David Nilsen’s face twitches. The owner and broker of Cedar Funding nervously shifts in his leather seat inside Monterey County Superior Judge Marla Anderson’s courtroom. He wears a black suit, gray beard and glasses. The courtroom is full of people to whom he owes money, investors who are anxious to hear from Anderson. She will decide whether Nilsen can stay at the helm or appoint a receiver to take over his unraveling investment firm and mortgage fund.

In the front row sits Nilsen’s wife of almost 36 years, Angela, along with other worried family members and devoted employees. His clean-cut twin sons, David Jr. and Daniel, stand guard at the back of the courtroom. Investors chat while sitting on wooden benches. Many who have invested their life savings or retirement money with Nilsen still trust him.

“If people didn’t believe in him they wouldn’t have invested over $200 million,” says Jim Pederson, a Cedar Funding investor and Nilsen’s friend. An estimated 1,500 investors, most of them local, have a financial stake in Cedar Funding and affiliated companies.

Pederson, like many Nilsen supporters, describes the man as honest and honorable, someone who never would cheat his clients. But local lawyers and state regulators say Nilsen mismanaged investments, commingled funds and ran a “Ponzi” scheme.

Faced with mounting accusations and demands from some investors that he return their money, Nilsen tries to keep his cool on this day in court, but he is visibly distraught. In the eight years he has been doing business with Cedar Funding, Pederson says, this is the first time he has seen such anger in his friend.

“Through all these years he’s wanted to be the good guy,” Pederson says. “Now he is the bad guy, and it has confused him.”

Since the early 1980s, Nilsen has been brokering loans and, by numerous accounts, making money for investors on the Monterey Peninsula. He built up his hard money lending firm from a small office front to a business handling an estimated $160 million worth of loans.

But now his company is being scrutinized by investors, state agencies and the Monterey County District Attorney’s Office.

On May 26, Nilsen filed a petition for Chapter 11 bankruptcy protection. The filing lists more than 200 pages of creditors with liabilities valued between $100 million and $500 million. The move has stopped a court-appointed receiver from managing the fund and could keep Nilsen in the driver’s seat.

Just days before the bankruptcy filing, Anderson appointed receiver Gregory Sterling to run Cedar Funding and untangle what she described as a spider web of conflicted investment properties and construction loans. About a week earlier, the state Department of Real Estate stripped Nilsen of his real estate license, which means he can’t broker new loans or service old ones.

Over the past six weeks, lawyers filed seven lawsuits against Nilsen and his companies. Plus, the District Attorney’s office continues to probe Cedar Funding’s dealings. Annie Michaels, managing deputy district attorney for the office’s consumer protection unit, has declined to provide details of the investigation. But she did say the DA’s office has never handled a case comparable in nature and scope. “It appears to be a unique situation,” she says.

A spokesman from the federal Securities and Exchange Commission declined to confirm or deny any investigation into Cedar Funding.

Despite his considerable professional woes, Nilsen still garners support from some who chalk up his troubles to a dive in property values and tightened loan regulations. But others say greed or pride got him in this fix. From various investor anecdotes, a portrait emerges of Nilsen as an over-protective caretaker who stepped beyond legal bounds to keep properties out of foreclosure.

This is how it worked: When a borrower would default on a loan, Nilsen would try to rescue stalled construction projects himself, instead of foreclosing on the property and notifying investors. That happened in the case of a Southern California golf resort and RV park called Lake Elizabeth.

Nilsen’s rescue attempt was hardly a benevolent move, says Allen Kaplan, a lawyer who is representing investor Catherine Lau in the Lake Elizabeth property.

“He was taking care of himself by not letting anything go into foreclosure,” Kaplan says. “If he doesn’t have a record of foreclosures, he can keep collecting money.”

Nilsen declined to be interviewed for this story. His private attorney, Roy Gunter III, says Nilsen took over troubled properties so the investments wouldn’t get wiped out by foreclosure. “If there is anything that David has done,” Gunter says, “he’s been over-paternalistic.”

That paternalism carries over to Nilsen’s personal life, where family is extremely important.

“He’s a good father and he’s a good husband,” says friend and borrower Robert Van Zile, adding that Nilsen adores his two grandchildren. “He is one of the most doting grandfathers I’ve ever seen.”

