SEC Charges Former Real Estate Executives in $300M Ponzi Scheme

SEC Charges Former Real Estate Executives in $300M Ponzi Scheme
By U.S. Government [Public domain], via Wikimedia Commons

On Wednesday, the Securities and Exchange Commission (SEC) charged five former real estate executives of defrauding investors. They had believed the group had been funding five-star resort developments in Florida and Las Vegas when they were actually conducting a Ponzi scheme.

SEC Charges Former Real Estate Executives in $300M Ponzi Scheme

According to a SEC press release, the agency has alleged that through 1,400 nationwide investors, Cay Clubs Resorts and Marinas raised more than $300 million by using a network of hundreds of sales agents, marketing seminars, and podcasts that promoted the profitability from buying residences at the various Cay Clubs resort locations.

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In turn, investors had been promised by the group to immediately receive income with a guaranteed 15 percent return along with future income via Cay Clubs rental properties. But in reality, the investors’ funds built resort properties and units and the Cay Clubs executives used new investor money to then pay leaseback returns to investors who came in early to the scheme. They also paid themselves large salaries and commissions of $30 million-plus; investor funds also were used to purchase airplanes and boats.

The Cay Clubs continued promoting themselves as profitable but the operations had been abandoned and investors’ properties entered foreclosure.

The SEC’s investigation had been conducted by the Miami Regional Office. Its investigators listed the following former Cay Clubs executives as charged in its complaint filed in U.S. District Court for the Southern District of Florida:

  • Fred Davis Clark, Jr. – president and CEO
  • David W. Schwarz – chief accounting officer
  • Cristal R. Coleman – manager and sales agent
  • Barry J. Graham – sales director
  • Ricky Lynn Stokes – sales director

Eric I. Bustillo, Director of the SEC’s Miami Regional Office said in the press release, “These Cay Clubs executives lined their pockets with millions of dollars that they told investors would be used to develop five-star resort properties. They continued to defraud investors as Cay Clubs collapsed.”

From the SEC’s complaint, here’s additional details.

The scam started in 2004 when Clark, Coleman, Graham, and Stokes solicited investors through a number of promises: guaranteed income, instant equity in undervalued properties, historic appreciation, and a minimum of $30,000 in upgrades to their units bought at the Florida and Las Vegas Cay Clubs resort locations. There were also falsehoods in the representations about investors’ profitability and instant equity; this came from the alleged triple-digit returns that came from undisclosed insider transactions with Cay Clubs executed by Coleman, Graham, and Stokes.

From their actions, Cay Clubs units appeared to have large appreciation rates over a short period of time when really the transactions were just part of the insider scam. In addition, Stokes wrote letters to possible investors and and included claims of “guaranteed” leaseback payments and profits and that Cay Clubs was a “very stable financially healthy company worth BILLIONS.”

In addition, the SEC has alleged that Cay Clubs continued soliciting new investors as the company’s financial condition plummeted so low that it did not have enough funds to make investors “guaranteed” leaseback or rental payments. Clark, Coleman, and Schwarz had misappropriated millions of dollars in investor funds by utilizing the numerous bank accounts under their control.

Along with the airplanes and boat transactions, the group had misused investor money for business ventures that included precious metals and a liquor distillery investment that made Pirate’s Choice Rum.  In 2008, Cay Clubs abandoned operations and Clark and Coleman (now married) relocated to the Cayman Islands; they continued to spending assets and funneling around $2 million to offshore accounts.

The SEC’s complaint is asking for financial penalties from Clark, Coleman, and Stokes and the “disgorgement of ill-gotten gains” along with prejudgment interest by the five executives. The complaint also asks for injunctive relief to enjoin the group from future violations of the federal securities laws along with accounting and an order to repatriate investor assets, according to the SEC press release.

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