Investors are frequently the victims of friends, relatives and local celebrities who leverage their relationships to gain the confidence of a potential investor and secure their capital which is then misappropriated. In the Commission’s latest offering fraud action a local developer leveraged his contacts and the high profile nature of a local infrastructure development with representations that he had “skin in the game” — his money in the deal – to lure investors. He did not; the investors did; and the developer misappropriated it. SEC v. Hitt, Civil Action No. 1:18-cv- 01262 (E.D. Va. Filed Oct. 5, 2018).
Defendants in the action are local real estate developer Todd Hitt, along with his two firms, Kiddar Capital LLC and Kiddar Group Holdings, Inc. Mr. Hitt is the managing member of Kiddar AQ, a fund he advised as to the value of securities and investments in firms such as Aquicore, Inc. A number of Mr. Hitt’s related entities are named as relief defendants.
In 2014 Mr. Hitt began raising capital for the Home Building Fund which provided liquidity to residential homebuilders in northern Virginia. The pooled investment fund extended loans to developers in exchange for a second mortgage on each property being developed. The loans carried an interest rate of 12% and, at sale, an additional fee of 3-5% was due — the Fund’s ROI.
At least 15 investors were solicited to invest in the Home Building fund over the last several years. About $4.5 million was raised. The representations used to solicit the investors varied. For example, Investor A, the largest, was told that Mr. Hitt would put up 50% of the capital and the investor the other half. Other investors were told that they were investing in a project with others. In the end, Defendants misappropriated a significant portion of the money raised. In some instances they also misappropriated a portion of the ROI from a project.
Defendants also solicited investors for Aquicore, Inc., a tech start up company. The firm provides Internet of Things solutions for commercial real-estate operations. Investors purchased interests in a pooled investment fund. The funds were pooled through another entity created by Mr. Kitt, Kiddar AQ. Overall Mr. Hitt raised about $2 million from five investors. Mr. Hitt misrepresented his contribution to this venture. The funds were comingled with those from other ventures. About half of the investor money was misappropriated.
In 2017 Mr. Hitt initiated his signature deal – Herndon Station Property. The five story commercial building was located adjacent to the planned subway station for the Washington D.C. metro system in Herndon, Virginia. The purchase price for the property was $33 million with an overall cost, including necessary reserves, estimated to be about $36 million. The plan was to acquire the property by borrowing $24 million from a bank using a $6 million contribution by the General Partner and raise an additional $6 million in a private offering to limited partners. Investors were told that Kiddar Capital was planning to contribute half of the equity required for the project. Select partners would then be permitted to acquire interests in the second half.
Initially, Defendants raised over $9 million for the deal – more than the half that was supposed to be raised from outside investors. Nevertheless, Defendants sought and raised another $1.2 million. Portions of those investor funds were then diverted to pay Mr. Hitt’s credit cards and for other business and personal expenses.
In the summer of 2018 Mr. Hitt raised another $6 million from an offshore investment company. About $1.6 million of that investment was diverted to Mr. Hitt’s personal accounts and expenses. Defendants never put in their capital as represented. Overall Defendants raised at least $20 million from 29 investors for this project. The complaint alleges violations of each subsection of Securities Act section 17(a), Exchange Act section 10(b) and Advisers Act section 206(1) and 206(2).
Defendant Hitt settled with the Commission, consenting to the entry of a conduct based injunction prohibiting him from participating in the offer or sale of interests in real estate development firms. He also agreed to the entry of a freeze order and the appointment of a receiver. See also U.S. v. Hitt, No. 1:15-cr-480 (E.D.Va.)(parallel criminal action).