Looks like wood, but....
Read part one of this two-part story.
On February 21, 1985, assistant U.S. Attorney Judith Hayes was invited by Michael and Peggy duPont to attend a meeting at the office of their attorney, James Lorenz.
Rodger Morford: “The Gutierrezes’ sample was beautiful. It was carved just like a real wood door.”
In the conference room at Finley Kumble & Wagner in downtown San Diego, Hayes confronted about fifteen people who claimed to have been swindled by Walter and Alex Gutierrez, proprietors of a “secret formula” to make artificial wood and concrete, a miracle invention employing the use of weeds and other inexpensive “junk” that was touted to be the greatest industrial discovery since plastics.
Antonio Miguel: "If the Gutierrezes spend one dollar, I will spend ten. If they have one lawyer, I will hire ten."
Many of these people, whose dealings with the Gutierrezes spanned eleven years, had traveled from various cities throughout California to attend the meeting. Hayes, along with two Internal Revenue Service investigators, listened as each person recounted his involvement with the Gutierrezes’ local companies. Imperial Dynamics and W&A Research Associates.
Charles Seviour: “I'd gone to industry, I had the orders, all I needed was the material.”
The stories, some told in anger and frustration, were strikingly similar. Every investor had put up money (between $10,000 and $250,000) in exchange for the secret technology to manufacture Impervium (artificial wood), Impervicon (artificial concrete), or Ceramicon (artificial ceramics).
Eugene Dedlow: “No dice. We want it now or we sue.”
But in more than a decade,no one had ever actually seen a significant amount of raw material, no one had ever mass produced a single product line, and no one had ever made a nickel off the formula except the Gutierrez brothers.
In just about any city other than San Diego, which is vying tenaciously for the distinction of “fraud capital of the universe,” all this would seem highly implausible.
Gunstock made from Impervium
These were intelligent people, some with impressive credentials in business and industry. Yet they’d violated all standards of business prudence: they invested substantial sums of money without first verifying the products’ cost effectiveness; they signed booby-trapped licensing agreements; and they neglected to check the Gutierrezes’ track record, which is nonexistent.
Dick Thompson: “I didn’t want to believe they were frauds.”
There was something mysterious, downright mesmerizing, about the buzz words the Gutierrezes used to describe the secret formula — “high-fusion science”; “chemical cross-linking”; “molecular linear fibers.” For some reason, mere mention of the formula shuts down the critical thinking process like a drug and takes the imagination on a wild and reckless ride — straight to bankruptcy. The stories told at the February 21, 1985 meeting suggested an extremely sophisticated and possibly massive fraud perpetrated by the Gutierrezes, a series of systematic contract violations (many of which had been wrangled about in civil courts) that had somehow escaped the eye of federal authorities for more than a decade.
The meeting at Lorenz’s office had broad implications for the government. For about one year it had been investigating Michael duPont — a member of the E.I. du Pont chemical family from Wilmington, Delaware and the president of a San Diego firm called duPont Energy Control Corporation (duPECC) — and was preparing a fraud indictment against both him and his wife Peggy. Through the duPonts, duPECC, which was involved in a joint venture with the Gutierrez brothers and was to act as their manufacturing arm, had disseminated what app>eared to be wildly unrealistic, possibly fraudulent claims concerning the virtues of the Gutierrezes’ “secret formula.” Based in part on these claims, duPECC had managed to sell more than one million dollars in stock to 250 people, some of whom had complained to authorities when they failed to receive returns on their investment. The duPonts had been telling the government all along that they had tried in good faith to make their company successful, but because the Gutierrezes had repeatedly reneged on promises to provide formula material for production, duPECC had been bled white by negative cash flow. In sum, the duPonts were saying they were victims, not instigators, of a fraud.
The government already suspected the Gutierrezes and knew about at least some of the people who assembled in Lorenz’s office last February. But it had no idea so many people out there were telling the same story about these two short, stocky Mexican-Americans from Chicago. In the weeks that followed, the duPonts, who had been conducting their own makeshift investigation, arranged for eight more “victims” to meet with Lorenz, who turned over all information on them to the U.S Attorney’s office.
Most of the information contained in this article is known by the federal investigators. Presumably they know far more. Almost all of the sources for this story have been interviewed by the IRS and the FBI, and several have appeared before a federal grand jury investigating the Gutierrezes. Based in part on the information received from these people, last May the FBI entered the Arjons Drive office of Imperial Dynamics, near the Miramar Naval Air Station, with a search warrant and confiscated company records, equipment, and samples of the Gutierrezes’ products. Yet nearly a year later no indictment against the Gutierrezes has been filed, and the two brothers, now believed to be in Orange County, are still actively seeking venture capital in their formula.
If the past informs the future, we can only assume they’ll get it. Their samples of Impervium and Impervicon products are so good, and their sales presentation so effective, that dozens of business people of varying degrees of sophistication have sp)ent more than five million dollars on formula-related ventures in the past eleven years. What follows is a typical response to the Gutierrezes’ presentation; it is an excerpt from a 1982 letter written to Alex and Walter Gutierrez by Sheldon Coleman, Jr., of the Coleman Company, Inc., a Kansas-based manufacturer of camping items that also owns Hobie Cat. “First off. I’d like to thank you for your presentation of products. I am completely amazed and awed by your abilities. The scop>e of applications is unending. I find myself thinking of more potential uses every day, almost every hour. After seeing your spectrum of accomplishments, I have tremendous resp>ect for your ability to do the impossible; not just once, but time after time.” Coleman continues later, “I see your capabilities as staggering. I want to be on the leading edge of technology .... I certainly am hopeful of the future with Imperial Dynamics materials. I’ve never seen anything like them.”
The first San Diego company known to have involved itself with the Gutierrezes was Vanont Inc., an importer of jute formerly of Mira Mesa. Vanont, owned by the Chiaravanont family from Bangkok, Thailand, created Imperial Dynamics in 1974 in order to manufacture a variety of artificial-wood products using a slurry made from a mixture of the Gutierrezes’ secret formula and their own jute fibers. Unlike later companies, Vanont did not enter into a licensing agreement with the Gutierrezes. Rather, it actually bought the secret formula, offering the brothers fifty percent of Imperial Dynamics’ stock as payment. As co-proprietors of this potentially revolutionary technology, the Chiaravanonts insisted on placing a copy of the secret formula in a safe-deposit box at the Balboa-Genesee branch of the Bank of America. This box could only be opened in the presence of a Chiaravanont and a Gutierrez, though the Chiaravanonts never actually saw the formula. Except for the absence of a licensing agreement, the relationship between the two entities resembled those the Gutierrezes would form in the years to come: the Chiaravanonts would put up money for marketing, salaries, equipment, and distribution of products. The Gutierrezes, in return, would offer knowledge of their extraordinary trade secret.
Charles Seviour was named president of Imperial Dynamics by the Chiaravanonts in 1975. His job was to hire personnel, set up production, and sell the products. Making sales, he soon discovered, was child’s play. Armed with impressive samples and a pitch about how Impervium could alleviate the worldwide shortage of wood, he flew all over the country and in less than four months booked three million dollars in sales orders to manufacturers of caskets, plant pots, hoe handles, prostheses for amputees, shoe heels, decorative statues, tables, and numerous other items typically made with wood. According to Seviour, a company would give him a product it manufactured using wood a table leg, for example — and the Gutierrezes would reproduce it using the secret formula. ‘‘I’d take the duplicate back to the company and they honestly couldn’t tell the difference,” said Seviour recently in a long-distance call from his present home in Minnesota. ‘‘These companies were giving me orders for hundreds of thousands of items per week. It got to the point where I was hiding from people because they wanted more and more orders.”
Representatives of Union Fork and Hoe, a major manufacturer of shovels, forks, and hoes, witnessed a demonstration in which a 4000-pound fork lift ran over a hoe handle made of Impervium. The handle remained intact, much to the delight of UFH. Charles Seviour made a presentation to the Mattel Company, where he encountered similar enthusiasm. Mattel, which wanted to make toys out of artificial wood, even gave Seviour a $10,000 check “to ensure their place in line when production began.” However, before Mattel officials would put down more money, they insisted on coming to the Mira Mesa plant, meeting the Gutierrezes, and observing operations. “The Mattel people were completely disenchanted,” says Seviour. “These were seasoned engineers, and what they got from the Gutierrezes had no rhyme or reason. They just didn’t get the answers they wanted. If there had been anything there, Mattel would have bought it.” Seviour saw to it that Mattel got back the $10,000.
In later years, one of Imperial Dynamics’ few tangible assets was a custom-made injection mold machine that was paid for by the Chiaravanonts. In 1976 Imperial Dynamics attempted to mass produce an order for 250,000 imitation redwood flowerpots. However, the machine, while pumping the pasty secret formula into molds, would continually clog. The so-called goop, which is soft and mushy in its natural state, was activated by a catalyst, or hardening agent, just before it reached the mold. The catalyst worked so fast, though, that hardened material would accumulate in the injection nozzle and clog it. In the end, most of the pots were made by hand (the same way all the Gutierrez samples were). But they were much too heavy and brittle, and during shipment to Los Angeles there was severe breakage. The contract was never fulfilled.
Seviour, who had been an executive for thirty years in major corporations, became concerned when he realized that the Gutierrezes were not proceeding with production to meet even his initial orders. He began having serious doubts that the Gutierrezes’ wonderful samples, which were made painstakingly by hand under ideally controlled circumstances, could ever be produced on a large scale. So he asked for specific information about the formula in order to conduct a cost analysis and determine whether mass production was even feasible. The Gutierrezes refused to give him the information. When he asked for evidence of what the Gutierrezes had successfully produced in the past, he encountered the same resistance. “I told the Chiaravanonts I’d gone as far as I could,” Seviour recalls. “I'd gone to industry, I had the orders, all I needed was the material.” He eventually delivered an ultimatum to the Chiaravanonts: “Either the Gutierrezes tell me what’s in the formula or I quit.” According to Seviour, the Chiaravanonts “wouldn’t take the chance of upsetting the Gutierrezes” and refused to push them on the issue, even though Seviour made it clear he didn’t need to know the exact proportions of the ingredients in the formula and was thus respecting the Gutierrezes’ proprietary rights. So after about eighteen months on the job, and after obtaining three million dollars in sales orders, Seviour resigned from Imperial Dynamics.
Several months later, in late 1976, another Imperial Dynamics employee, also frustrated by the lack of production, pressed the Gutierrezes for information about the formula in order to analyze costs, but he was no more successful. He resigned as well, advising the Chiaravanonts to “get out and take their losses.” The Chiaravanonts followed his advice and abandoned Imperial Dynamics after losing $750,000. The company was eventually acquired outright by the Gutierrezes.
Seviour attended the February 21, 1985 meeting at James Lorenz’s office. In the room was a Los Angeles businessman who had contacted Seviour some years before and asked about the Gutierrezes. “I told you to take your money and go home,” Seviour said to him. The Los Angeles man, whose company paid $250,000 to the Gutierrezes for access to the secret formula technology, replied shamefacedly, “Charlie, I should have listened to you” Some of those at the meeting viewed a 1984 videotape of Walter Gutierrez on The 700 Club. Seviour, who hadn’t seen the Gutierrezes since 1976, was surprised at how Walter’s image had changed and how much more effective his sales pitch was. “I was amazed at the turnaround,” says Seviour. “He dressed well, he looked well-to-do, and he was much more polished than before.”
In January of 1982, Los Angeles financial consultant Eugene Dedlow received a phone call from an old friend in Tijuana named Antonieta Flores Lara, who told him about a new business she was involved in — the manufacture of artificial wood and concrete. Flores (who now lives in Chula Vista) had agreed to put up $300,000 toward a one-million-dollar license that would give her exclusive rights to manufacture and sell fireproof shake shingles in San Diego County. But she was short $30,000. Might Dedlow want to invest?
The consultant came to San Diego several times and met with the Gutierrezes at their Mira Mesa facility. According to Dedlow, who is a native of Aigentina, the Gutierrezes spoke to him in Spanish, his mother tongue, and appealed to their blood bond: “Gene, you’re a Latin like us; we’re going to give you a golden opportunity,” they told him. As with others before and after him, Dedlow had no time for doubts about the Gutierrezes. At one meeting, when Dedlow put a lighter to a supposedly fire-resistant shake shingle, it smoldered. “Oh, this is just a prototype,” the Gutierrezes told him. “When we have the final product, it won’t burn.” Dedlow accepted that explanation. “I was impressed with the stuff when I saw it,” he says. “I’ve been involved in businesses in trying to decrease housing costs in South America for years. For me, getting involved in this thing [the Gutierrezes’ technology in general) was altruism. I saw myself as a great hero, bringing low-cost housing to the homeless, impoverished people in Latin America.”
At a later meeting with the Gutierrezes, the brothers gave Dedlow an ultimatum disguised as an opportunity. The meeting took place on a Friday, and the Gutierrezes said that on the following Tuesday, Imperial Dynamics would be signing a merger agreement involving both Honda and duBont (they made no distinction between the modest duPont Energy Control Corporation and the multinational conglomerate E.I. du Pont). A couple of licenses would be sold soon to both a Texas and a northern California firm, but after that, all the licenses would be bought up. But the Gutierrezes were willing to make a “secret deal” with Flores and Dedlow if they were able to move quickly enough. Flores had already invested $30,000. Could Dedlow scrape up another thirty grand by Monday?
That was impossible, he told them. But on Saturday morning while eating breakfast back at his home in Los Angeles with his friend Gene Bates, he pulled out a sample of an Impervium shake shingle and talked about his meeting with the Gutierrezes the day before. Bates went bonkers. He agreed to put up the money immediately in partnership with Dedlow. On Monday, January 26, 1982, the two men drove down to the Mira Mesa plant, met the Gutierrezes, handed over a cashier’s check for $30,000, and signed an option to negotiate the purchase of a license. During the ninety days within which they had to exercise the option, the Gutierrezes, as part of the agreement, were to look for a plant where the shingles could be manufactured. From this moment, just about everything went wrong for Dedlow, Bates, and Flores.
First they learned that the duPont/Honda merger did not take place on Tuesday, as the Gutierrezes had claimed would happen. In the weeks that followed, one delay led to another, and after the ninety-day option period, no plant was found and no sales had been made. “The Gutierrezes were responsible for the delays,” says Dedlow. “They were going to do the [shake shingle] prototypes and get sales through Honda, then they were going to put up the plant. But they did absolutely nothing.” The Gutierrezes did, however, see to it that the option agreement contained a clause stating that “if for any reason whatsoever” the terms of the option were not met, the Gutierrezes could keep the initial investment of $60,000 from Flores, Dedlow, and Bates. Which is precisely what they did.
In the spring of 1982, Gene Bates was diagnosed as having a brain tumor that required immediate surgery. Luckily it was benign, but he incurred tens of thousands of dollars in surgery and hospital bills, which he couldn't pay. Dedlow, to help his friend, went to the Gutierrezes. “I begged Alex to return the $30,000 so Gene Bates could pay his hospital fees,” says Dedlow. “He promised several times that he would. He kept saying, ‘Next week, next week. I have some money coming in. You have my word. You’ll get it back.’ ” He never did.
Some months later Dedlow finally hired a Los Angeles attorney, John Hanrahan, and set out to get the money back. Dedlow, Bates, and Hanrahan met with Alex Gutierrez at the Santa Ana office of the Gutierrezes’ attorney, Morris Sorenson. According to Dedlow, Alex agreed to return the money but said it would have to wait until Monday. Dedlow said, “No dice. We want it now or we sue.” Sorenson then proposed that he write a check to Hanrahan on Sorenson’s own trust account. The check, Sorenson insisted, was not to be cashed until the following week, once the Gutierrezes had paid him: Dedlow and Bates agreed. Hanrahan called Sorenson repeatedly to obtain permission to cash the check, but each time Sorenson said he still hadn’t received the money. It has never been repaid.
Dick Thompson, a mechanical engineer with GA Technologies in La Jolla, heard about the Gutierrezes from a friend in the fall of 1983. When he met with Michael duPont and the Gutierrezes, he was so impressed with “high-fusion technology” that he invested $5000 in duPECC immediately. “I saw it as the magic wood, as the second coming of Christ,” he says. “I saw it as the answer to all my problems.” In subsequent months he put down another $4000, and his wife cashed in her IRA account and invested $6000. At one point Thompson’s sister-in-law sent in a check for $10,000, but she was having personal problems and was advised to withdraw the check. “When the Gutierrezes told me |my sister-in-law’s] check had bounced, I felt so guilty that I went out and found three more guys to invest to make up for the ten grand,” explains Thompson. The Solana Beach engineer says that if his wife hadn’t adamantly objected, he would undoubtedly have mortgaged his house and invested it in duPECC. “Thank God I didn’t do that,” he says today.
