SEC Brings Offering Fraud Action Centered On Collapsing Real Estate Business

The Commission brought an offering fraud action against two long time residential real estate businessmen, Thomas S. Mulholland and James C. Mulholland, Jr. The two defendants had been in the residential real estate business since the 1990s. By 2008 they had raised about $16 million from investors. Thomas and James Mulholland had about 300 properties and apartment building units.

Beginning in January 2009, and continuing over the next year, the defendants raised an additional $2 million for their real estate operations from over 75 investors in Michigan and Florida. Investors were induced to purchase promissory notes based on a series of representations including:

• Claims that their real estate business was profitable;

• That investors would earn 7% per year on their investment from the profits of the real estate business;

• That the principle and interest was guaranteed; and

• That investors could get their money back on 30 days notice.

These representations were false, according to the complaint. The real estate business was, in essence, tottering on the brink of failure. It had negative monthly cash flow; required new investors to pay its bills and prior investors; and could not refund payments to investors on 30 days notice if even a small number made such a request.

As their business deteriorated the two defendants continued to raise money from investors, never revealing the actual financial condition of their real estate business. By February 2010 the defendants filed for bankruptcy.

The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is in litigation. SEC v. Mulholland, Civil Action No. 1:12-cv-14663 (E.D. Mich. Filed Oct. 22, 2012). See also Lit. Rel. No. 22518 (Oct. 23, 2012).