SEC Alleges Illinois Developer Ran $41 Million Real Estate Ponzi Scheme

The Securities and Exchange Commission has charged a Chicago property developer and his companies with violating federal securities laws based on allegations that a fix-and-flip real estate investment pitched to hundreds of investors was in reality a $41 million Ponzi scheme. Glenn C. Mueller, 72, and seven entities were named as defendants in an action filed by the Commission in a Chicago federal court on Thursday, September 5, 2019. In addition to seeking the standard injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties, the Commission has also requested the appointment of N. Neville Reid as a federal equity receiver to take control of Mueller’s entities and marshal assets for the benefit of defrauded victims.

In addition to Mueller, the Commission’s Complaint also named Northridge Holdings, Ltd., Southridge Holdings, Ltd., Eastridge Holdings, Ltd., Brookstone Investment Group, Ltd., Guardian Investment Group, Ltd., Unity Investment Group I, Ltd., and Amberwood Holdings, L.P. as defendants. According to the Complaint, potential investors were told that Northridge was in the business of buying and improving undervalued or mismanaged multi-family residential buildings. The company touted its “nearly 50 years” of real estate business expertise, with its recent February 2019 marketing materials claiming to operate 11 different properties with 935 total units.purchased with a total of $57 million.

Beginning no later than May 2014, Northridge began offering “real estate promissory notes” that paid annual interest of 3% until the funds were invested in a specific property. At the same time, the company also began selling promissory notes characterized as “CDs” or “CD loans” carrying terms ranging from one year to five or more years and annual interest rates ranging from 3% to 6% depending on the note term. Mueller also promised higher interest rates to certain noteholders who invested a larger amount or agreed to a longer note term. From at least May 2014 to April 2019, the Defendants sold at least $41.6 million in promissory notes to 319 investors across 32 states.

As is increasingly common in alleged investment frauds, the Complaint highlights Mueller’s appeal to potential investors based on charitable and religious beliefs by, for example, touting the presence of a church-sponsored resource center located at a large Northridge apartment complex. A Fall 2016 newsletter sent to investors again promoted the church and concluded by saying,

“Your investment in Northridge is growing financially and I believe God rewards those who help others in need. You are benefitting [sic] from both areas. Thank you for working together with us to make this a good investment.”

Northridge’s marketing materials told potential investors that their funds would be used to buy and renovate real estate assets, that each loan was secured by “any and all of the properties and their cash flow,” and the ensuing cash flow would “back up the promissory notes.”

But, the Commission alleges, Mueller and Northridge made numerous misrepresentations to investors in the course of operating a Ponzi scheme that depended on the inflow of new investor funds. When Northridge’s cash expenditures began to exceed the company’s cash inflows, it began using new investor funds to make interest and principal payments to existing investors. The Commission also claims that Mueller diverted nearly $2.5 million in investor funds to trade stocks and options and to make loans to family members. After Mueller learned of the Commission’s investigation in March 2019, he allegedly solicited two new investments totaling $650,000 and used a significant portion to make Ponzi payments, pay legal fees, and to settle a lawsuit involving two previously-purchased properties. Mueller also invoked his Fifth Amendment rights against self-incrimination when subpoenaed for testimony by the Commission.

The action comes almost exactly a year after the Commission filed charges against a separate Chicago-based real estate investing company on charges it was operating a $135 million Ponzi scheme.

The charges also mark the latest scheme discovery in what has been an active 2019. In a recent Ponzitracker analysis of Ponzi scheme discoveries in the first half of 2019, the number of schemes discovered was nearly statistically identical from the same period in 2018. However, the average and median scheme size in the first half of 2019 was nearly double and triple, respectively, from the same period in 2018, perhaps indicating that schemes have recently been able to raise money at a quicker clip.

California Woman Accused Of $300 Million Liquor License Financing Ponzi Scheme

The Securities and Exchange Commission has filed an emergency enforcement action against a California woman accusing her of running a massive $300 million fraudulent scheme involving liquor licenses that essentially operated as a Ponzi scheme by using new investor funds to pay fictitious returns to existing investors.  Gina Champion-Cain, of San Diego, California, and her entity ANI Development, LLC (“ANI Development”), were accused of violating federal securities laws in a Complaint filed on Thursday.  Another company operated by Champion-Cain, American National Investments, Inc. (“American National”), another entity founded and operated by Champion-Cain and an alleged affiliate of ANI Development, is also named in the action as a relief defendant.  The Commission announced that Champion-Cain has agreed to entry of a preliminary injunction, asset freeze, and the appointment of a receiver over ANI and the relief defendant.  