Though Thompson kept his job at GA Technologies, he was given an office at Imperial Dynamics in the summer of 1984 and worked extensively for the Gutierrezes without pay. There was continual talk of a contract agreement to pay him a salary, but the Gutierrezes stalled him repeatedly. Thompson drew up blueprints for a new and better injection machine to feed the molds. He analyzed test data. He attended meetings with potential clients, where he was introduced as “our engineer.” As Charles Seviour had done back in 1976, Thompson asked the Gutierrezes for information about the formula. He needed to know precisely what ingredients were in the mysterious mix so he could make sure they were compatible with the materials in the new equipment he was designing. Rudimentary engineering. The Gutierrezes always had an excuse for not telling him. Thompson wrote up a report describing the products and the various tests that had been performed on them over the years. He gave the report to some engineer friends, who pointed out several flaws and offered suggestions. When Thompson insisted that the flaws be corrected before the document was given to potential clients, the Gutierrezes gave him “the cold shoulder. They started to realize that I was a serious engineer,” says Thompson.
When he first began working regularly for the Gutierrezes, Thompson saw Michael duPont frequently at duPECC's Carroll Road plant in Mira Mesa. However, after August of 1984, when duPECC moved to new offices in Scripps Ranch, Thompson lost contact with duPont. In February of 1985, as the list of Gutierrez victims was growing daily, Thompson’s name came up in a discussion at duPont's office. “Where is Thompson, anyway?” duPont asked. “Why, he’s still with the Gutierrezes,” someone replied. Thompson was contacted immediately and invited to a subsequent meeting attended by the duPonts and a few other duPECC stockholders, including Bill Graul, the chemical engineer who had recently analyzed a sample of goop and found it to be plastic, not a new miracle substance. Peggy duPont showed Thompson her list of investors who had lost money to the Gutierrezes. “I didn’t want to believe they were frauds,” says Thompson. “But when I saw that list, I was absolutely awestruck. I couldn't believe the positions and titles and reputations of these people.”
Thompson is exceedingly embarrassed by all this. “I just got caught up in the aura of it,” he says. “Of all people, I should have thought of the negatives, but I didn't. Nobody had any reason to believe it couldn’t be done, because I was telling everyone it could be done. I’m responsible for $50,000 worth of small investments from six to eight people — hard-working people I suckcred into investing because I believed in it.”
Thompson also unwittingly participated in the recruiting of Dale Edgecombe, a southern Illinois businessman whose association with the Gutierrezes resulted in great financial and personal tragedy. Edgecombe's brother, Ron, met Walter Gutierrez and his San Diego associate Jack Harker in Tunisia early in 1984 when Edgecombe International, a manufacturer of environmentally controlled greenhouses, was part of a delegation sponsored by the U.S. Trade and Development Program. Harker and Gutierrez traveled to Tunisia with former Colorado governor (1956-1962) Stephen McNichols, who was working as a business consultant for the brothers. Ron Edgecombe and his associate, Gary Organ, were impressed, not only with samples Gutierrez showed them, but with the company he seemed to keep. When Gutierrez said he was in business with Michael duPont of the duPont chemical family, Edgecombe and Organ believed that Gutierrez was directly involved with the E.I. du Ponts of Wilmington. Delaware. No one told them otherwise. (San Diego attorney Jack Fitzmaurice, who worked for Michael and Peggy duPont. reflected. “For the Gutierrezes, the duPont name was a horse when they wanted to ride it and a cow when they wanted to milk it.”) Walter Gutierrez showed Ron Edgecombe engineering tests. He told him he had signed contracts for millions of dollars in sales to countries in the Middle East. He spoke of a possible major contract with a Japanese shipbuilder to sell a corrosion-resistant paint called Ultran.
Ron Edgecombe returned to Decatur with exciting news for his brother Dale, the president of Edgecombe International. Impervium (the artificial wood) could be used to make flowerpots for the greenhouses. Impervicon (artificial concrete) would be ideal for greenhouse floors. And Ultran could protect metals in the humid greenhouse environment. Dale Edgecombe came to San Diego in the summer of 1984, where he met the Gutierrezes and toured the Imperial Dynamics plant. He was impressed.
Perhaps what influenced Edgecombe the most, though — even more than the extraordinary samples and the apparent support of the former Colorado governor — was the fact that Walter Gutierrez and Jack Harker professed to be devout Christians and said their primary aim was to serve mankind. Dale Edgecombe, a deeply religious man himself, listened with eager ears as Gutierrez and Harker told him how they were doing the Lord’s work, about how He was their guiding force, about how Edgecombe International was a company driven by destiny, and about what a great opportunity this was to fulfill God’s will. It was hard to disagree, because, as Edgecombe says, “If this stuff was just one-tenth what they said it was, it would solve the problems of the world.”
Edgecombe decided to buy three licenses for one million dollars each and to put down $30,000 for an option agreement. Jack Harker and Alex Gutierrez went to the downstate Illinois farmlands to meet with Edgecombe in October of 1984, where it was decided that Edgecombe would receive several samples and an air freight shipment of Impervium on January 1, 1985. In November of 1984 Dale Edgecombe returned to San Diego, where he met engineer Dick Thompson, whose enthusiasm for the Gutierrezes further convinced him that the brothers were legitimate. During this visit, Edgecombe paid the $30,000 option fee, with the understanding that he would pay nothing more before the samples and the shipment of Impervium arrived. To prepare for the move into mass production, Edgecombe says he spent approximately $300,000. He had several molds built. He changed all his company’s advertising and promotional literature. He scheduled trade shows all over the country for the spring of 1985. He took the necessary steps to go public on the New York Stock Exchange, paying for audits and for registration with the Securities and Exchange Commission. “We were out on a limb with our lenders,” says Edgecombe. “Everything depended on our ability to manufacture these products.”
