The Market Crisis Continues To Spawn Financial Fraud Cases

The market crisis continues to send stock prices to new lows. It is also unraveling fraudulent investment operations and schemes at a record pace. In recent weeks, the SEC has brought a stream of cases against Ponzi schemes and other fraudulent funds and operators who, like Bernard Madoff, have been exposed by the collapse of the finance markets.

Yesterday, the SEC brought another market shake-out case. SEC v. Sunwest Management, Inc., Case No. CV-06056 (D. Ore. Filed March 2, 2009). This action was brought against Sunwest Management, Inc. which, at its peak in 2007, managed over 320 retirement facilities in 34 states with assets valued at about $2 billion, its primary shareholder and former president Jon Harder, and Canyon Creek Development, Inc., a captive broker-dealer.

According to the Commission’s complaint, the defendants raised at least $300 million from more than 1,300 investors through fraudulent offerings of tenancy-in-common interests. Investors were told that their funds would be invested in a specific retirement home. That home would generate sufficient revenue to pay a 10% annual return. Southwest, investors were told, had never missed a payment.

Contrary to the representations made to investors, Defendants ran Sunwest as a single integrated enterprise, commingling all investor cash into a single fund. Returns were made to investors from a variety of sources, not just the particular retirement home designated. By misrepresenting the nature of the investment, the SEC claims, defendants concealed the fact that the profitability of each specific investment depended on the success of other properties and defendants’ ability to continue the operations of the entire enterprise.

As credit tightened in 2007 and 2008, the complaint alleges, the entire enterprise began to unravel. Yet, “despite the dire financial condition, defendants continued to raise additional money from investors. By June 2008, they operated Sunwest virtually as a Ponzi scheme: money raised in the final offerings (supposedly for new properties) was used to pay old investors their 10 percent return and otherwise fund operations at existing facilities.” By January 2009, over 100 retirement homes had been placed in foreclosure, receivership or bankruptcy. This eliminated any interest of the investors. The SEC has sought a freeze order.

Sunwest is only the latest investment scheme to crash in the wake of the current market crisis. It will not be the last. The SEC reportedly has dozens of investigations which are related to the current market crisis. The FBI has hundreds of open white collar investigations. As the market crisis continues to spiral on, it will, no doubt, tumble more fraudulent schemes, spawning more enforcement actions.