Nilsen, 57, also is a devout Christian and an avid golfer.

“Dave is passionate about his golf,” Van Zile says. “He likes to use golf to get away from the stress of business. You don’t talk business when you are playing golf with Dave.” (Van Zile is named as a defendant and co-conspirator in a lawsuit connected to Cedar Funding; he denies any wrongdoing).

Bob Massaro, executive director of the Monterey Commercial Property Owner’s Association, got to know Nilsen last year when they organized the association’s golf tournament at Pasadera Country Club. Nilsen, association vice president, is honest and quiet, and has a strong work ethic, Massaro says.

And his hard work apparently has paid off: Nilsen lives in a Pasadera home valued at about $2.2 million, according to the Monterey County Assessor’s Office.

Born in Portsmouth, Va., Nilsen grew up in the San Joaquin Valley. He married Angela in 1972 in Santa Clara County and became licensed as a real estate agent in San Jose in 1975. He received his associate’s degree from West Valley Community College in Saratoga and earned a bachelor’s degree in real estate finance from San Jose State University. The couple moved to the Monterey Peninsula in the late 1970s, and bought a home in Seaside.

Nilsen began Cedar Mortgage in 1980. He sold the company in 1988 and started Cedar Funding because he wanted to switch to private money lending, according the company’s website. Hard money lenders charge high interest rates and pay large returns to investors because the loans often go to individuals or companies that don’t want to hassle with banks or can’t obtain traditional loans because of bad credit or lack of documentation.

Cedar Funding investor Maria Connolly remembers the 1980s when Nilsen and his wife worked out of a small office on Washington Street in Monterey. “He’s very low key, very smooth talking,” Connolly says.

Nilsen kept Cedar Funding all in the family. His son, Daniel, joined the office in 2004, followed by David Jr. in 2007. But as Connelly says, “[Nilsen] was always the Big Kahuna.”

Nilsen incorporated Cedar Funding Inc. in 2003. He is listed as the chief executive officer, secretary, financial officer and sole director of the firm, which oversees private investor funds. Cedar Funding Inc. also manages Cedar Funding Mortgage Fund LLC, a blind pool Nilsen used to make loans secured by deeds of trust. His lawyer for the receiver case, Shawn Mills, told Anderson at the May 22 hearing that Nilsen knows the company’s 150 loans by memory.

Nilsen also started numerous offshoot companies based out of Cedar Funding’s office. Accustom Development was the first to incorporate in 1997, followed by LLCs such as Black Creek Ranch and River Grove Park.

Nilsen was able to grow his business largely based on the success of the mortgage fund. Opening in January 2004, the fund attracted 1,150 investors by advertising 10.75 interest rates. The fund had a much lower buy-in than specific property investments: $2,000 for retirement accounts and $5,000 for non-retirement accounts. Plus, Nilsen’s nearly 30 years of real estate experience was a big selling point for investors.

A now-notorious ad, “The Good, The Bad, The Ugly” appeared in local publications starting in 2005. The ad said Cedar Funding’s 10.75 annual interest rate was the “good,” World Savings’ 3-month liquid CD at 2.35 percent was the “bad” and Washington Mutual’s Platinum Checking account at .4 percent was the “ugly.” Some lawyers and securities experts speculate that these ads broke federal securities laws because they didn’t disclose the inherent risk of such investments. Cedar Funding also ran pervasive ads on radio stations.

Santa Cruz resident Aneya Gengel invested some of her retirement money in the mortgage fund last year after learning about Cedar Funding on the radio. “You kept hearing it and hearing it,” Gengel says. She checked with her accountant and nobody had heard anything negative about Cedar Funding. Like many others, Gengel invested her individual retirement account with the company through Pensco Trust Co., a San Francisco-based firm that manages self-directed IRAs.

Churches like the Community Church of the Monterey Peninsula also joined the fund. The church invested $220,000, according to a list of fund members obtained by the Weekly. “The interest rate appeared to be a very good return,” says George Brehmer, vice president of the church’s board. Brehmer says the church used its investment like a bank account and made withdrawals while collecting roughly 10.75 percent interest.

