REITs

SEC Cases: Atlanta Fund Manager is Accused of Misusing Investors’ Funds and Final Judgments are Reached in $1.95M Matched Trades Scam and in REIT Fraud Case Against Ex-ARCP CFO Brian Block

Published on: February 14, 2018 | by Shepherd Smith Edwards & Kantas, LLP

SEC Accuses Atlanta Man of Misusing Over $1.2M in Investor Funds

In an enforcement action, the US Securities and Exchange Commission is accusing Timothy S. Batchelor of misusing over $1.2M in investor monies. The funds were supposed to go toward the development of a submarine vessel and to businesses involved in national security.

According to the regulator’s complaint, of the $2.4M that Batchelor raised from investors through the Specter Ventures Fund II, he improperly spent half of the money, including almost $250K to buy new cars and about $225K to cover student loans. He allegedly moved thousands of dollars in investor monies to his own relatives. Batchelor also is accused of trying to conceal his actions by faking a document that misrepresented unauthorized expenditures as a loan.

Texas REIT UDF Files Lawsuit Accusing Hedge Fund Manager of Damaging False Statements

Published on: November 30, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The United Development Funding, a beleaguered Texas real estate investment trust accused of running a $1B Ponzi-like scam, is suing a hedge fund manager for the allegedly “false and disparaging” statements that led to the fraud allegations.

The REIT came under fire two years ago after an investor website issued a report accusing UDF IV of being run like a Ponzi scam. For the last two years, our Texas securities fraud lawyers at Shepherd Smith Edwards and Kantas LTD, LLP has been fielding calls from investors who suspect they may have suffered financial losses from investing in UDF Funds.

According to UDF’s complaint, filed in Dallas County, hedge fund manager Kyle Bass and his Hayman Capital Management are the ones that anonymously published the Ponzi allegations online and then later on a proprietary site. They allegedly did this to damage the UDF Funds.

In its filing with the US Securities and Exchange Commission about the complaint, the REIT accused the defendants of engaging in “false and disparaging statements,” including that: the UDF Funds were part of a Ponzi fraud, they were unable to run their own business, had insolvency problems that made their shares “worthless,” their real estate developments that were “not genuine,” and they “misappropriated” investors’ funds. The filing countered that the UDF Funds were “successful” and had actual real estate developments. The REIT claims that because Bass had set up a “large short position” in the Texas REIT before publishing the false allegations, he and his company “profited” from the damages wreaked by their claims.

Bass had a short position in the REIT. Once he disclosed this news, United Development Funding shares plunged in price. In response to this lawsuit, the hedge fund manager claims it is meritless.

Judge Approves $31M Class Action Securities Settlement Over RCS Capital Shares

Published on: October 5, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In New York, a federal judge has approved a $31M shareholder fraud settlement reached in the class action securities case filed by investors that purchased stock in former broker-dealer RCS Capital. The plaintiffs, including lead plaintiffs the City of Providence, Rhode Island and the Oklahoma Police Pension Fund, had sued the brokerage firm, its head Nicholas Schorsch, and other ex-executives in 2014 claiming that that RCAP and the other defendants misled investors with “false and misleading statements and omissions” about RCAP’s business prospects.

The investors contend that they purchased RCS Capital stock at prices that were artificially inflated because of these statements. They are claiming massive shareholder losses.

RCAP, once controlled by Schorsch and others, was a privately held brokerage firm that wholesaled American Reality Capital nontraded REITs. Schorsch also owned ARC, which set up and managed the real-estate investment trusts.

Securities Fraud: Investment Manager is Accused of Bilking Retired Teacher of $950K, Ex-U. Va Football Player is on Trial in $9M, and Former Investment Adviser Pleads Guilty

Published on: August 16, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Wyoming Investment Manager Indicted for Allegedly Bilking Retired Investor
Tyris D. Maxey has been indicted on multiple counts of wire fraud and he was arrested this week. Maxey, a Wyoming investment manager, owns RB Mister Enterprises LLC. He allegedly convinced a retired school teacher to give him about $950K to invest and then using almost all of the funds on his own expenses.

Meantime, any investments he made with the investor’s money experienced “heavy losses.” Funds that he gave to the investor, which he claimed were returns, were actually the same funds that the teacher had given him to invest.

Maxey pleaded not guilty to the criminal charges of financial fraud.

Securities Fraud: Ex-American Reality Capital Properties CFO is On Trial, Abu Dhabi Investor’s Lawsuit Against Citibank is Revived, and Drivers File Class Action Case Against Juno

Published on: June 20, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Former REIT CFO’s Criminal Trial is Under Way
Brian Block, the ex-American Realty Capital Properties CFO, is on trial over his alleged involvement in accounting errors that led to the former Nicholas Schorsch-controlled real estate investment trust’s release of inaccurate financial statements during the first two quarters of 2014. As a result of the inaccuracies, ARCP overstated its adjusted funds from operations (AFFO) by about $12M for the end of that first quarter and by about $10.9M for the second quarter while understating its net losses.

This week, Lisa McAlister, a key witness and ARCP’s ex-chief accounting officer gave testimony. She suggested that Schorsch, the REIT’s CEO and chairman at the time, instructed Block on how to distort the number in the books. Block was McAlister’s boss at ARCP.