According to the Complaint, Cain began offering investors the chance to make high-interest short-term loans to applicants seeking California liquor licenses sometime in 2012.  Cain told investors that their funds would be used to loan the license purchase price required to be escrowed during the purchase process which at completion would then generate an interest payment to be split by ANI and the investor. 

Cain’s first investor, a high net-worth real estate investor who had previously invested with Cain, prepared an escrow agreement that provided, among other things, that his investment would only be used for the promised purpose and that his money would be kept in an escrow account for the duration of the license transfer process.  The SEC claims that Cain falsely told investors she had cleared the form of the escrow company and that Cain also warned investors not to contact the company, in one instance emailing the escrow company and instructing them:

“[I]f they call asking about escrow agreements and alcohol licenses, blah, blah, blah… just say ‘SURE WHATEVER NOW SHOW ME THE MONEY… HAHAHAHA’” 

After Cain’s first investor personally invested approximately $250 million through accrued principal and interest rollovers, he began to bring in other investors who were provided with a list of potential liquor licenses they could fund that Cain claimed to have received from a California attorney.  Accoridng to the SEC, that list “contained largely cancelled or expired liquor licenses.” ANI also raised funds from a second investor group that were provided with short-term promissory notes promising annual returns ranging from 15%-25% depending on the loan type.  Investors were provided with an escrow agreement signed by the company’s escrow officer.

But according to the Commission, “ANI Development’s investment strategy was wholly fictitious…[and] ANI does not appear to have made a single loan to alcohol-license applicants.”    For example, investors allegedly deposited nearly $88 million in 2017 to a pooled escrow account yet not a single dollar was ever escrowed to “actually facilitate….the transfer of the alcohol licenses identified in the false investor escrow agreements.”  Instead, Cain allegedly used those funds to support other unrelated businesses controlled by relief defendant American National and also to make principal and interest payments to existing investors - a classic hallmark of a Ponzi scheme.  Through the unauthorized diversion of investor funds and the payment of above-average returns, the scheme also depended on an infusion of new investor funds since there apparently were no legitimate liquor license loans being made.  The escrow agreements were also purportedly phony, with Cain accused of forging the signature of escrow officers. 

As recently as July 2019, the Commission claims that Cain sent a “bogus email” to the high net-worth investor purporting to come from an escrow officer who confirmed a $140 million escrow account balance.  That in turn allegedly induced the investor to invest another $2.2 million with Cain.  The account had nowhere close to the represented balance, however, and the Complaint alleges that approximately $11 million is remaining while Cain’s investors are owed at least $120 million in outstanding principal.

While there is no mention in the Commission’s news release of any criminal charges, the existence of fabricated escrow agreements and doctored emails, if true, could also signal potential criminal liability.

Given what appears to be a significant shortfall in assets, which appears to be attributable to funds diverted to unrelated businesses and the payment of 15%-25% returns, the appointment of a receiver may signal potential fraudulent transfer actions against investors who were able to handsomely profit by withdrawing their accrued interest payments.  

A copy of the Complaint is below: 

Pennsylvania Woman's Alleged $100 Million Ponzi Scheme May Be Largest Scheme Run By A Woman

A Pennsylvania woman is facing charges from civil and criminal regulators on allegations that her hedge fund was operated as a massive Ponzi scheme that raised over $100 million from dozens of investors. Brenda Smith, 59, was arrested Tuesday morning on a criminal complaint from the U.S. Attorney’s Office for the District of New Jersey charging her with four counts of wire fraud and one count of securities fraud. That same day, the Securities and Exchange Commission filed an emergency enforcement action alleging violations of federal securities laws and secured an asset freeze against Smith and her entities. Each of the criminal charges carries a maximum sentence of up to twenty years in prison. Based on preliminary research and a review of Ponzitracker’s database of Ponzi schemes, it is believed that Smith’s alleged scheme is not only the largest Ponzi scheme in Pennsylvania history but possibly the largest scheme run by a woman.

