A New York real estate developer charged with securities fraud related to a Ponzi-like scheme settled with the SEC in New York federal court last week, the commission announced today.
The initial complaint filed against Robert C. Morgan came on May 22, 2019, when he was accused of selling securities to more than 200 retail investors, including approximately three dozen individuals who used funds taken directly from their retirement accounts. Morgan primarily develops residential and commercial real estate projects in the northeastern United States, and helps to fund these projects through a variety of means, including selling securities directly to investors, according to the complaint.
The SEC argued that between 2013 and September 2018, Morgan raised more than $110 million through sales of securities to investors, including $80 million from retail investors into four sets of funds. Morgan said these funds would be used to purchase and manage multifamily residential properties, as well as being used to purchase new properties for development.
Investors were promised a target return of 11%, but there was a problem, according to the complaint; the purchased properties were not generating the returns needed to service or repay the funds. This led Morgan, through his companies, to use these funds as “a single, fraudulent slush fund,” using new investments to pay returns to early investors. He also used incoming money to pay off a fraudulently obtained loan used to purchase apartments in Cranberry Township, Penn., in order to hide that fraud, according to the commission.
Morgan could not be reached for comment.
The complaint also accused Morgan of creating false loan documents to make the fund transfers appear legitimate to auditors. When filing the 2019 complaint, the SEC sought out emergency relief, including a freeze on Morgan’s assets, stressing that investors were owed more than $63 million. Therefore, a freeze could help maintain the few assets Morgan had left (the complaint alleges that the day after a guilty plea from a man implicating Morgan in insurance fraud, Morgan put his main residence on the market).
Earlier this year, the SEC announced that Morgan had “voluntarily liquidated certain assets” since the original complaint, and the court approved a plan that would distribute $63 million back to investors affected by the scheme.
“Although this case is ongoing, the return of funds to investors is an extremely important development and the product of considerable effort by the parties and the receiver,” Daniel Michael, chief of the SEC’s Complex Financial Instruments Unit, said.
The Nov. 6 decision included approval for an addition $3.3 million to be returned to investors; while Morgan did not admit or deny any allegations included in the original complaint, he agreed to an injunction on any future violations of securities laws, in addition to the $66 million that has either already been, or will be, distributed to harmed investors. The decision doesn’t include any other monetary relief, according to the commission.
But Morgan also faces legal troubles with the Department of Justice, which filed a separate criminal indictment concurrently with the SEC’s original complaint, accusing him of mortgage fraud and insurance fraud. According to The Buffalo News, a judge tossed out the DOJ’s criminal indictment on “procedural grounds” earlier this month, but the Justice Department is continuing to pursue the case (and Morgan’s assets) via a civil suit.