the Pacific surf. There, a team of bright, young investment managers scoured the planet for places to invest Waitt's money.

Waitt, who was Avalon's CEO, sent Avalon employees to exotic places, from Dubai to Sao Paulo, Brazil, searching for innovative startups and the latest trends. He fired off ideas on his Blackberry at all hours of the day and night. "Working for Ted was like a career on speed," Haskel said. "A lot of his ideas we never pursued because they were just too far out there."

In 1999, two former Northwest Airlines executives made a pitch that got Waitt's attention. They planned to create a non-bank lending company that would forge tight relationships with builders and developers, arranging short-term construction loans to purchase land and create subdivisions.

The company, which they named Lakeland, would finance projects in fast-growing suburbs like Blaine and Albertville, where land was cheap and banks scarce. Waitt liked the idea. His Avalon Capital invested about $10 million in return for control of Lakeland and the right to most of its profits.

"Ted was the rock star that Lakeland needed," said Kurt Manley, a Twin Cities developer and one of Lakeland's largest borrowers. Having a billionaire investor also helped the company raise more money from bankers and pitch its loans to developers. "He had a certain magnetism about him, because of the money he had and who he is," Manley added.

Waitt left the day-to-day running of Avalon and Lakeland to others. Within three years, Lakeland had lent $84 million to developers for new subdivisions, and it took off from there. In another three years, the company lent more than triple that amount on more than 200 projects across Minnesota.

He didn't get rattled when one of Lakeland's founders and top executives was charged in 2000 with embezzling $355,000 in an earlier job with a rival finance company. After pleading guilty to mail fraud, Robert Machacek avoided going to prison, but lived for nine months in a halfway house, showing up for work as Lakeland's chief operating officer wearing a monitoring device on his ankle.

Waitt even vouched for Machacek's character, one bank's lawsuit says. That happened several years later, when the Bank of Montreal grew worried about Machacek's record. Waitt allegedly told a banker "he was extremely supportive of Machacek and very comfortable with his role of heading up Lakeland's loan origination and underwriting operations," the bank alleges.

The investment in Lakeland turned a comfortable profit. Low interest rates and affordable gasoline fueled a building boom in many places where Lakeland financed new housing. By 2005, Lakeland was making a remarkable 40 percent margin, according to financial statements filed in court. As Lakeland's largest investor, Avalon had made back its initial investment and was collecting up to $5 million a year in profit distributions.

Yet Waitt's charitable foundation lost money on a Lakeland-financed project. It lent $2.1 million in 2002 directly to the developer of a Sherburne County housing project. The developer defaulted on the foundation loan and other loans from Lakeland.

Waitt's role changes

In 2005, Waitt's career took a dramatic turn.

Gateway had been struggling, and its acquisition of eMachines didn't turn things around. Gateway closed its stores and fired three-quarters of its employees. The future for PC makers looked grim, and Waitt called it quits after 20 years as chairman.

Waitt still had plenty of energy and much of his fortune. He also had eclectic interests from the scientific to the scholarly. His nonprofit Waitt Institute for Discovery helped finance an ambitious project to map the human genome. The institute restored and translated the Gospel of Judas, and led a deep-sea search for Amelia Earhart's plane, which disappeared in the Pacific Ocean on her 1937 around-the-world flight.

He also gave more attention to Lakeland. In 2005, he recruited Joseph Burke, a former executive at Gateway and Blockbuster Entertainment Corp., to run the company. Lakeland executives began making trips to Southern California to update him and other Avalon officials.

Lakeland had visions of becoming a national company and opened two offices in South Carolina.

Avalon injected more capital into the Minnesota firm. That helped Lakeland borrow more money to lend to developers. In 2006, Waitt made a guest appearance at Lakeland's annual meeting in Eagan, at a time when some lenders had "grown a bit skittish" about its expansion plan, said Chad Anderson, a business banking officer at Winona National Bank, which is no longer a lender to Lakeland. Waitt assured the bankers that he agreed with the expansion and planned to invest in Lakeland "for the long haul," Anderson said.

Avalon also gave Lakeland a $10 million line of credit -- with Waitt's personal signature -- as collateral for bank loans. The signature impressed bankers. "It sent a message that he was willing to put his money where his mouth was," said Marc Timm, senior vice president of Bay Bank of Portland, Ore.

International banks also had grown interested in Lakeland. In 2005, the Bank of Montreal agreed to buy up to $150 million in Lakeland loans, enabling the Minnesota company to offload risk and make more loans. Two years later, the Bank of Scotland replaced financing from more than 20 smaller banks in a $425 million deal that it soon would regret. Small banks got off the hook.

By then, Lakeland had built a reputation for repeatedly extending short-term loans until housing projects were finished and the developers could pay them off. In many cases, Lakeland issued multi-million-dollar loans without insisting on real estate appraisals, according to developers. In return, Lakeland sometimes tacked on fees that surprised and angered developers, who called them "spiffs" or "kickers."

As a specialty lender, Lakeland operated largely free from regulation. No state or federal agency examined its finances or loans. Yet the firm financed real estate deals with money borrowed from government-insured banks, putting them at risk.

Blame for risky loans

In mid-2007, the housing market began its slide.

Developers said they began having difficulty getting Lakeland's approval to pay contractors under their credit lines. Construction on many Lakeland-financed projects began to slow. Rumors began to circulate that the firm was running short on cash and might not survive.

Yet in September of that year, Lakeland transferred to Avalon $67.5 million of the money borrowed from the Bank of Scotland. Later, a court-appointed receiver alleged in a lawsuit that the transfer was fraudulent because Lakeland was insolvent at the time. Avalon disputes the claim, saying the money repaid a Lakeland debt.

Lakeland defaulted on its $425 million debt to Bank of Scotland in early 2008.

Now, a major creditor alleges that Waitt's investment firm bears much of the blame.

The investment arm of Bank of Montreal alleges that Avalon took in from Lakeland more than $100 million in loan payments and equity distributions, leaving the construction lender undercapitalized. The Montreal bank also alleges that Lakeland overstated the value of projects, and that Waitt knew, or should have known, about risky loans. The bank claims to have suffered losses in excess of $100 million.

Not everyone is suing. Emily Handy, a housing developer in Spartanburg, S.C., said she tried to contact Waitt for help after Lakeland cut off funding for her project, forcing it into bankruptcy. She said she never heard back, and isn't surprised.

"I doubt that even Ted Waitt has the money to pay everyone that was hurt by this," she said.

Waitt now has new interests. His mother said she gets three or four e-mails a week from her son about them. Just a week ago, he sent her a photo of a new fish species discovered during his institute's search for Earhart's plane, she said.

"Now his big thing is he wants to save the oceans," she said. "I told him, 'Teddy, you've got so much going on, maybe you should specialize in something.'"

Chris Serres • 612-673-4308