SEC Files Emergency Action in Real Estate Investment Ponzi Scheme
Yesterday, the SEC sought emergency action in federal court charging Robert Morgan, a New York residential and commercial real estate developer, and two of his entities, Morgan Mezzanine Fund Manager LLC and Morgan Acquisitions, LLC, with fraud for siphoning and misusing investor funds. The SEC seeks an asset freeze and other relief.
The SEC alleges Morgan financed his real estate deals through sales of securities to more than 200 retail investors, many of whom invested through their retirement accounts. Morgan represented to investors that their money would be used to improve multifamily properties, and based on these representations, raised at least $80 million. Instead, Morgan allegedly diverted investor funds to facilitate Ponzi scheme-like payments to earlier investors. In addition, the complaint alleges Morgan’s improper use of more than $11 million in investor funds to repay an inflated, fraudulently-obtained loan for an unrelated apartment complex. To view the SEC’s Press Release, please visit SEC.gov.
The Ponzi scheme is named after Charles Ponzi, who, in the early 20th century convinced investors that they would get a 40 to 50% on their investment in International Postal Reply Coupons (IPRCs) within 90 days. Early investors received payouts as promised because Ponzi was using funds from later investors to give the promised payouts to earlier investors. The scam continued to grow, as more and more investors, lured by stories of huge payouts, invested their money in IPRCs. Eventually, the scheme collapsed, but not before investors paid Ponzi millions of dollars.
Today, it still works the same way. Early investors, lured by promises of huge payouts in a short amount of time, invest money in whatever investment is selling at a given time, and the early investors will receive their payouts as promised. Early investors praise success and other are enticed to invest. The Ponzi schemes grow before people eventually catch on, and the scheme collapses.
At Kennyhertz Perry, we understand that critical judgments and decisions in the investment process essential. Whether it’s stocks, bonds, real estate assets or any other type of financial commitment, the more research and preparation that is done on that investment, the better. Proper due diligence requires creativity coupled with common sense for any unnecessary surprises to be avoided, especially when it comes to money. Kennyhertz Perry regularly counsels potential investors in many areas and can assist in the due diligence process.
Kennyhertz Perry, LLC is a business and litigation law firm representing clients in highly regulated industries. The firm was founded by two veteran Kansas City attorneys, John Kennyhertz and Braden Perry. To learn more about the firm, visit kennyhertzperry.com.