McAlister said that she was in the room when Schorsch advised Block on how to hide the fraudulent accounting. McAlister said that Schorsch, who has not been charged with wrongdoing in the accounting mistakes, was instructing Block on how to compensate for a 3-cent shortfall in ARCP’s targeted AFFO/share by fudging a certain line item.

McAlister has already pleaded guilty to fraud charges over ARCP’s accounting irregularities.

Securities Cases: David Lerner Associates Settles Nontraded REIT Sales for $700K, RBS Resolves Investor Lawsuit, and HSBC Holdings Settles More Libor Rigging Claims

Published on: May 31, 2017 | by Shepherd Smith Edwards & Kantas, LLP

David Lerner Associates to Pay NJ Over Nontraded REIT Sales

David Lerner Associates has agreed to pay a $700K penalty to resolve allegations accusing it of illegally selling nontraded real estate investment trusts in the state of New Jersey. In the consent order from the New Jersey Bureau of Securities, the firm also agreed to pay $50K to a fund for investor education, as well as $100K for costs.

At issue are the nontraded REITs Apple 9, Apple 8, and Apple 7. In early 2014, the three REITs merged together and became Apple Hospitality REIT Inc (APLE). Investors complained to the state regulator about the sale of the three REITs, which raised money to purchase hotels. After the NJ regulator contacted the firm about possible failures in its compliance system related to the sale of the non-traded real estate investment trusts, David Lerner Associates said it would assess its sale of the REITs there.

Investors File Nontraded REIT Fraud Lawsuit Accusing Nicholas Schorsch And Others of Stealing from RCAP

Published on: March 10, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In Delaware Chancery Court, investors have brought a nontraded real estate investment fraud lawsuit against former RCS Capital (RCAP) CEO Nicholas Schorsch accusing him and his partners of enriching themselves by taking revenue from the publicly traded brokerage holding company. The plaintiffs are part of the RCS Creditor Trust. They are unsecured creditors who say they lost all of their investments with RCAP.

It was just last year that RCAP filed for bankruptcy after falling into millions of dollars in debt. It emerged as Aretec, the holding company that controls Cetera Financial Group.

The plaintiffs contend that Schorsch and partners Peter Budko, William Kahane, Brian Block, and Edward “Michael” Well took advantage of their authority at RCAP to enrich AR Capital, which was the nontraded REIT business that they wholly owned.

Purshe Kaplan Sterling Investments Must Pay Native American Tribe $3.4M Over Excessive Sales Charges Involving Nontraded REITs and BDCs

Published on: February 22, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering Purshe Kaplan Sterling Investments (PKS) to pay almost $3.4M in restitution to a Native American tribe. The tribe had paid excessive sales fees for the purchase of Business Development Companies (BDCs) and non-traded Real Estate Investment Trusts (REITs).

Gopi Vungarala was the Purshe Kaplan Sterling registered representative for the tribe from 7/2011 through at least 1/15/15. He was also the tribe’s Treasury Investment Manager at the same time. It was his job was to oversee the group’s investment portfolio.

FINRA’s case against Vungarala in this matter has yet to be resolved. However, Purshe Kaplan Sterling must also pay $750K for its purportedly inadequate supervision of nontraded REIT and BDC sales.

Texas Ponzi Scams: Oil Co. Owner Is Indicted by a Federal Grand Jury, CEO of Texas First Financial is Charged in Internet-Related Fraud, and Texas REIT United Development Funding Remains in Trouble

Published on: December 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Texas First Financial CEO is Arrested For Fraud

Authorities have arrested Bobby Eugene Guess, an ex-Texas-based registered representative and the CEO and founder of Texas First Financial, for financial fraud. Guess promoted himself as a financial expert through financial seminars and radio promotions in the Dallas-Fort Worth area.

He is accused of running a Ponzi scam online involving two companies—StaMedia Inc., which is a Dallas company, and TenList Inc. According to the Texas State Securities Board, Guess was indicted for money laundering, securities fraud, theft, and taking part in organized criminal activity involving the multi-million-dollar sales of investments in an internet ad company.

Prosecutors contend that Guess and others sold $6M in investment contracts, stock certificates, and notes in Stamedia Inc. Also, he allegedly raised millions of dollars from Stamedia investors from ’14 to ’16 but did not disclose that the company’s net income and revenue were negligible. Investor funds were allegedly used to pay earlier investors the returns they were promised.

American Capital REIT is Accused of Charging Hundreds of Millions of Dollars in Excessive Fees

Published on: October 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A class action securities case brought by stockholders is accusing American Capital Agency Corp. of charging excessive management fees that were given to directors and executive officers as compensation. The real estate investment trust invests in agency mortgaged backed securities “on a leveraged basis.” Because of this, American Capital must pay 90% of profits to investors as dividends.

However, according to William Wall, the lead plaintiff in the REIT case, a number of the individual defendants “improperly funneled” millions of dollars that should have gone to AGNC stockholders. He said that the REIT’s board allegedly forced the company to pay the AGNC Manager “exorbitant” fees in light of the management agreement between the AGNC Manager and AGNC. The fees went to the defendants.

Noting that the REIT’s dividend is a key metric for its success, the class action securities complaint said that in 2012 the board cut AGNC’s dividend by over 50%. The plaintiff said that the board had the contractural right to either end the unfair management agreement or make the AGNC Manager charge fees that were fairer. Instead, AGNC allegedly kept paying the manager over $100M annually even though results were “abysmal.”