The owners of a Los Angeles-based real estate company were charged last week by the Securities and Exchange Commission with violating antifraud and securities registration provisions by defrauding investors through a business that had false track records.
The SEC alleges that Michael Stewart, John Packard and Randall Smith created Apartments America LLC to pool investor proceeds from an unregistered offering of securities in order to invest primarily in apartment buildings in Southern California and Arizona.
Potential investors were solicited through a website, Internet advertisements, cold calls, letters and newspaper ads. The defendants claimed that they were producing an annual return on investment of at least 60% and creating more than $100 million in net equity.
However, investors did not know that Apartments America was a new company with no assets or track record. The three fraudsters were using the same investment strategy and statistics from a previous bankrupt company that had defaulted on $91.6 million in promissory notes held by 647 investors.
“Stewart, Packard, and Smith deliberately omitted information about their bankrupt operation and created the appearance that Apartments America was a successful venture and sound investment opportunity. In reality, it was the same failed business model masked under a new name to lure and deceive investors,” said John McCoy III, associate director of the SEC's Los Angeles regional office.
According to the SEC's complaint filed in federal court in Orange County, Calif., the defendants formed Apartments America in September 2009, just three months after Pacific Property Assets filed for bankruptcy. In the months prior to defaulting on its promissory notes, PPA was actively soliciting investor funds and promising an annual interest rate of 24% to 30%, the SEC said.
Under Apartments America, whose securities have never been registered with the SEC, the SEC alleges that the defendants similarly solicited investor funds with the same plan to purchase apartment buildings. But they engaged in a concerted scheme to distance themselves from PPA and its bankruptcy.
When communicating to potential investors, the defendants supposedly used selective PPA investments and touted them as Apartments America data. For example, the defendants came up with the 60% annual return on investment by picking PPA’s successful property investments while omitting the losses incurred on more than 50 properties in PPA’s portfolio at the time of its bankruptcy, the SEC revealed.
Stewart, Packard, and Smith also misrepresented that they had created more than $100 million in net equity by calculating some of PPA's property investments while omitting information about its bankruptcy and the losses on its bankrupt properties. They also falsely represented to potential investors that they were managing a property portfolio valued at more than $200 million when that in fact referred to PPA's bankrupt property portfolio, which was actually being managed by the bankruptcy trustee.