Elderly investors, like 86-year-old Rheta Brumm, also put in their hard-earned cash. Brumm retired in Carmel after selling real estate for 30 years and started investing with Cedar Funding. “These people are honest people,” Brumm says of Cedar Funding staff. “I still have faith. We’ve made a lot of money with Cedar Funding.” Brumm wouldn’t divulge how much she has profited from her investment. She says hard real estate times are plaguing Cedar Funding now. Still, she is a plaintiff in the receivership lawsuit because she wants to protect Nilsen and his investors. “It’s not for the money,” Brumm says. “It’s to save him and save all the rest of the people.”

Business boomed. At the end of 2004, the company reported assets of about $6.7 million. Two years later, the report was $45 million in assets. Now there is an estimated $71 million of investors’ money in the mortgage fund and a total of $160 million between that fund and Cedar Funding Inc.

But while the mortgage fund was expanding, the California Department of Real Estate found some disconcerting real estate practices in an audit of the company. In October 2005, the department said Nilsen failed to file required reports for his company’s trust accounts dating back to 2001. The department in early 2006 alleged that Cedar Funding didn’t record deeds of trusts in the name of investors, which means their names weren’t formally tied to any property, putting their financial interests in jeopardy. Nilsen paid $10,000 in fines and the department withdrew a 100-day suspension of his license, providing there was no cause for disciplinary action for two years.

Tom Pool, department spokesman, wouldn’t say why the audit of Cedar Funding happened in the first place, but says that in general the state does investigations in response to consumer complaints.

Michael LePage of Carmel, lead plaintiff in the receivership lawsuit, says the audit was an early warning sign that the state virtually ignored.

“All the [Department of Real Estate] did was give him a fine and didn’t raise any concerns or alert the public about it,” LePage says.

Had he known about the state enforcement action, LePage says, he wouldn’t have invested with the company.

In June 2007, Nilsen’s accounting firm Hayashi & Wayland filed an independent auditor’s report with the state Department of Corporations that pointed to other questionable business practices. At the end of 2006, the report said, Cedar Funding had made $9.8 million in loans to entities like Accustom Development, which Nilsen owns. The fund’s circular, which spells out the company’s investment terms, says these so-called insider loans are prohibited.

Fund members are supposed to receive annual, audited reports, according to the operating agreement. But they never got this audit report.

By the time of the audit, investors already had started making a run on the bank. In an interview this past April, Nilsen said Cedar Funding had returned more than $20 million to investors in the previous 15 months. He said news of surging home foreclosures and declining real estate values scared investors. Adds Gunter: “The line of people that wanted to put in the fund dried up and the line of people that wanted to get out of the fund got longer.”

Some investors in specific properties didn’t receive interest payments in March. And then at the beginning of April, when fund investors checked their accounts, they found they had gotten a little more than 6 percent interest– without notice. This set off a flurry of angry investors, especially those who depended on their investment as income or cashed in their home equity to invest in Cedar Funding.

Bill Jackson, of Elkhorn, is among them. Jackson is 65 and retired. “My earnings are coming off of this interest,” he says. “This hurts me big time.”

Under terms of the fund’s offering circular, investors weren’t supposed to deposit more than 10 percent of their net worth into the fund. The document also clearly spells out that withdrawals are limited by cash flow. Many people apparently were so dazzled by the idea of a 10.75 percent rate of return and Nilsen’s good reputation that they didn’t read the fine print.

Worried investors still wanted to withdraw their money, and Nilsen turned them down. After trying unsuccessfully to get more details from Cedar Funding staff, investors started talking to attorneys.

Nilsen insists no investors have lost their principal. “The investors are secured by the real estate,” Nilsen said in April. “We’ve got to get money from the borrowers to pay the investors.” Cedar Funding was feeling fallout from the sub-prime mortgage crisis, he said, and investors would receive their payments once borrowers’ checks cleared. Nilsen held two meetings with investors at the Golden State Theatre and smaller meetings at his office. But not all investors were reassured.

On April 24, Monterey law firm Duffy & Guenther filed a lawsuit on behalf of six investors, saying Nilsen was running a Ponzi scheme by using new investor money to pay off earlier investors. The lawsuit set the framework for complaints to come, alleging that Nilsen recorded deeds of trusts in Cedar Funding Inc.’s name instead of investors or the mortgage fund, and that Nilsen made illegal insider loans to himself and Accustom Development. The suit implored the court to appoint a receiver to sort things out.

