The Securities and Exchange Commission charged a well-known Chicago rabbi with running a Ponzi scheme that raised at least $10 million from primarily Orthodox Jewish investors who thought their funds were being used to buy, operate, and sell nursing home facilities. Zvi Feiner, 49, his business associate Erez Baver, 39, and several companies operated by Feiner were charged with violating federal securities laws in a complaint filed on September 19, 2019. Baver and his company, Cedarbrook Management, Inc., agreed to settle the Commission’s charges without admitting or denying the allegations and consented to disgorgement and prejudgment interest of over $2.25 million and a civil monetary penalty to be determined at a later date. Feiner is contesting the Commission’s allegations.
According to the Commission’s complaint, Feiner formed FNR Healthcare, LLC (“FNR”) in 2007 and told investors it was “a private equity group focused on quality healthcare assets throughout the United States.” But FNR did not actually hold those assets; instead, Feiner would establish a separate LLC for each nursing home facility he purchased and then sell membership interests in those entities to investors. In private placement memorandums that were prepared for each entity, prospective investors were told they would receive an above-average annual return - often around 15% - from the operation of the specific facility they invested in, that an investment would be “low-risk,” and that they could expect a full return of their investment within three to five years.
Some PPMs also contained language or provisions designed to reassure investors of the safety and success of the investment, including claims that (i) Bayer and/or Feiner were also making a personal investment in the facility; (ii) investors would receive quarterly distributions that were paid out before any profits were paid to the managers; (iii) the investment would be so profitable that the investor would be entitled to an additional “windfall” return when the facility was sold; and (iv) that the principals had extensive experience in the industry and were currently operating a significant number of “beds” in other facilities. In total, and based on these claims, FNR and Feiner rated at least $10 million from over 60 investors from March 2014 to 2017. Many of those investors came from Feiner’s connections in the Orthodox Jewish community, including an 86-year old Holocaust survivor who alone invested over $1 million.
But the Complaint alleges that many of Feiner’s claims to investors were misleading at best and in some instances fraudulent. For example, Feiner is accused of misappropriating investor funds in at least four LLCs “upon receipt,” using those funds to pay promised distributions to investors in separate LLCs, fund operations in other struggling facilities, and misappropriate funds for his and Baver’s own personal use. Nor did Feiner and/or Baver purportedly make the personal investments they touted in various PPMs, often either failing to invest at all or making a substantially lower investment than advertised. In another instance, investors who believed their funds were being used to purchase two nursing homes were not informed about or given equity in a third facility that was purchased with their funds. Feiner also allegedly sold at least three separate facilities without telling investors who would have been entitled to a portion of the sale proceeds, instead misappropriating funds to support other separate projects, fund distributions to other investors, and for his own personal use.
The Complaint alleges that Feiner and FNR raised “at least $10 million” from March 2014 to 2017, likely focusing on that period because of the current legal uncertainty over whether the Commission is limited to a five-year statute of limitations to obtain disgorgement. But the Complaint contains other allegations showing that the actual amount raised during the entire duration of the scheme - which may have dated back as far as 2010 - may have been much higher. For example, and in addition to the four primary LLCs highlighted in the Complaint during the relevant period, the Commission claims that Feiner raised at least $8 million by selling interests in three different LLCs during 2013. When the facilities owned by those LLCs were sold, Feiner purportedly concealed the sales from the respective investors and instead misappropriated the sales proceeds by making transfers to other LLCs and paying back loans.
While the sales of the nursing facilities were often profitable, the Commission alleges that the scheme eventually collapsed under the weight of increasing obligations and eventually ceased paying investor distributions by late 2016. Only then did investors begin to ask questions, with several investors in a 2014 project learning with their attorney’s assistance in early 2017 that the property at issue had been sold back in 2015.
A copy of the Complaint is below: