Real estate is big business, and so is real estate fraud. A Fresno area man was just sentenced to 13 years in prison for duping investors out of $24 million, and a former police officer from Missouri could get as much as 20 years for a $3.4 million investment scheme in Orange County. It’s easy to wire your money into a deal, but not so easy to get it back if you are scammed. You should never invest without doing your homework ahead of time.
48-year-old Shawn Patrick Watkins was well-respected among Southern California real estate professionals. He lived in Layton, Utah at the time of his scam and was the owner of The Equity Growth Group. He also represented himself as a former police reservist, which commanded some amount of respect and trust from those who dealt with him.
Orange County Investment Scam
His operation appeared to be legitimate. He’d hold monthly seminars in Orange County, California to tell attendees about investment opportunities. He would say that he had hundreds of properties under his management, and that any new funding would be used to maintain current properties or buy new ones. But prosecutors say it was all a lie. They say as money came in, he’d pay off earlier investors and use the rest for his own living and business expenses.
Watkins and his associate, Angel Bronsgeest, have both pleaded guilty to mail fraud. They are scheduled for sentencing on November 19th. There are probably many of our listeners who knew them, or maybe even invested with them. I personally met them and saw them at various real estate events. (1)
How could investors have protected themselves from losses?
First, investors should be cautious of open-ended funds. These types of funds allow new investors in, which can make it easier for a Ponzi scheme to take place – which means new investor funds are used to take out old investor funds.
Now, some deals require new funds. For example, in our RISE Costa Rica development, we had a group of investors buy the land and entitle it. Some of those investors need to exit because they wanted to have their funds tied up for just one year or they didn’t want the tax consequences of the next phase. They started out as passive investors, and would get active tax treatment once construction starts. Our documents spell this out very clearly. The difference is that it’s not an open fund, meaning there’s no limit to how much new investor funding we can take in. We are only allowed to raise the funds to pay off the first investors, plus the cost of construction for the houses. Everything is explained in the Private Placement Memorandum, which was created by a very high profile San Francisco attorney. Usually scam artists do not use legitimate attorneys.
Second, the investors could have asked for a list of the properties. A quick title search would have told them who owned the properties.
Central Valley Ponzi Scheme
In the Central Valley, 36-year-old Seth Adam DePiano pleaded guilty to an even larger Ponzi scheme. He’s a former Clovis high school football player who’s now facing a long prison sentence for mail fraud, wire fraud, and money laundering. His plea deal includes about $20,000,000 in restitution to the 28 investors he defrauded.
Those victims were told the money would be used to buy homes that he’d manage as rentals or homes that would be renovated and resold. According to the Fresno Bee, some of the properties he told investors about didn’t even exist. Prosecutors say he also paid off earlier investors with money from newer investors, claiming the money was from rental income. (1)
It’s not clear how DePiano will raise the money he needs to pay people back. Authorities have only been able to seize $700,000 from his bank accounts and a collection of baseball cards worth about $30,000.
His arrest last July came as a big blow to people who knew him as an upright individual. The Fresno Bee published a note written by his mother asking the judge for leniency. She told the judge that her son came from a good family, with parents who were married for 43 years. She says her son always played sports, had many friends, and worked hard through high school. She said, “I am not sure what happened on his way to adulthood.”
Court documents say he operated his Ponzi scheme from February 2010 through June 2017. Business names that he used include The Rental Group, U.S. Funding and Home Services, LLC, and Draymond Homes. In addition to a 12-year sentence and the $20 million he needs to pay back, he’s also given up his right to appeal.
How could investors have protected themselves?
If they were investing in an LLC or S-Corporation, they would need to ask for the operating agreement. When investing large sums of money, it’s wise to have an attorney review those documents and make sure the LLC is in good-standing.
Next, the investor could have easily asked for a list of the properties that the LLC owned. Then he or she could perform a quick title search. If the title of the property was not the same entity in which he claimed ownership, then the investor would know there’s a problem.
Real Estate Scams Are Extremely Common
If you go to a website called California Real Estate Fraud Report, you’ll see just how often these kinds of schemes are uncovered. You can scroll down a list of scams that have occurred in California.
There’s a recent one out of Roseville for a scheme that lured 183 investors to pump $10 million into an investment fund that was supposed to provide a 12% annual return. There’s another one out of Santa Barbara that involves a website that charged $200 for access to foreclosure listings. The website collected about $27 million over eight years, but it turns out that the properties were fake. They either were not for sale, didn’t exist, or were not in foreclosure.
There are also links to other resources including blogs like The Mortgage Fraud Reporter, Fraud Blogger, and White Collar Fraud Blog. There are stories about real estate fraud in states across the country. It’s an eye opener to see just how often people are being duped into relinquishing their money for fraudulent purposes. (3)
Protecting Yourself Against Fraud
Here are some other simple ways to protect yourself:
1. If you are investing in a syndication, make sure the managers have a proven track record.
2. Watch out for “blind pool” funds which don’t provide any specific details on where the funds are going. Blind pool funds are not fraudulent in themselves – they just give the syndicator a lot of leeway. If you do invest in a blind pool fund, you should insist on regular audits. Ideally, audits should be offered to investors annually.
3. If you are lending money as a private loan, make sure the funds are recorded and secured as a lien against the property, and always go through title and escrow.
4. When wiring money, make sure to call the escrow company to verify wire instructions. Wire fraud is increasing.
Freddie Mac also has a page on fraud trends and how to avoid them. (4)
(4) Freddie Mac