By this point, state agencies and the District Attorney’s office already had opened investigations. On April 30, the state Department of Corporations suspended the mortgage fund’s state permit, which barred it from raising money. The Department of Corporations cited the same audit report that Hayashi & Wayland generated in June 2007 and found excessive loans were made to Nilsen and his affiliate companies.

In early May, three more lawsuits by three different attorneys were filed against Cedar Funding to secure investors’ interest in properties across the state and to stop them from being sold. According to the lawsuits: Monterey dentist Stanley Post invested in a Belavida Road property that Nilsen put in his and his wife’s name after the borrower defaulted; Catherine Lau, a 71-year-old widow, took out equity loans against her house to invest in Lake Elizabeth; and George and Janece Havstad invested $658,000 of their retirement savings in three properties spread across Butte, Riverside and Fresno counties, and now are at risk of losing some or all of their money.

Meanwhile, the Department of Real Estate, following up on its last audit, started inspecting Cedar Funding’s books. Lawyers Thomas Duffy and Ralph Guenther also wanted to see company records. On May 2, Monterey County Superior Court Judge Robert O’Farrell ordered Cedar Funding to open its books. When the plaintiffs showed up at Cedar Funding’s office on Tyler Street on May 8 to examine the firm’s records, Cedar Funding locked its doors and turned out the lights, according to Duffy.

Mills argued during the receivership hearing that the Department of Real Estate was busy auditing Cedar Funding and that’s why Nilsen didn’t respond to the order. Duffy said Nilsen was in contempt of court.

On May 13, another lawsuit landed on Nilsen’s desk, this time a design professional’s lien. Nilsen had planned to turn the former Regency Theater at 426 Alvarado St. in Monterey into residential and commercial condominiums. The Monterey Planning Commission approved Nilsen’s permit in September 2006. Eric Miller Architects Inc. completed the design work but Nilsen never paid the firm, according to the lawsuit. The architect group says it’s due more than $95,000. The theater is one of the few vacant storefronts on Alvarado Street. Its walls are stripped. The front window is cracked and a notice for a long-past public hearing still is posted.

But owing an architect money is the least of Nilsen’s worries.

On May 16, a Cedar Funding investor filed yet another lawsuit. For more than 10 years Dwight Landon, a 95-year-old Monterey resident, invested with Nilsen on first deeds of trust. On the four properties named in the suit, the complaint says, Nilsen recorded the deeds of trust in his own name and “made advances of his own funds to pay the monthly interest so that fractionalized owners would be deceived as to the performing status of the loan.”

In regard to a property at 55 La Rancheria in Carmel Valley, Nilsen allegedly foreclosed on the borrower, Katherina MacGown, in February 2006 but didn’t tell investors. Until this past March, the lawsuit says, Nilsen continued to make interest payments, despite the fact that the property was foreclosed. This is where the allegation of a Ponzi scheme comes in. How could Nilsen continue to pay interest to investors if their borrower was in default?

Presumably realizing he was in trouble, Nilsen tried to fix things. Starting in early May, he began retroactively transferring deeds of trust from Cedar Funding Inc. into the names of the numerous investors. On May 19, for example, nearly 40 trusts were assigned in the Monterey County Recorder’s Office.

But by this time the Department of Real Estate had suspended Nilsen’s real estate license for 100 days. Among allegations in the department’s May 16 action was that Nilsen did not put almost $14 million of investor funds in a trust account and made nearly $38 million in insider loans.

Without a real estate license, Nilsen by law was barred from servicing loans. It seemed a single warp thread was all that was holding the carefully woven tapestry of Cedar Funding together.

Back in the courtroom, Nilsen paces around the defendant’s table, a stack of papers under one arm. He keeps looking at the courtroom entrance like he’s waiting for someone. Across from him, several lawyers in dark suits congregate.

Nilsen’s brother-in-law, Mike Olson, sits in the front row with other family members. “It’s sad seeing a good guy getting hounded by greedy lawyers,” Olson says. “He’s a good Christian man. He wants to do the right thing.”

When court begins, Nilsen sits by himself. Santa Cruz attorney Richard Damon tells the judge Nilsen has taken him off the case. Mills steps in as the new attorney and requests a change of judges. The hearing is delayed for two hours, after which Judge Anderson takes over from Judge O’Farrell.

