I saw the recent case against Landon M. Smith for operating a real estate offering fraud and Ponzi scheme and jumped in to see if I could learn anything from the case.
According to the SEC complaint, Smith held himself out as a “property wholesaler” who could earn significant returns on any funds invested with him for purported property deals.
Smith explained that a property wholesaler is a person who identifies property and then agrees to buy property for a certain price, signs a real estate purchase contract with the property owner, and pays the property owner an earnest money deposit to hold the property under contract until the sale can close. The wholesaler then finds a third-party buyer who is willing to pay more for the property than the wholesaler agreed to pay in the purchase contract
That’s not a real thing. There is no pool of real estate owners willing to sell for wholesale (less than market) or sellers willing to pay more than market. He faked the real estate contracts he was showing to his “investors.”
Needless to say he was taking money from people. They forked it over with his promise of a 100% return when he flipped the property.
Smith was offering his “investors” unsecured promissory notes. Are those promissory notes securities?
The Securities and Exchange Commission thinks so.
- Investors provided Smith with money to purchase promissory notes with the potential to earn returns of up to 100% on their investment.
- Smith sold the promissory notes to a wide distribution of unsophisticated investors.
- Smith represented the opportunity as a short-term investment.
- The promissory notes were all unsecured and uninsured.
- Smith pooled investor funds in a common bank account.
- Investors expected profitability from the wholesaling efforts of Smith.
I assume they are using the Howey test of investment contract, “investment of money” in “a common enterprise” with the “expectation of profits from the effort of others”. Or may just be using the term “note” from the definition of security.
Statements 2, 3, and 4 seem irrelevant to the argument that the “notes” are securities. Statement 5 seems to indicate that there was a common enterprise. But the mixing in the bank account may just be a byproduct of the Ponzi scheme. Smith pooled the money to pay back earlier investors.
It’s not clear if multiple “investors” were expecting their money to mixed in with other “investors” to fund the investment or whether each was expected to be freestanding.
It’s a relatively weak argument that the notes are securities. But Smith settled with the SEC so the argument doesn’t need to stand up to scrutiny.
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