The Commission’s focus on retail investors has resulted in a series of cases frequently called offering frauds. In those cases, as repeatedly noted in this space, investors typically get lured to part with what is often their savings and/or retirement capital by unscrupulous persons. Frequently the schemers bate investors by waving around high-profile and popular terms tied to large potential profits such as “crypto currency” or “blockchain.” The article yesterday focused on one such fraud involving marijuana. As noted in connection with that post, investors typically lose most or all of their investment.
Today is different. The Commission announced it will return over $63 million to investors tied to a real estate investment offering fraud. While regulators such as the Commission strive to secure funds that can be returned to investors, typically by the time they arrive much of the investor capital has been dissipated. Those involved may be sanctioned but the chance of recovering much investor capital for the retail investors is small at best.
SEC v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y. Filed May 22, 2019) is the action in which the Commission’s hard work will pay off for investors. That case named as defendants Robert Morgan, a residential and commercial real estate developer, Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a firm used to put properties Mr. Morgan planned to acquire under contract.
Over a five- -year period, beginning in 2013, Mr. Morgan raised over $110 million from investors through the sale of securities. About $80 million of that amount was from investors in four sets of Note Funds. Three of those funds were managed by Fund Manager and one by Morgan Acquisitions.
Investors in the Note Funds were told that their capital would be used to make unsecured subordinated loans to affiliated entities. Investors were also told that the target return for the Notes Funds managed by Fund Manager was 11 % while those managed by Morgan Acquisitions were supposedly guaranteed by Mr. Morgan personally. Over 200 investors and entities in 17 states invested. Contrary to the representations made, investor funds were used to facilitate Ponzi scheme type payments and to help pay-off prior loans. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) along with control person liability.
When the complaint was filed the Commission obtained emergency relief, freezing assets and appointing a receiver responsible for marshalling the assets for the benefit of investors. Morgan voluntarily liquidated certain assets to generate funds for collection by the receiver. Yesterday the Court approved the receiver’s plan to distribute over $63 million to harmed investors — a true success story for investors, the Commission and the staff. Well Done!