Dozens of investors exit the courtroom and linger in the hallway. One woman holds cardboard signs that say “55 La Rancheria” and “Arlen B Chaparral Road,” referring to her investment properties. Many of the deeds of trust are divided among 10 or more investors and people have had difficulty locating others on their loan. Nilsen has offered to provide investor lists, but hasn’t followed through with everyone.

Despite the lawsuits and investigations, many investors still have faith in Nilsen. After all, their investments have paid off until recently. And the prospect of an outsider taking over their money frightens some.

Investor Mary James Capson sits on a courtroom bench wearing a sun hat. She calls Nilsen a wonderful man who deserves another chance.

“I think it would benefit us all if he could stay through this under strict guidelines,” says Capson, who has been investing with Nilsen for five years. “He’s been very good for the community. Think of all the contractors that have borrowed money and been able to do their work.”

When asked about Nilsen’s tactics of recording deeds in his companies’ names and making loans to himself, Capson’s tone changes.

“He blew it,” she says firmly. “He did some bad things. He should eventually have to stand up to every one of those. He also needs to get us out of this.”

Anderson disagrees. At the late-morning hearing, the judge questions how Nilsen or a manager of his choice could effectively run the business while faced with a flood of litigation and state enforcement actions. She compares Cedar Funding to a hemorrhaging patient.

Mills argues that only about 20 percent of the fund’s investors wanted receivership and attorneys solicited the clients through ads and other means.

Ultimately, Anderson appoints Sterling, of Receivers Inc., to manage the mortgage fund and Cedar Funding Inc. Sterling had to hire a locksmith to get into Cedar Funding’s office. But he soon had to return the keys to Nilsen.

Nilsen filed for Chapter 11 bankruptcy May 26 in the Northern California District of U.S. Bankruptcy Court in San Jose. Under Chapter 11, a business can reorganize its debt while continuing to operate free from litigation. The federal petition also trumps state rulings. “The bankruptcy filing overcomes the state court action in which I was appointed receiver so I no longer have any connection to the case,” Sterling says.

Charles Logan, Nilsen’s San Jose-based bankruptcy attorney, did not return calls seeking comment. Guenther, one of the attorney’s representing mortgage fund investors, says Nilsen wants to remain the debtor and manage Cedar Funding. Guenther has filed a motion asking for a trustee to be appointed to the case, who would act a watchdog over bankruptcy proceedings.

Although all investors’ claims will be consolidated in federal court, Guenther says they will shoulder more administrative costs than with a state court-appointed receiver. A trustee and his or her staff is allowed to seek reimbursement from the estate, Guenther says, and the creditors will be grouped into different committees and will have a right to professional help.

“The cost associated with the case is going to be very, very large, and I think that’s going to be in detriment of investors,” he says.

The bankruptcy judge will likely rule June 13 on Guenther’s motion for a trustee. A meeting of Cedar Funding’s creditors is scheduled for June 25.

Investors had just gotten used to the idea of a receiver. Now a bankruptcy trustee could be managing their investments. Melodie Chrislock says many investors, like her, are confused. She wants to know the status of the fund’s assets. “How much is the land that backs all our money worth now and what kind of oversight do we have over David?” she asks. “You want to trust him but at the same time you also want some real information. Some facts, not just wishes.”

It likely will be months before investors have any clear answers, and even longer before anyone gets money back.

Regardless of the outcome, Nilsen’s best prospects are paying back investors and staying out of jail. Still, though, his real estate reputation is in ruins.

Maybe he didn’t intend to defraud investors, but $14 million in missing trust funds reported by the Department of Real Estate is a big problem, to say the least. He clearly didn’t properly secure deeds of trust in each investor’s name and those of the fund. There also is strong evidence he wasn’t straight with investors about loans going into default. To top it off he apparently loaned millions of dollars to himself and his companies.

Sure, Cedar Funding investors would be hurting, regardless, because of the downturn in the real estate market. And yes, the nature of securities is risky. But ultimately, clients put their trust in Nilsen to invest their money wisely so they could send their kids to college, or retire comfortably, or simply pay their bills. Now they don’t know when– or if– they’ll see their money again.

Cedar Funding investors may file a complaint with the DA’s office at www.co.monterey.ca.us/da/pdfs/Cedar%20Funding%20Information.pdf.