The Securities and Exchange Commission filed civil fraud charges against a North Dakota company and two of its principals, alleging that the company raised at least $62 million in a Ponzi scheme - likely the largest ever in North Dakota - that promised lucrative returns through the development of "man camps" that served as temporary housing for oil field workers. North Dakota Developments, LLC, along with Robert Gavin and Daniel Hogan, were charged with multiple violations of federal securities laws in an action filed in North Dakota district court. The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties.
Gavin is an 80% owner of NDD and resides in Malaysia, while Hogan was a 20% owner of NDD who resided in the United Kingdom. Beginning in May 2012, NDD began marketing the sale of interests in several temporary housing projects located in North Dakota and Montana that would house oil field workers in the Bakken oil field region. These investments were marketed through NDD's website, www.nddgroup.com, as well as print and online advertisements, seminars, conference calls, and flyers. In addition, NDD utilized agents who were paid commissions for the successful recruitment of new investors. Potential investors were offered the ability to purchase "units" in NDD's projects that would yield impressive returns as a result of NDD's purported development and management.
For example, one project known as Watford West was advertised as a modular housing unit on State Road 85 in Arnegard, North Dakota. Watford West was sold in three phases beginning in May 2012, and a brochure distributed to potential investors advertised projected first year income of 36% to 42%. NDD further estimated that investors would average returns of 48% - 56% over the following ten years, and also offered investors the option of a 23.5% guaranteed investment return. A purchase price for each "unit" varied, but typically ranged from $50,000 to $90,000. While investors were given the option of managing their own "unit," doing so resulted in a required $24,000 lease "payment" to NDD. Not surprisingly, every investor gave NDD responsibility for managing their units. In total, NDD raised at least $62 million from hundreds of investors from both the US and foreign countries.
However, the "man camps" did not experience the success or performance represented by NDD. For example, the Commission alleges that the Defendants knew by late 2013 that the Waterford West project was suffering significant delays and would not be as profitable as previously promised. Other projects have experienced similar issues, with each having varying levels of inoperability - including one that has twice been denied approval by local authorities. Recently, Waterford West had occupancy of approximately 30% with average nightly rates of $80 - well below what was promised investors. Yet, despite learning of these delays, the Commission alleged that the Defendants continued to make promises of lucrative first-year returns.
Despite the significant funds raised from investors, the Commission claims that less than $100,000 remained in NDD's operating account in early 2015 as a result of Gavin and Hogan's significant misappropriation of investor funds. This includes nearly $2 million in investor funds used to fund an unrelated oil-and-gas project, $5.5 million for the unrelated purchase of several real estate parcels, $500,000 to fund an unrelated engineering project, and over $3 million for the men's personal expenses. Further, more than $10 million is alleged to have been paid in undisclosed commissions to agents for recruiting new investors - a total that amounts to nearly 20% of all funds raised. The Commission also alleges that millions of dollars in new investor funds were used to pay returns to existing investors in Ponzi-like fashion.
The Complaint indicates that Defendants have stopped paying returns to investors due to the unprofitability of Watford West and the lack of available funds.
According to Ponzitracker's Ponzi Scheme Database, the scheme is just the third Ponzi scheme to be discovered in North Dakota since 2008. Given the size of the scheme, it is likely the largest financial fraud in North Dakota's history.
The Commission's Complaint is below: