SEC Charges COB, CEO in Two Fraud Schemes
p>As the Commission focuses on retail investors, offering fraud actions have proliferated. In those cases, small investors are typically defraud by being induced to enter into what appears to be a very attractive deal. Later the investors learn the deal was actually a fraud.
In contrast, the Commission’s most recent investor fraud action does not center on an offering fraud. To the contrary, the wrongful scheme is conducted largely from the top, through control, by a board member and CEO. It centers on two fraudulent schemes involving REITs and BDCs. The result is the same however – the fraudster takes the investor cash. SEC v. Singal, Civil Action No. 19-cv-11452 (S.D.N.Y. Filed Dec. 13, 2019).
Defendants are Suneet Singal, First Capital Real Estate Trust Inc. or FC REIT, First Capital Real Estate Advisors, LP or FC REIT Advisors, and First Capital Real Estate Investments, LLC or FC Private. Mr. Singal is the CEO and Chairman of FC REIT, the CEO and beneficial owner of FC REIT Advisor and a minority owner of FC Private. FC REIT is a public, non-traded REIT advised by FC REIT Advisor which is beneficially owned by Mr. Singal. FC Private operates as a commercial real estate firm and the holding company for several of Mr. Singal’s businesses.
On September 15, 2015 Mr. Singal entered into a transaction with FC REIT in which he supposedly contributed over $41.7 million in real estate interests to the firm in exchange for about 3.3 million OP Units or shares of FC REIT’s common stock at a price of over $12 per unit. The properties were contributed because Mr. Singal did not have the cash to close the transaction.
The difficulty was that Mr. Singal did not actually own the properties – he did not have the authority to contribute them to the deal. To the contrary, some of the hotels involved were in bankruptcy and could not be sold. Nevertheless, they involved documents representing that Mr. Singal owned them and had “good and marketable” title. Indeed, the day after the transaction, a side letter was executed with one of the Hotel Principals listing the steps needed to close. Yet later in September Mr. Singal and FC REIT filed a Form 8-K regarding the transaction which was later amended. It stated that the deal was done – it materially misrepresented the deal as essentially having occurred.
Subsequently, Mr. Singal continued his efforts to acquire the hotel properties. By year end however, he abandoned the quest. Additional misrepresentations regarding the deal were made, however, in subsequent firm filings with the Commission. The NAV for FC REIT was also misstated and overvalued because of what was actually a sham transaction.
By the fall of 2016, Mr. Singal’s FC Private and its subsidiaries had significant cashflow issues. After acquiring ownership interests in two BDCs, Mr. Signal had them execute two lending agreements for $1.5 million each. The loans were extended to firms Defendant Singal controlled. Mr. Singal diverted about half of the funds to his personal use. Nevertheless, Mr. Somgal continued to conceal the true nature of the transactions. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(d), Advisers Act Sections 206(1) and 206(2) and Investment Company Act Sections 57(a)(3) and (4). The case is pending. See Lit. Rel. No. 24619 (Dec. 16, 2019).