On January 1 the goop failed to arrive. In the weeks that followed, Edgecombe was forced to cancel his appearances at all the trade shows. He had to face his employees, many of whom were working without pay until the company got going. “We’re a Christian company,” says Edgecombe. “People put their heart and soul into this. They said, ‘We’ll have to suffer a little for the betterment of mankind.’ That’s the kind of people we are.” Edgecombe had to face the family and friends who invested in his company. “Most of the investors were small farmers,” says Edgecombe. “It’s a down economy in agriculture these days, and some people were putting their life savings in this. All the money has been lost.” Although the contract with the Gutierrezes represented only a portion of Edgecombe’s total business, he says that all of his $2.4 million in capital ($1.6 million from about forty-two investors and $800,000 in bank loans) was “leveraged” against his investment in the Gutierrezes’ products. When the goop and the samples failed to arrive on January 1, the Gutierrez brothers had a different excuse for every week they were overdue. The machine isn’t running right. Someone changed the nozzle. The mold makers are asking for more money. We have some Impervium here, but the formula for your products is slightly different, and we have to make adjustments. We’re moving to bigger headquarters and we’re going through growing pains. In late January, while attending a trade show in Chicago, Edgecombe received some samples of plant pots and other products from the Gutierrezes. They were supposed to be production prototypes, but Edgecombe says they were “shoddy” and were obviously made by hand: “You could actually see the finger marks where they'd pushed the stuff into the molds.” Edgecombe and his entourage left the trade show without even displaying the samples. When he contacted the Gutierrezes about their poor quality, he was told, “This is the best we can do until the machine gets going.”
A later shipment was equally disappointing, and some of the samples broke in transit. When Edgecombe put a piece of supposedly waterproof Impervium in water, it changed color. At his wits’ end, Edgecombe violated his option agreement with the Gutierrezes by hiring a Decatur engineering firm to analyze the composition of the samples. “It appeared to be fiber glass,” says Edgecombe. “When we told the Gutierrezes that there were problems with the samples we were sent, they said someone must have screwed up in the inventory and sent the wrong ones.” In May of last year, when the FBI raided their offices and confiscated their equipment, the Gutierrezes told Edgecombe they were suffering the consequences of Michael duPont’s problems with the government. It was all duPont’s fault; he was out to get them.
None of this stopped the Gutierrezes from asking Edgecombe for more money. Though Edgecombe clearly understood that the $30,000 he paid for the option agreement would include the initial shipment of material and the samples, the Gutierrezes wanted him to pay an additional $300,000 up front. Edgecombe recalls that about last March he received a phone call from the Gutierrezes’ office, during which statements were made that Edgecombe interpreted to be physical threats against him regarding his reluctance to make further payments. When Edgecombe got off the phone, he immediately called the FBI.
Some weeks before this call, Edgecombe was contacted by the IRS and the FBI to answer questions concerning the Gutierrez investigation. “I told them I was planning to put up more money and asked them about it, and they said, ‘We can’t tell you what to do with your money.’ ” Edgecombe insisted, “Come on, off the record, tell me what’s going on. I don’t want to throw my money away.” An IRS agent eventually gave Edgecombe the phone number of San Diego attorney James Lorenz, who put him in contact with Michael duPont. DuPont told Edgecombe he was the newest character in a horror story that had begun eleven years before. Later in the spring of 1985, Edgecombe came to San Diego to testify before a federal grand jury about his dealings with the Gutierrezes. After meeting with duPont and Dick Thompson, who presented him with hard evidence concerning the Gutierrezes, Edgecombe woke up from his Imperviuin dream and prepared to face a financial nightmare back in Illinois.
Last August Edgecombe International shut its doors. Edgecombe says many of his lenders believe he was involved in a fraud and today refuse to extend him further credit. The banks are currently liquidating his assets. To date Edgecombe hasn’t declared personal or corporate bankruptcy, but his attorneys have recommended that he do so. “I’m fighting it, but I don’t know how much longer I can hold out. Luckily we didn’t spend the money for the licenses and go public,” he says, searching for a consolation. “If we had, we’d have ended up like the duPonts.” Edgecombe is now selling insurance.
Very few people have been reimbursed by the Gutierrezes. In 1983 two separate private investigators researched court records in Los Angeles, Orange, and San Diego counties and discovered some twenty lawsuits against the Gutierrezes and their companies, many of them involving failure to pay rent. It is not clear how many of these suits were settled, though some definitely were. The list of thirty-six known investors in the Gutierrezes’ secret formula includes $1,072,800 in civil court judgments against the brothers; an estimated $197,500 has actually been repaid.
Most of those who lost money to the Gutierrezes chose not to file suit because it would have been too expensive. But at least two people have chosen to circumvent the legal system altogether. One such person was Mr. Z, a Bay Area businessman who asked not to be identified. He entered into a partnership with the Gutierrezes four years ago and formed a company in San Diego to produce Impervicon products, notably railroad ties. He paid the Gutierrezes $10,000 for a sixty-day option agreement to obtain a license. In May of 1982, Mr. Z and Walter Gutierrez went to the Pentagon in Washington, D.C. to conduct a demonstration before Department of Defense officials (Mr. Z paid all expenses). Gutierrez filled a hole in the Pentagon parking lot with Impervicon and an hour later had a car drive over it. In a letter the following month, the Department of the Air Force called the material “impressive” and said its high compressive strength makes it desirable in runway construction and repair, and in weapons storage facilities. Mr. Z received two subsequent letters from the navy and the Undersecretary of Defense, both very encouraging.
Six months after signing the option agreement, however, the Gutierrezes, who were supposed to have set up a manufacturing plant in San Diego, had done absolutely nothing to advance progress toward production, according to Mr. Z. In fact, they were asking for hundreds of thousands of dollars in additional money. Suspicious, Mr. Z. conducted a rigorous cost analysis for production of Impervicon and found that it could not possibly have been produced for one-third the cost of concrete, as the Gutierrezes had told him. “The cost would have been enormous,” says Mr. Z. “It would have been impossible to charge the customer what it cost to make the stuff.” Mr. Z felt he'd been had. In late 1982 he came to San Diego, went to the offices of Imperial Dynamics, met with Walter Gutierrez, and — lo and behold — got back on the spot $7500 of his $10,000. When asked how he did it, Mr. Z responds cagily. “Let’s just say I threatened bodily force,” he says. To attorney Jack Fitzmaurice he was more candid: “I bounced him off a wall,” he said.
Mr. Z is not the only one to have successfully resorted to violence with the Gutierrezes. Partners in an Orange County firm who invested $48,000 with the Gutierrezes sent some “Mexican Mafia types” to the Gutierrezes’ offices in Mira Mesa. A fellow investor who knew one of these partners says that the thugs told the Gutierrezes, “Pay up or we’ll break your legs.” The $48,000 was returned expeditiously.
Antonio Miguel comes from one of the richest families in Mexico. The $2.6 million he lost pursuing the Gutierrezes' technology will probably not be missed, but Miguel is miffed as a matter of principle. In 1981 the Mexican businessman entered into what was by far the most ambitious project ever attempted using the Gutierrezes' formula. Miguel is one of five brothers from the city of Puebla who inherited the largest textile manufacturing company in Mexico. He now has thirty years’ experience in the textile industry, owns about fifty textile plants, and, if a certified Financial statement shown to Michael duPont by Alex Gutierrez is to be believed, is worth about $500 million. Communicating with Miguel is difficult, and not only because of the language barrier. Having breathed only the rarified air of the multimillionaire all his life, he has little time for the details of his catastrophic association with the Gutierrezes. At issue are his family’s honor and higher values that transcend mundane considerations such as money and time. True to his aristocratic roots, Miguel’s speech is poetic rather than prosaic. “I want the truth to destroy the lie,” he repeated time and again during a recent interview in San Diego.
Miguel intended primarily to produce construction blocks made of Impervicon in order to provide low-cost housing to Mexico’s poor. “What the Gutierrezes showed me was incredible, not only for Mexico, but all the world,” says Miguel. “Ninety percent of Mexico's citizens are poor, and I wanted to produce cheaper products for the people. My father told me, ‘Dress the poor and you will be rich, Antonio. If you dress the rich, you will be poor.' ” Miguel planned to produce the actual goop that would serve as raw material in the manufacture of Impervicon products. His Puebla operation would be the headquarters for development of the Gutierrezes’ products all over Latin America. The plant he envisioned would achieve tremendous output; operating twenty-four hours a day seven days a week, it would produce one million Impcrvicon blocks per day. Miguel tore down an older structure on the factory site and laid the foundation for a new 30,000-squarc-foot facility, for which, according to his accountant, Miguel paid $1.5 million.
Essentially, the story of Miguel’s business deal with the Gutierrezes resembles everyone else’s, except the numbers are significantly higher. He spent $400,000 on licenses that he never received, and over a six-month period between 1981 and 1982, he gave the Gutierrezes approximately $400,000 more in small cash payments. Some of these were made during meetings in Mexico City and Las Vegas, where Miguel likes to gamble. On such trips, Miguel paid for the Gutierrezes’ food, hotels, transportation, and, he says, prostitutes. In return the Gutierrezes were to deliver equipment, information on the formula, and technical expertise to train Miguel’s workers. “But they never did anything,” says the Mexican. “Nada. They always said, ‘Manana, mahana, manana.’ ”
Including about $300,000 in legal fees, Miguel’s losses total about $2.6 million. In addition, he says he will lose five years of rent (at $20,000 per month) on the building he tore down. For years Miguel has suffered from severe alcoholism, and he now has cirrhosis of the liver so badly that his doctors say if he ever drinks again he’ll die. Miguel claims that the Gutierrezes took advantage of his illness by encouraging him to drink.
Miguel, who was in San Diego three weeks ago to meet with FBI investigators, is very confused about the way the American legal system has handled the Gutierrezes. “It is not understandable for us in Mexico why with all the facts, your government has not taken any action against the Gutierrezes. We just don’t understand.” Miguel vows to see the Gutierrezes behind bars. “Estoy esperando la justicia (I am waiting for justice!,” says the plucky millionaire. “The rooster fights to the death; I am the rooster. For me and my family, this fight must be won. If the Gutierrezes spend one dollar, I will spend ten. If they have one lawyer, I will hire ten. We must stop them.”
Antonio Miguel is not the only one who wonders why the government has taken so long to indict the Gutierrezes. The duPonts and just about everyone else interviewed for this article have asked the same question. According to sources involved in the Gutierrez investigation, fraud cases usually take a year to eighteen months to prepare. Given existing evidence that the Gutierrezes became serious subjects of investigation in the fall of 1984, preparation of their indictment, expected in about six weeks, falls within the upper limits of that time frame. Since criminal fraud investigations tend to be lengthy, how does the government ensure that the suspected offenders do not continue to defraud others while the investigation is being conducted? In civil cases, an injunction can be obtained to prevent further fraud. But in criminal cases, no such preventive mechanism exists. At least one man, Ventura businessman Rodger Morford, wishes it did.
