World-class surfers Andy and Bruce Irons are among dozens of investors owed millions by now-bankrupt Kaua'i mortgage lender James W. Lull.

Lull, Kaua'i branch manager of mortgage lender U.S. Financial Mortgage Corp. from 1994 to 2006, filed personal bankruptcy papers in December 2006, listing more than $31 million in debts and $6.7 million in assets.

The total amount owed by Lull is now believed to be $50 million, according to Stephen Jones, attorney for the trustee overseeing Lull's bankruptcy case.

The trustee, Ronald Kotoshirodo, alleged in court papers that Lull operated a massive "Ponzi scheme" that duped investors with false promises of high interest rate returns on low risk investments.

In a Ponzi scheme, early investors are paid promised interest earnings with money obtained from later investors. The scheme collapses when new sources of investment money dry up.

Lull has not been charged with a crime and his lawyer, James Wagner, denied that his client was operating a Ponzi scheme.

FBI spokesman Brandon Simpson said his office "can neither confirm nor deny if a criminal investigation is under way."

Lull now lives in Washington state and was unavailable for comment.

Wagner said Lull "borrowed more money than he should have" and could not repay it.

"For quite a few years, Mr. Lull was quite successfully managing people's money for them," Wagner said. "People were making a great deal of money from his investments."

Lull told investors that he was making "bridge loans" to real estate customers who could not qualify for conventional mortgage loans, and that the loans eventually would be repaid.

Lull said in bankruptcy papers that he owed $1 million to three-time world champion surfer Philip A. "Andy" Irons and his brother Bruce for unpaid loans the brothers made to him between 1998 and 2006.

Both men are in Australia competing in the Quiksilver Pro surf meet and couldn't be reached for comment.

'GAVE UP HOPE'

But their father, Bill Irons, said Friday that his sons "pretty much gave up hope" of recovering what Lull owes them.

"They're lucky compared to some of the people in this community" who did business with Lull, Irons said.

"They're young, they're successful, but some of the people here, they've lost their life savings," he said.

Irons acknowledged that Lull "did help a lot of people in the early years" he was doing business on Kaua'i but said that wasn't the case in the end.

"His friends, his business partners, he took them all. Stuff like this in a community this small just crushes people," Irons said.

While working at U.S. Financial, Lull developed what he called a "side-line business" of making his own loans to borrowers who could not qualify for conventional financing, according to bankruptcy papers filed by Kotoshirodo.

MONEY FROM INVESTORS

Much of the money that Lull used to make the purported loans came from well-to-do investors Lull had met and befriended through his real estate business.

He promised the investors that their money would be used to make short-term, low-risk loans that would return higher interest rates than available from other, more conventional investments.

In a ruling last month, Federal Bankruptcy Judge Lloyd King said one of Lull's investors, Donald Tipaldi, made 33 separate loans to Lull from 2004 to 2006 totaling $3,011,200, which Lull never repaid.

Attempts to reach Tipaldi and his lawyer were unsuccessful last week and yesterday.

Lull obtained the money "with the intent to defraud Tipaldi and to keep said money," the judge ruled.

King described in some detail how Tipaldi was duped.

In meetings at Lull's U.S. Financial office on Kaua'i, Lull would show Tipaldi "loan application files" from people who wanted to borrow money from the company but were not financially qualified, the judge ruled.

Lull told Tipaldi that if he "would make a short-term loan to these persons they would then qualify for a U.S. Financial loan and he would be repaid his short-term loan at a profit," King said in his ruling.

When the short-term loans became due, Lull "would inform Tipaldi that these persons required longer-term loans" but promise that Tipaldi would receive an interest in the borrower's property to assure repayment, according to King.

But Lull always delayed delivery of the promised paperwork, King ruled.

"Unbeknownst to Tipaldi, Lull was using a similar scheme with other investors, offering them security in the same real property," the judge ruled.

Tipaldi claimed in bankruptcy papers that Lull actually never made the bridge loans and "diverted the money" for his own use.

In March 2006, when Tipaldi pressed Lull for repayment, Lull wrote him a $300,000 check that bounced, King wrote.

NO LOANS MADE

Kaua'i couple Stephanie and William Britt said in their bankruptcy claim against Lull that he persuaded them to invest their life savings, $500,000, in two "short-term bridge loans" in 2006.

King upheld the Britts' claim, ruling that Lull falsely told the couple that the loans "had an 'extremely quick turnaround' and that the Britts would be repaid their loans in several months, with interest at the rate of 12 percent."

The loans were never made and Lull never repaid the Britts, King ruled. Lull did give the Britts a check for $517,500 in August 2006, but it bounced. He later promised to repay what he owed with money from a $1 million auction of a coin collection he owned.

"At the time he made those representations to the Britts, Lull had already pledged the proceeds of the coin auction to multiple creditors besides the Britts," the judge ruled.

As of September 2007, Lull owed the Britts $607,739, with interest on the unpaid debt accruing at the rate of $164 per day, King said in his ruling.

In trying to recover what they're owed, the Britts incurred more than $40,000 in attorneys' fees.

Elijah Yip, attorney for the Britts, yesterday said his clients had no comment on the Lull bankruptcy.

FIGURE IN DISPUTE

Wagner, Lull's lawyer, last week disputed the $50 million figure that the trustee claims is owed to Lull's creditors.

Wagner said he believes the sum is "probably between $10 million to $20 million."

He said that when Lull's financial problems began to intensify, he reacted in the same way many others have in similar circumstances.

"You start borrowing more money than you ought to, in the belief that that there will be a (market) correction," Wagner said. "His problems became unbearable in late 2006."

In financial statements filed with the court, Lull listed three pieces of real estate — two on Kaua'i and one in Idaho — as his principal assets. He estimated their market value at $6 million, but said the properties carried mortgages worth $8.4 million.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.