The Securities and Exchange Commission ("SEC") obtained an emergency asset freeze and charged a father and son with operating a $220 million Ponzi scheme that ranks as one of the largest schemes uncovered to date. Wendell Jacobson, 58, and his son Allen R. Jacobson, 33, along with their company Management Solutions, Inc., were charged with violations of multiple federal securities laws, including fraud and the sale of unregistered securities. The SEC is seeking injunctive relief, disgorgement of ill-gotten profits, civil monetary penalties, and the appointment of a receiver to marshal assets for the benefit of defrauded investors.
According to the SEC, the scheme began in January 2008, and centered around soliciting investment in limited liability companies that directly or indirectly owned and maintained apartment complexes in multiple states. Operating as Management Solutions, investors were told that the company purchased apartment complexes with low occupancy rates at a deep discount. The complexes were then renovated and resold within five years. Investors were promised annual returns ranging from 5% to 8%, paid monthly, and assured that their underlying principal investment was safe. Wendell Jacobson represented to investors that Management Solutions had achieved historic returns of 12% to 15%, and that only one apartment investment had failed to return a profit - in which case Jacobson covered the loss personally so that investor returns would remain unchanged. Additionally, Management Solutions represented that, even during its worst performing years, investors had still enjoyed annual returns of approximately 13%. Based on these misrepresentations, the company raised over $200 million from 225 investors.
The Jacobsons were also members of the Church of Jesus Christ of Latter Day Saints, which the SEC alleges they exploited to solicit additional investors. However, rather than use investor funds for their stated purpose, investments were almost immediately diverted to one of several collecting accounts, where funds were commingled with other investor funds. Investor returns were paid from new investor funds - a classic hallmark of a Ponzi scheme. According to the SEC's complaint, as of December 31, 2010, one of the collecting accounts had outstanding debts to investors and other LLC's of approximately $103 million. However, the current balance of that account is under $200,000.
Last month, attorneys for the Jacobsons indicated to the SEC that rescission offers were being made to members of all of the companies under the umbrella of Management Solutions. Despite the fact that misrepresentations continue to be made in the offers, the Jacobsons cite the ministerial failure to register the investments with the SEC as the reason for rescission.
While the SEC acknowledges the FBI's assistance in the investigation, the Jacobsons have not been charged with any criminal wrongdoing.
A copy of the complaint is here.