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Monday
Feb042013

Guilty Plea in $50 Million Real Estate Ponzi Scheme 

A New Jersey man pled guilty to orchestrating a real estate Ponzi scheme that took in more than $50 million from over 200 victims.  David Connolly, 51, agreed to plead guilty to one count of securities fraud and one count of money laundering.  In return for his plea, the government agreed to drop the remaining thirteen charges in the 15-count indictment originally returned by a federal grand jury in May 2012. The securities fraud charge carries a maximum sentence of twenty years, while the money laundering charge has a maximum term of ten years.  

Connolly was originally charged back in May 2012 by both the Department of Justice and the Securities and Exchange Commission.  According to authorities, Connolly began forming separate investment vehicles in 1996 to be used for separate offerings of securities to investors, who were told that the proceeds would be used to acquire and manager one or more rental apartment buildings in Pennsylvania or New Jersey.  For each offering, Connolly drafted an offering prospectus that was provided to investors and detailed the "shares" each would receive in return for their investment.  In total, Connolly raised more than $50 million from over 200 investors.

According to authorities, the operation turned criminal sometime in 2006, when Connolly fraudulently induced investors to purchase interests in certain investment vehicles by making material misrepresentations concerning the use and segregation of investor funds.  For example, while Connolly represented that the proceeds of an offering would be used solely to purchase the specific properties identified in the offering prospectus, this was inaccurate.  Instead, on numerous occasions Connolly used funds from one offering to purchase properties that were the subject of a different offering.  Additionally, Connolly used investor funds to make purported cash flow dividends from the performance of the properties tied to each offering, a classic hallmark of a Ponzi scheme.  Investor funds were also used to make improper payments totaling $2 million to Connolly, as well as refinance properties and other unauthorized uses.  When the scheme unraveled in 2009, the properties owned by the investment vehicles were forced into foreclosure, thus eliminating all investor interests.

Connolly is scheduled to be sentenced June 4, 2013, and faces up to thirty years in prison for the securities fraud and money laundering charges.  As part of his plea agreement, Connolly also agreed to forfeit nearly $10 million.   

A copy of the SEC lawsuit is here.

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