One of the challenges faced by the Securities and Exchange Commission when encountering a real estate scam is finding jurisdiction. The SEC is limited to securities and a real estate investment is not a security. But a real estate investments may involve securities or be a securities-like investment. That is the case the SEC is trying to make against Marquis Properties and its principals, Chad R. Deucher and Richard Clatfelter.
The SEC has two challenges in its case. First it needs to prove that there was fraud. Second it needs to prove that the case involves securities.
Marquis, Mr. Deucher and Mr. Clatfelter have not agreed to the charges, so I’m relying on the SEC’s side of the story to look at the real estate versus securities part of the case. It does not take much time browsing in internet search results to find a long line of disgruntled investors who feel that were ripped off by Marquis.
Marquis main strategy appears to be helping investors put money into turnkey residential rentals. Marquis promises to source the investments, buy the property and manage it for the investor. That structure would likely leave little room for the SEC to get involved. That does not mean its a good investment and not a scam. It’s just not a securities transaction.
According to the SEC complaint, Marquis offered three investment options: (1) turnkey real estate investments, (2) joint ventures, and (3) promissory notes secured by real estate. That covers the spectrum going from pure real estate to more securities-like.
The SEC in the complaint paints the turnkey real estate investments as “investment contracts.” In reading the complaint, I’m not moved by the SEC’s view. The SEC fails to lay out the key features of an investment contract: “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” (328 U.S. at 301). Or the other variation of the third prong of whether the investment was premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
The SEC does a better job of at least describing the joint ventures as “investment contracts.”
“Joint venture investors have had no participation in management or decision-making for the joint venture and have relied solely on Marquis’ efforts to locate and purchase properties, renovate, and sell the properties to earn a profit on their investments.”
However, if the investors actually have the contractual right to be involved in management, regardless of whether they actually do, the SEC may lose the argument that the joint ventures are investment contracts.
As for the promissory notes, Marquis seems clearly in the “securities” business with this option. If the note was actually the single mortgage note, there is an argument to be made. But pooled investment notes used to fund real estate investments are going to be securities.
Maybe Marquis was a legitimate business at one point. If the SEC complaint’s statements are mostly true, Marquis was very cash flow negative in 2015. The company was paying out more to investors than the properties were making. The shortfall was paid from new investor cash. The classic ponzi scheme situation.
You can get your own taste of those involved in this video:
Sources: