SEC Investigating Mortgage Company That Raised $1 Billion From Investors
The Securities and Exchange Commission has asked a Miami federal judge to enforce subpoenas against nearly 250 companies affiliated with Woodbridge Group of Companies, LLC ("Woodbridge") in connection with the Commission's investigation into whether "the company is perpetrating a fraud on its investors." In a proceeding filed today seeking an order compelling the production of various financial- and investor-related documentation, the Commission disclosed its ongoing investigation into Woodbridge's receipt of more than $1 billion in investor funds relating to various real-estate offerings. The move comes after the Commission successfully brought a similar action against Woodbridge after the company refused to produce any of its emails and several officers, including CEO Robert Shapiro, invoked their Fifth Amendment rights in sworn investigative testimony.
According to the Commission, Woolbridge, based in Sherman Oaks, California, has raised over $1 billion from thousands of investors nationwide through various products offered for investment. These products include the First Position Commercial Mortgage ("FPCM"), which the company describes as:
“[a] private third-party loan to Woodbridge [which] provides higher returns with shorter terms secured by commercial real estate. Private lenders select a commercial mortgage in Woodbridge’s inventory to serve as collateral for their private loan. They are recorded on title and acquire a first lien position on the mortgage. And every lender is paid monthly interest from the moment they loan to Woodbridge at a fixed annual 5% interest with a return of principal at the end of the one-year term.”
In other words, investors loan money to Woodbridge which purportedly uses those funds to acquire properties and in return pays investors a 5% annual return as well as records those investors on the property title. According to the Commission, Woodbridge forms a limited liability company for each one of the properties it acquires in order allegedly for liability purposes. Woodbridge also raises money using investment offerings through entities such as Woodbridge Mortgage Investment Fund III, LLC.
The Commission began investigating Woodbridge in September 2016 for what it described as "possible significant violations of the securities laws," including "the offer and sale of unregistered securities, the sale of securities by unregistered brokers, and the commission of fraud in connection with the offer, purchase, and sale of securities." While the Commission first informally reached out to the company to request documents in late 2016, the lack of any response forced the Commission to issue a formal subpoena for certain documents including email correspondence between Woodbridge principals, investors, and sales agents. While Woodbridge produced documents in response to the subpoena, the Commission took issue with its failure "to produce many of the requested documents critical to the investigation." In addition,
Many key witnesses, including, but not limited to, Mr. Shapiro, D.R., Woodbridge’s Managing Director of Investments, and N.P., Woodbridge’s Controller, have invoked their Fifth Amendment rights in sworn investigative testimony, and have thus refused to answer any substantive questions or provide any of their e-mails.
The Commission then provided several prioritized requests for certain documents, including emails, but was informed by Woodbridge's counsel that only one person at the company was available and capable of searching for emails and that the company could not afford to contract with a third-party vendor. After Woodbridge's counsel attempted to meet with senior leadership at the Commission to discuss the investigation, the Commission filed an action in July 2017 seeking to compel Woodbridge's compliance with the subpoena. The Court granted that request on September 20, 2017, ordering Woodbridge to produce responsive documents and emails using Court-ordered search terms.
In connection with the discovery that Woodbridge formed separate companies to purportedly hold their commercial properties, the Commission sent out subpoenas to the 236 LLCs it had identified. The Commission alleged that:
The 236 LLC subpoenas sought basic information about the formation, ownership and bank account information about the LLCs, in order to garner further insight into their affiliation and connection with Woodbridge and its President, Robert Shapiro. However, despite service of the subpoenas, and demand letters sent approximately six-weeks later, the Commission has not received a response from 235 of the LLCs.
According to the Commission, its investigation demonstrated that "many, if not all, of these LLCs may be Woodbridge affiliates with Shapiro as their Manager." The 235 subpoeaned LLCs failed to respond to the Commission's subpoenas, and the Commission filed an action yesterday seeking to compel their compliance.
A quick Google search shows that several state securities regulators have investigated various Woodbridge entities. For example, several Woodbridge Mortgage Investment Fund entities entered into a consent order in May 2015 with the Massachusetts Securities Division in which the entities neither admitted nor denied that they had sold unregistered securities, agreeing to cease selling unregistered securities to Massachusetts residents, offering rescission to those investors, and also agreeing to pay a $250,000 civil penalty. Similarly, the Michigan Department of Licensing and Regulatory Affairs recently issued a Notice and Order to Cease and Desist in August 2017 to Woodbridge Mortgage Investment Fund II, LLC, ordering the entity to cease and desist from selling unregistered securities and from omitting to state material facts.
A copy of the Commission's Application is here.