Pair of Ponzis with Real Estate

Real estate related fraud cases with the Securities and Exchange Commission catch my attention. Two real estate-ish cases popped up in a flurry of cases filed before Labor Day weekend. One was for timber and the other for mobile home parks.

Timber operates in a gray area between real estate and extraction. Clearly, the land has value for capital and the trees have value as product. Of course you have to own the land or have the right to harvest the trees.

In the case of Madison Timber Properties, LLC, the SEC claims that the company and its principals didn’t own the land or have the harvesting rights. In other instances, the SEC claims the company would pledge the same tracts to more than one investor. Instead of using the money to acquire land or harvesting rights, the company diverted investor capital for other uses.

Last week, the SEC brought charges against Terry Wayne Kelly and his company for selling the notes that funded Madison Timber. At the base level, Kelly and his firm were not registered as broker-dealers. The Madison Timber notes were not registered nor did the sales properly use an exemption from registration.

Further, the SEC charged that Kelly was aware of the red flags at Madison Timber. At a meeting with unnamed financial institutions, Kelly and Madison were confronted about the business practices at Madison. The SEC charged that Kelly is civilly liable for negligently and recklessly selling the securities.

In a separate action, the SEC accused Tytus Harkins and the Hartman Wright Group with defrauding investors in connection with mobile home parks. They misrepresented the

Unlike Madison, Hartman Wright owned the real estate. But according to the SEC, Madison overstated the purchase price for the mobile home parks.

In both cases, the firms used some of the cash provided by later investors to redeem or make payments to earlier investors. That gives each scheme the label of a Ponzi scheme.

The question that I’m left with is how the firms expect to exit from these schemes. There would not be enough cash to pay off investors at the end of the day. Eventually the scheme would unravel.

Sources:

• SEC Shuts Down $85 Million Ponzi Scheme and Obtains Asset Freeze
• SEC Complaint against Madison Timber
• SEC Charges Mississippi Company and its Principal with Fraud in Timber Ponzi Scheme
• SEC Complaint against Terry Wayne Kelly and Kelly Management
• SEC Charges Real Estate Company and its Founder with $8.75 Million Offering Fraud
• SEC Complaint against Hartman Wright Group and Tytus Harkins