In late 1984, Morford paid the Gutierrezes $30,000 for an option to negotiate two separate one-million-dollar licenses to build specialty furniture and fireproof doors using Impervium (the fire doors, as they are called, are built to withstand heat; they are used, for example, in all hotel stairwells). In early 1985, some time before he intended to make his first $80,000 payment toward the fire door license, Morford heard that the Gutierrezes were being investigated by the government. So he contacted the U.S. Attorney’s office in San Diego, but he was unable to get through to Judith Hayes, the assistant U.S. Attorney who prosecuted the duPonts. One time he was put in contact with IRS investigator Dusty Faulkner, who, according to Morford, confirmed that the Gutierrezes had “tax problems” and that an investigation was under way but said he wasn’t at liberty to discuss the case. “I figured, ‘God, they have tax problems, that’s not my business,’ ” says Morford. “A lot of legitimate businesses have tax problems.” Finally, Morford says someone at the U.S. Attorney’s office gave him an appointment with Hayes at ten o’clock one morning. “I drove down from Ventura to see her, but she wasn’t there and wasn’t supposed to be back until late afternoon,” recalls Morford. “They asked me to wait, but I told them I was a busy man, and I drove back home.” (Judith Hayes says she and Faulkner were waiting to meet with Morford but that he never showed up. Morford insists that the receptionist at the front desk told him Hayes was in a hearing until late in the day.) Eventually Morford gave up trying to squeeze information out of the government, and he wrote the Gutierrezes a check for $80,000.
After he paid for the license, Morford received a sample fire door from the Gutierrezes. It was extraordinary. “Most fire doors are big, heavy things made of steel, and they’re the ugliest things in the world,” says Morford. “The Gutierrezes’ sample was beautiful. It was carved just like a real wood door.” A Dallas firm saw the sample door and guaranteed Morford it would purchase two million fire doors per year if he gave them an exclusive contract. Morford anticipated enormous profits; his business plan projected $20 million in sales the first year and $468 million the second year. Then Morford had the door tested at Wamock Hersey, a fire-testing lab in Antioch, California. Initially it gave off a billow of black smoke that smelled like polyester, which is toxic when burned. Morford asked Walter Gutierrez about it and was told that polyester resins had indeed been used as an adhesive to glue the outer coverings on the door. “No problem,” Gutierrez told him. “We'll make another one without polyester.” Except for the initial burning of the covering, this sample door “passed the test with flying colors.”
During the summer of 1985, Morford began setting up his plant in Ventura to manufacture the doors. One day Walter Gutierrez asked him for $1300 “to pay the phone bill.” Morford gave him the money but made him sign a personal loan agreement. Morford, like so many before him, noticed that the Gutierrezes were disorganized, but he believed that they were simply poor managers, not frauds. In fact, he tried to put together a plan that would allow him to bypass the Gutierrezes altogether — he proposed to buy the secret formulas. Morford knew a group of investors that was interested in backing him, so he came to San Diego and met with the Gutierrezes at the Plaza International Hotel in Mission Valley. The brothers said they would consider selling the formulas for $55 million. A remarkable turn of events: in 1975 the Gutierrezes had sold the formula to Vanont, Inc. for a fifty-percent interest in a company with virtually no assets; now, eleven years later, they were asking $55 million! In spite of the fact that no one had ever successfully manufactured anything with it. The Gutierrezes told Morford they wanted five million dollars cash up front, then $2.5 million per year for twenty years. Morford replied that no one in his right mind would give them five million dollars in advance and suggested that perhaps he’d consider putting the money in escrow, having the secret formula tested by a laboratory and, if it passed the test, giving them the money. “They refused,” Morford recalls. “They said, ‘You give us the money, we’ll mix up a batch for you, then you can check it out.’ ” Morford and his backers scheduled a later meeting with the Gutierrezes at an Irvine hotel to discuss a more reasonable plan, but the brothers never showed up.
Last July Morford took his fire door sample to Analytical Research Laboratories, Inc. in Monrovia, California, where he had it “reverse engineered” to determine its composition. It proved to contain seventy-seven percent cellulose acetate and ten percent glass fiber. Nothing to get particularly excited about, and certainly not the result of a revolutionary chemical fusion process. The fireproof door also contained three percent borates and two percent phosphates, two chemicals commonly used as fire retardants. Surprisingly, though he says he believed the secret formula was a hoax, Morford still didn’t abandon the Gutierrezes. “I took the fire door around to people, and they said if I could reproduce it, they could sell it. The solution, whatever it was, was workable. I didn’t care what it was made of.”
In September Morford was ready to begin production of fire doors and formally requested a shipment of material from the Gutierrezes. “All of a sudden it was hard to get hold of them,” says Morford. “I kept calling the office, but no one was there. I sent a letter registered mail, but it came back. Then I drove down to San Diego and found that the office had been closed.” Morford finally got through to Judith Hayes, who agreed to meet with him in Orange County. “I met her and she laid out the whole story,” says Morford. “If she’d told me the story six months earlier. I’d be a quarter of a million dollars richer. But they tell us life is a learning experience. I’m learning.” Morford's estimate of his losses includes $111,000 given to the Gutierrezes, plus money spent on reports, engineering drawings, trade shows, and market research. Not to mention the $1300 loan, which was never repaid.
In the past few months, Morford’s bank account has dipped to below one hundred dollars. He drove a Vons truck during the recent meatcutters strike to help pay off his immediate debts, which total about $25,000. His own savings have been lost on the project, as have tens of thousands of dollars invested by Morford’s family and friends, “who believed I could do what I said I could do.”
Morford is not the only investor in the Gutierrezes who found the authorities unresponsive. Eric Johnson, an Orange County businessman who invested $20,000 in an unfruitful venture to manufacture Ceramicon roof tiles using the Gutierrezes’ formula, made serious attempts several years ago to expose what he saw as fraud. He first complained to the Tustin Police Department in about 1979 but was told that there seemed to be insufficient evidence to file criminal charges. In October of 1980, Johnson wrote to San Diego County District Attorney Edwin Miller. Miller referred Johnson to the Orange County D.A. because the case seemed to be in that jurisdiction. When the Orange County authorities failed to act, Johnson went back to Miller, who replied that he’d received word from Deputy D.A. John J. Ryan in Orange County, who advised him that “his office does not have the resources to handle this type of matter.” Miller then advised Johnson to “pursue your civil remedies.” Johnson says today, “The thing that bothers me a lot is that the authorities aren’t set up to respond to this sort of thing at all. I find that very sad. I tried to alert the authorities to a fraud, and they just didn’t care.”
