[REN #946] Due Diligence: Real Estate Investors Hit by California Ponzi Scheme Fraud

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Due Diligence: Real Estate Investors Hit by California Ponzi Scheme Fraud, Real Estate News for Investors Podcast Episode #946

The death of a California real estate investor has uncovered what appears to be a 30-year-old Ponzi scheme and hundreds of victims who don’t know if or when they’ll get their money back. Kenneth Casey died suddenly of a heart attack in May which led to a post-death audit and the discovery of financial irregularities at his two companies. In addition to an SEC investigation, investors are now hoping that a bankruptcy filing will help them recover some of the millions that they have invested.

Who Is Ken Casey?

The San Francisco Chronicle says that Ken Casey was known by many people as a philanthropist, a political donor, and a sled dog racer with an enormous portfolio of properties in Marin and Sonoma Counties. (1) He controlled about 70 investment properties with his  companies — Professional Financial Investors and Professional Investors Security Fund. The properties include warehouses, office space and about 1,000 apartments divided among 28 of the properties.

Corporate restructuring attorney, Michael Hogan, says the portfolio is worth an estimated $550 million. Unfortunately, the companies also have about $400 million in debt and another $250 million owed to investors. In all, more than 1,000 investors are impacted by this situation.

Why Is This a Ponzi Scheme?

Hogan said in a court document that hundreds of millions of dollars from newer investors were used to service debt to older investors, which is the definition of a Ponzi scheme. He wrote that Casey and possibly others affiliated with the Companies are also suspected of benefiting from the scheme. Three company officers resigned in June, including former CEO, Lewis Wallach. The Chronicle says, he has agreed to return $1 million along with two properties worth several million in equity. Casey’s ex-wife, Charlene Albanese, also resigned as director so that an independent director could assume that position.

She told the Chronicle that company operations are stable, but she said, “I am heartbroken and sick to my stomach that so many investors, myself included, have been devastated by Ken’s actions. Like all of the other investors, I am waiting to see what can be preserved.” Casey and Albanese were divorced about 14 years ago, in 1996.

Investors Jolted by News in Early June

Investors learned about the Ponzi scheme in a letter dated June 4th. It was sent by company attorneys informing them that the SEC had launched an investigation due to questions about the structure and investment history of the companies. It said that investigators have not reached a conclusion about illegal activity, but that funds have been frozen. The company has been allowed to continue operations that include property management services.

The letter concluded, “We understand it will be difficult having to wait for answers on your investments. Please know that PFI and PISF will promptly update you as soon as circumstances warrant.”

News of the Ponzi scheme took investors by surprise, and not in a good way. The Chronicle spoke to investor Robin Schild, who sunk $250,000 into Casey’s companies. He was so happy with that initial investment that he mortgaged his house and handed over another $400,000. He started investing with Casey back in 2016 and had been getting 9% interest payments on a regular basis. He had even withdrawn $200,000 at one point, without any problems, so he was totally shocked when he first learned about the investigation and the freezing of all investments and payouts.

Schild told the Chronicle, “It’s like, do I need this in the middle of the worst epidemic in 100 years? I think I’ll be lucky to get half of it back.” He said ,he’s heard that other investors are in worse shape because they invested everything they own and without those distributions, he said they need to get food stamps.

Do Your Due Diligence & Diversify

That’s an unfortunate situation, but putting all your eggs in one basket is probably not the best idea, in any situation. There was also a lack of due diligence by investors and apparently a lack of transparency by the companies. Investing all your hard-earned money should come after very thorough research into any company you plan to invest with.

In this case, a little research would have revealed that Casey has a criminal record. Back in 1997, he pled guilty to one count of conspiracy to defraud the government, five counts of tax evasion and the filing of false tax returns, and 41 counts of bank fraud. He ended up in jail for 18 months for those crimes.

Investors apparently didn’t know about Casey’s past. The lack of due diligence was summed up by the investor I mentioned earlier. He told the Chronicle that a Ponzi scheme depends on getting new investors which he called suckers. He says, the scheme eventually fails because “there’s not an infinite supply of suckers.”

According to the Marin Independent Journal, the bankruptcy filing was prompted by a group of investors. They petitioned the court to force the companies into bankruptcy so they can, hopefully, recover some of the millions of dollars that have been frozen. (2)

My advice for investors: 

  • Never put more than 10% of your net worth into any one investment. Diversification is key because all investments have risk.
  • Avoid Ponzi schemes by only investing in funds that have an end date for raising investor money. If the fund is able to stay open and continue to take more investor money, there’s a greater chance they can use those new funds to cover expenses.
  • If you do decide to invest in a fund that controls several assets, make sure there is a board of directors overseeing the operations. It’s easier for a one-person management team to commit fraud than it is for an entire team to go rogue.
  • Invest in funds that provide audited financials annually.
  • Simple is better. If you can’t explain the investment to your Grandma in five minutes, don’t do it.

Find more due diligence tips in our articles Real Estate Due Diligence Checklist: What You Need to Know and Due Diligence in Real Estate: 9 Tips for Smart Buyers.

Links:

(1) San Francisco Chronicle Article

(2) Marin Independent Journal Report

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