Real estate investor, Louis Glickman shared, “The best investment on Earth is earth.” The long run-up in prices in the Lone Star state brought real estate investors from around the globe to follow Glickman’s advice from 2017 to 2019. Some investors did great, some okay and then there were 100 investors who hooked up with real estate developer Timothy Barton to the tune of $26 million.
Three men were at the core of this fraudulent real estate investment scheme, according to a recent suit filed by the SEC. Barton teamed with a home builder who’d been in the trade for 30 years, Stephen Wall, and a Chinese-based investment broker, Michael Fu. Prior to inventing the real estate investment scheme, Wall sold homes to Fu’s Chinese clients. However, greed entered the scene, and the three-some decided to sell unregistered real estate fund investments.
The Investment Scam
Financial investors loaned the real estate entities money which was to purchase the raw land to be developed into residential subdivisions. The investors were told they would receive their principal back within two years, and would also receive annual interest on their investment. The price of the land parcels was set forth in the agreements.
The Wall entities (companies receiving investor funds) did not contribute funds to the deal as promised. Instead, the cost of land parcels was inflated, so they could raise more money. With the land value overstated, the investments became riskier even before the gross misappropriation of funds alleged by the SEC. SEC Litigation News Release
In just over two years, Barton, Wall, and Fu wrangled $26 million for the purchase of land in nine offerings. However, only two parcels of land were acquired for $2.6 million. The balance of the investors’ money was “misappropriated and misused.” Barton bought a plane and paid family credit card bills and rent. Fu received undisclosed sales commissions and fees amounting to about $3.76 million. Wall received payments as well. Some investors received Ponzi scheme payments to keep them quiet. The money also went to acquire property in unrelated deals.
Just When You Thought It Couldn’t Get Worse
To add insult to injury, Barton obtained loans against one of the investors’ properties. He did not use the funds to improve the property, however. Barton repaid the first loan, but he failed to repay a subsequent note, leaving the principal plus $400,000 in interest and fees secured against the investors’ land.
At the end of the scheme, most investors were out of both their principal investment and about 80% of the promised interest payments. SEC Litigation Complaint
The Wall Entities did not contribute to the projects as promised. Properties’ values were vastly overstated, and most were never purchased. Many of the investments included a “corporate guarantee by one of Barton’s other entities, JMJ Holdings, LLC for ‘up to the principal loan amount in the event of default.’” However, JMJ was a dormant company with no assets. And, in order to perpetuate the fraud, the quarterly investor reports made false statements about the status of the projects. SEC Litigation Complaint
Managing Your Investment Risk
Most investors know that oil and gas and crypto-currency investments come with additional risk. But almost all investors know someone who has made money in real estate. In this case, how would investors know to be wary of this investment scam? None of the players had prior criminal records; nor did they have prior issues with the SEC. The salesperson had put people into successful deals in the past, and the developer had thirty years in the business. Some investment fraud schemes are easier to uncover than others. What could investors have done to decrease their risk?
- Research the listings for properties for sale. Investors could have asked for addresses of land purchases in the works to investigate the value themselves.
- Asking for land appraisals might have helped if the investor verified the appraisal information.
- Verify the company that is securing the note has assets.
- Require public accounting review.
- Visit the proposed development sites, or have someone you trust visit to check on progress.
- Verify the broker and/or the deal is registered with the SEC or the state.
Investment Fraud Attorney – Mark A. Alexander, P.C.
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