So where’s the money? Millions of dollars have passed through the Gutierrezes’ hands in the past eleven years — money in the form of salaries, licensing option agreement fees, license fees, and, in Michael duPont’s case, handouts. “I’ll bet some of it’s being used for their legal defense,” says Morford. “And I’ll bet they’ve squirreled away some, thinking they’ll get out of this somehow.” Public documents in a related criminal case state that between 1978 and 1984, the Gutierrezes reported no income on tax returns. It is also known that between September of 1983 and November of 1984 (a period during which the Gutierrezes supposedly were so poor that Michael duPont had to pay for such things as rent on Alex Gutierrez’s home), the two brothers received loans totaling $700,000 — $500,000 from Eureka Savings and Loan and $200,000 from New City Bank. (New City Bank is a “Christian” bank. One of its loan officers, after seeing Walter Gutierrez on The 700 Club, met with the Gutierrezes and arranged for the $200,000. loan.)
Michael and Peggy duPont have an interesting theory about the money. They think it is “buried” somewhere, probably in several different spots. DuPont recalls that Alex often spoke of a condominium he owned in Hawaii. “Real estate is a good way to bury money,” says duPont. “Banks, too. Maybe in Mexico, Costa Rica, or Switzerland.” Copies of Walter Gutierrez’s travel itinerary, submitted to the U.S. Trade and Development Program when he applied for the government-sponsored trip to Tunisia in 1984, show that on his return trip he was to make stops in Madrid, Ireland, and London. Yet something Walter said to Michael duPont suggests another stop may have been made. “When he got back, he told me about the long moving sidewalk at the Geneva airport,” says duPont. “He said that all along the walkway there were these enormous advertisements for the E.I. du Pont company, whose European headquarters are in Geneva. Walter was really impressed by that. He was in Geneva on that trip. Did he put some money in a Swiss bank? I don’t know. But it sure makes sense, doesn’t it?”
It is a great mystery to many that the Gutierrezes are still in the country, that they haven't fled to some distant land to enjoy their money in peace. Several people interviewed for this story expressed concern that the government — which, including the initial stages of the duPECC investigation that began in early 1984, has been on the Gutierrezes’ trail for two years — will blow the case and let the two brothers flee. As one person said, “When that indictment comes, the border is just twenty minutes away.” Fleeing would be the logical thing to do. But not much in the Gutierrezes’ bizarre history makes sense, so it shouldn't be too surprising to hear that the brothers, despite a ten-ton indictment hanging over their heads, are still seeking investors in their miracle formula.
Last September retired Major General William H. Baumer of La Jolla drove to Newport Beach to meet with the Gutierrezes. Baumer, an organizer of venture capital gcoups, had heard about the brothers and their product from a banker friend, who held the meeting in his office. The Gutierrezes showed samples — an Impervicon brick and an Impcrvium shake shingle and golf club head. They mentioned contracts with Johns Manville and Mitsui. They talked about the goop, which they referred to as “oatmeal.” Natural fibers. Chemical bonding. High-fusion science. The same tune they’ve danced to for eleven years. “They were really putting on the dog,” says Baumer. “They have a real country boy approach. It was as if they were doing this for the first time.”
Baumer left the meeting unimpressed with the Gutierrezes — “I felt sorry for them” — but with some enthusiasm for their products. He met with Walter Gutierrez two weeks later in Pacific Beach. After talking in Gutierrez’s car for an hour, they had lunch at Carlos Murphy’s at University Towne Centre. The topic of discussion was a possible $500,000 investment. Baumer made it very clear he was only interested in forming a public company, which meant presenting a business plan to the Securities and Exchange Commission, signing legal papers, verifying past records, performing audits, and so on. Though Baumer didn't know why, he sensed Gutierrez was extremely uncomfortable with that idea. “I was thinking more in terms of a private investment,” said Gutierrez.
After lunch the two men drove to Imperial Dynamics’ latest offices, on Nancy Ridge Road in Mira Mesa. No one was there. ‘‘This is our engineer’s office,” explained Gutierrez. When Baumer asked what the engineer’s name was, Gutierrez wouldn’t tell him. ‘‘Why’s the place empty?” Baumer asked. “Well, everybody’s off work today,” Gutierrez replied. The major general never heard from the Gutierrezes again. “It was obvious Walter didn’t want to go public,” he says. “I think he realized that's all I was interested in and he dropped me.”
Three weeks ago I called the Gutierrezes’ most recent attorney in Newport Beach, Robert McDonnell, in an effort to contact Walter and Alex Gutierrez.
McDonnell, who says he has worked for the Gutierrezes for about six months, seemed largely unaware of his clients’ past business ventures. I talked to McDonnell twice. The first time, I mentioned the list of thirty-six investors who claim to have been defrauded by the Gutierrezes and said I would like very much to meet with the Gutierrezes and hear their version of events. McDonnell contacted them and called back two days later to say they had decided not to talk about their business ventures. “The Gutierrezes prefer not to try this thing in the press,” McDonnell said. “There has been no indictment. If there was going to be one, it seems to me there would have been one by now.” At the end of our first conversation, McDonnell suggested that perhaps he could meet with me. “You mean, just you and me, without the Gutierrezes?” I asked.
“Yes,” he said, adding that he was very interested in seeing the investors’ list.
“Well, I’m interested in investing money in the Gutierrezes myself,” McDonnell replied.