The SEC named Smith and the companies she controlled, Broad Reach Capital, LP (the “Fund”), Broad Reach Partners, LLC (“Partners”), and Bristol Advisors, LLC (“Bristol”), as defendants, alleging that Smith began soliciting investors for the Fund beginning in early 2016 on promises of consistent profits through lucrative trading strategies such as “Dividend Capture, VIX Convergence, Volatility Skew, S&P Premium Capture, Opportunities and Intraday Trading” as well as the Fund’s access to the Philadelphia Stock Exchange trading floor. The Fund touted its incrediblly consistent history of returns to investors, using charts in presentations claiming that the Fund had yielded positive returns for every month since inception in 2015 - even though the Fund itself did not even start until 2016. The Fund claimed to have returned 35% in 2016 and 33% in 2017 as well as a 6.07% return during the first three months of 2018. Based on these and other representations, the Fund raised more than $100 million from dozens of investors including more than $40 million from the three investors whose plights are chronicled in the Complaint.

According to the SEC, Smith’s claims about the profitability and trading success were simply false. Rather than using all investor funds for the promised trading strategies, the Complaint alleges that the balance in the Fund’s brokerage accounts never exceeded $30 million. Similarly, the Commission disputed the Fund’s claims of consistent profitability in alleging a continuous decine in the Fund’s total assets and the existence of a current “massive shortcoming” in which $63 million in investor principal is still outstanding.

The Complaint also details a chain of recent events which likely precipitated the filing of civil and criminal charges which began with an investor attempting to redeem its combined $46.6 million investment in March 2019. After the Fund failed to return the investment by the promised date in mid-May, Smith allegedly concoted various excuses for the redemption delay including providing a “proof of funds” from an unrelated entity owned by Smith and claiming that the entity owned an entire $2.5 billion bond issuance. This was easily disproven by public records. That same investor also received an “asset list” to show the Fund had sufficient assets to satisfy redemption requests, with the list including $20.25 million in “securitized cryptocurrency.” As the SEC recounts,

Attempting to substantiate this claim, Defendants provided Investor 3 with only a two-page, unintelligible document entitled “Wallet,” which shows a few lines of text with dollar figures. Fund bank records do not reflect the purchase of this purported asset.

Smith appears to have a lengthy history in the securities industry that included her ownership and management of a broker-dealer. According to the Financial Indsutry Regulatory Authority’s BrokerCheck tool, Smith had over 10 years of experience in the industry and at one point held Series 7, 24, 27, 53, and 79 licenses over a career that included stints at firms like Drexel Hamilton. Smith has a lengthy disciplinary history with FINRA that ultimately and recently resulted in her consent to be permanently barred from the industry after she refused to respond to regulatory inquiries. Notably, after an unnamed customer filed an arbitration claim against Smith in late 2018, Smith included the following response:

Registered Representative is in complete disagreement with this allegation and will defend herself including counterclaims. FINRA does not have authority over this arbitration as [REDACTED] is not and never was a customer of CV Brokerage. [REDACTED] has served a prison term for securities fraud himself. [REDACTED] alleges that Brenda Smith committed actions noted above. All are denied. [REDACTED] was redeemed involuntarily because of his hostile actions against Brenda Smith. His filing of this arbitration is retaliatory as he has no method to make the same level of returns as he received from Smith's Fund. This Fund is NOT governed by FINRA and Ms. Smith is confident this arbitration will be thrown out in its entirety.

Smith’s scheme may be historic on several levels. Based on Ponzitracker’s quick research and a review of its 11-year database, Smith’s scheme is likely the largest Ponzi scheme not only in Pennsylvania history and could also be the largest Ponzi scheme run by a woman based on investor losses. Florida woman Lydia Cladek was charged in 2012 with operating a $100 million Ponzi scheme but investor losses were likely closer to the $34 million she was ultimately ordered to repay when sentenced to a 30-year prison term. Similarly, Washington woman Doris Nelson was accused of raising $135 million from investors in a Ponzi scheme but investor losses were ultimately believed to be approximately $50 million. The SEC has alleged that Smith’s investors are currently owed at least $63 millon in outstanding principal.

A copy of the SEC’s Complaint is below: