SEC Secures Freeze Order In Nursing Home Offering Fraud
The SEC charged a 25 year veteran of the nursing home and retirement community business with offering fraud. The defendant has been involved multiple offerings, raising over $190 million. SEC v. Brogdon, (D. N.J. November 20, 2015).
The action names as a defendant Christopher Brogdon. He has a number of real estate and business entities throughout the state of Georgia in addition to those involved here. From 1992 to 2014 Mr. Brogdon acquired or renovated at least 60 facilities through 54 separate offerings, raising about $189,980,000. At least 22 of those offerings are still outstanding. They involved just under $100,000,000. Three municipal bond offerings are in default.
Through the issuance of public conduit municipal revenue bonds, Mr. Brogdon raised over $168,000,000. Generally, the proceeds of an offering were used to undertake a particular project. Key terms were set forth in the offering statements, many of which were executed by Mr. Brogdon. He also raised capital through private placements. Overall he raised about $22,435,000 through these placements. Typically the offerings were mixed equity and debt described in certificates of participation. The borrowing entities involved in these offerings were controlled by Mr. Brogdon.
As early as 2000 Mr. Brogdon began commingling the funds generated by unrelated facilities, securities offerings and other business ventures. As a result of this practice, and the fact that the facilities were not generating sufficient revenue to service the debt, when payments were due on an offering associated with a facility it had insufficient funds. The practice of commingling funds increased over time.
In the offerings Mr. Brogdon misrepresented the nature of the investors’ and bondholders’ investment. While investors were told their funds would be used for a particular facility and that it would be responsible for the payment of interest and principal primarily from the revenue generated, the claim was incorrect. In fact Mr. Brogdon used part of the offering proceeds for other business ventures. Mr. Brogdon also misappropriated portions of the offering proceeds, diverting the funds to other projects.
Since the projects had insufficient funding to cover the debt service from the commingling, Mr. Brogdon frequently raided the debt service reserve fund. Investors had been told that this fund would be used only if there were insufficient funds to cover debt and that it would immediately be replenished. Yet for several funds he began drawing on this fund in the first year and the funds were not replenished. He also paid debt service with third party loans.
Finally, Mr. Brogdon failed to make the required disclosures. He also misrepresented his compliance with others. The complaint alleges violations of Securities Act Sections 15(b) and 17(a) and Exchange Act Sections 10(b) and 20(e). The court entered an emergency freeze order. The action is pending.