The Wall Street Journal reported recently that the Securities and Exchange Commission (SEC) has filed suit against four individuals for alleged fraud in the real estate mortgage arena.
The four principals of the firm, Radical Bunny, LLC which is located in Phoenix, Arizona, are alleged to have defrauded about 900 investors nationwide who invested a total of $197 million that was then funneled to Mortgages, Ltd.
After the funds were raised, Mortgages, Ltd. used the funds to make short-term loans at high rates of interest to commercial real estate developers in the building of malls, condo projects, office complexes and various other developments. Mortgages, Ltd. sought bankruptcy protection in June 2008 and in a tragic turn the following month, its chief executive took his own life.
The four individuals involved also invested in the venture and sustained losses. According to their attorney, the principals did not mislead investors. He noted the fact that the principals made their own investments and subsequently suffered losses along with their investors, evidences their good faith.
However, the SEC doesn't agree.
The SEC's suit claims that investors were misled by the principals of Radical Bunny through material misrepresentations not only about the safety of their investments, but also the risks involved and the nature of the underlying investments.
The SEC suit also claims that the defendants' received legal advice that the investments were subject to securities laws, but investors were told otherwise.
As in the case of many of the Madoff investors, funds were raised through word-of-mouth through the defendants' friends and family.
In its press release issued July 31, 2009, the SEC claimed that in this scheme the "promoters promised investors more than they could possibly deliver." Rosalind Tyson, Director of the SEC's Los Angeles Regional Office noted that "Even to friends and family, they repeatedly overstated the safety of the investment and their knowledge of the underlying business to which they lent investor funds. Unbeknownst to investors, more and more of their money was being shifted into fewer and riskier loans."
According to the SEC, the defendants invested over time in fewer and more risky loans while the investors were kept in the dark as to the underlying investments. The suit seeks financial penalties against the principals, as well as injunctive relief. Radical Bunny is currently in bankruptcy proceedings.
At this point, we don't need to be reminded that investors must be diligent in their knowledge of the principals of any venture and the underlying investments being made. Seeking an independent legal opinion is always a good idea.
Related Web Resources
The complaint against Radical Bunny, LLC can be read in full on the SEC's website.
