Tag: Cay Clubs Resorts and Marinas

Update on the Cay Clubs

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The Securities and Exchange Commission brought charges against several executives of Cay Clubs Resorts and Marinas for defrauding investors. The case originally caught my eye because it involved real estate and would likely play a role in my continuing quest to figure out what’s a security. The SEC’s complaint stated that the defendants “offered investors the opportunity to purchase undervalued condominium units and obtain an immediate 15 percent return through a two-year leaseback agreement with Cay Clubs.” Cay Clubs was not named as defendant in the action against its CEO Fred Davis Clark Jr.; Clark’s wife, Cristal Coleman; sales director Barry Graham; investor-relations director Ricky Lynn Stokes; and CFO David Schwarz.

In its first stumbling block, the Securities and Exchange Commission failed to include a copy of the purchase agreement for the sale of the investments. The judge ruled in July 2013 that without that document the court could not apply the Howey test to see if the investment was an “investment contract.”

Apparently, the Securities and Exchange Commission fixed that mistake, but ran into a bigger stumbling block: time.

The SEC filed its charges over a year ago in January 2013. However, it appears that the investment sales had stopped in 2007. Several of the individuals had left Cay Clubs in October 2007. That’s more than five years and beyond the statute of limitations. Under 28 U.S.C. §2462 the SEC must bring an action for enforcement of any civil fine or forfeiture within five years from the date the claim first accrued.

Finding that the Securities and Exchange Commission “failed to meet its serious duty to timely bring” an enforcement action, the federal judge in Miami closed the case. He dismissed the action with prejudice, noting that “the SEC waited” despite an exhaustive seven-year investigation.

“In essence, the SEC’s argument in this case is that because the words ‘declaratory relief,’ ‘injunction,’ and ‘disgorgement’ do not appear in §2462, no statute of limitations applies.”

Judge King disagreed and cited the U.S. Supreme Court’s decision last year in Gabelli v. SEC.

We are not going to reach the substance of the case and the point of my original interest: were they selling “real estate” or were they selling “investment contracts.”

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Update: SEC Charges Real Estate Executives with Investment Fraud But Fails to State a Claim

cay clubs 1

The Securities and Exchange Commission brought charges against Cay Clubs Resorts and Marinas and several of its executives for defrauding investors. The case originally caught my eye because it involved real estate and would likely play a role in my continuing quest to figure out what’s a security.

The first ruling came out and it was bad for the SEC. A Florida court said the SEC failed to prove its case.  (SEC v. Graham, Case No. 13-10011 (S.D. Fla. Ruling issued July 10, 2013).

In order for the SEC to bring a claim against Defendants for violation of the Securities Act, the SEC must allege enough facts to establish that the subject transactions are investment contracts. Under the Eleventh Circuit’s interpretation of the three-prong test set forth by the U.S. Supreme Court in SEC v. W.J. Howey Co. (328 U.S. 293 (1946)), the Plaintiff must show that there was an investment, that it was a common enterprise, and that the buyer lacked control over profitability of the investment. See Alumni v. Development Resources Group, LLC, 445 Fed. Appx. 288 (1 1th Cir. 201 1); see also Bamert v. Pulte Home Corp. , 445 Fed. Appx. 256 (11th Cir. 201 ).

The court ruled that the purchase agreement is at the heart of the control analysis. The SEC didn’t file a copy of the purchase agreement on the record and did not include adequate factual allegations concerning the contents of the purchase agreement.

The case was dismissed without prejudice. So if the SEC can dig up a copy of the purchase agreement, the SEC can try again.

The SEC’s complaint stated that the defendants “offered investors the opportunity to purchase undervalued condominium units and obtain an immediate 15 percent return through a two-year leaseback agreement with Cay Clubs.”

Investors were also told that their units would appreciate after being renovated by Cay Clubs. Cay Clubs even managed to find lenders who would provide 100% mortgage financing.

During the leaseback, purchasers were restricted from using their units. They could only use the units for 14 days per year. Cay Clubs owned the common areas and controlled access to the units. Cay Clubs had a right of first refusal on the sale of a unit. Cay Clubs controlled the renovation of the resorts and the units. Under the master leasing program, Cay Clubs would rent out the units, with 65% going to the unit owner.

 

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SEC Charges Real Estate Executives with Investment Fraud

cay clubs 1

The Securities and Exchange Commission brought charges against Cay Clubs Resorts and Marinas and several of its executives for defrauding investors. The case caught my eye because it involved real estate and would likely play a role in my continuing quest to figure out what’s a security.

The defendants have not settled with SEC, so I’ll be assuming the allegations in the complaint are true for this analysis.

Executives of Cay Clubs Resorts and Marinas raised more than $300 million from investors to develop resorts in Florida and Las Vegas. They promised investors a guaranteed 15% return through a two-year leaseback agreement and future income through a rental program. The developments didn’t succeed, so the investment turned to a ponzi scheme. New investments were used to ay the 15% return to earlier investors.

A with most investment frauds, the executives spent lavishly with the investors’ money. They bought homes, planes, cars, and boats. At least they diversified and spent some of the cash on buying gold mines, coal refining machinery, and a rum distillery.

That all sounds like investment fraud. But the charges are under sections 5(a), 5(c), and 17(a) of the Securities Act and 10(b) of the Exchange Act. The SEC is saying that the defendants sold securities, and did so fraudulently. They were selling real estate interests, or at least what looked like real estate.

According to Cay Clubs’ marketing materials, the Company would finance the purchase of the properties, renovation of the units, and development of the luxury resorts with funds raised from investors through the sale of units, which ranged in price from $300,000 to more than $1 million, and a required membership fee ranging from $5,000 to $35,000 per unit.

Cay Clubs promised a 15% return by leasing back the units from the buyers. The materials stated the leaseback was optional, but 95% of the investors entered into the arrangement. To participate, purchasers would have to pay a membership fee in excess of $5,000. The 15% return would be needed by the investors to cover carrying costs. Cay Clubs even managed to find lenders who would provide 100% mortgage financing.

During the leaseback, purchasers were restricted from using their units. They could only use the units for 14 days per year. Cay Clubs owned the common areas and controlled access to the units. Cay Clubs had a right of first refusal on the sale of a unit. Cay Clubs controlled the renovation of the resorts and the units. Under the master leasing program, Cay Clubs would rent out the units, with 65% going to the unit owner.

You can go back to the Howey case and use the four part test to determine if there is an investment contract, where there is

  1. an investment of money,
  2. a common enterprise,
  3. a reasonable expectation of profits, and
  4. a reliance on the entrepreneurial or managerial efforts of others.

This reminds me of the Boutique Hotel case. In that case the judge found that the investment was not an investment contract because the owners were not required to participate in the rental program. An owner could chose to not rent out its condominium or rent it out on its own. That means the business arrangement did not have a reliance on the entrepreneurial or managerial efforts of others. Therefore it was not an investment contract.

That distinguishes the Boutique Hotel arrangement from the one being contested in the Salameh / Hard Rock San Diego case. Hard Rock San Diego restricted the rental program to the one run by the seller/issuer. That was found to be an investment contract.

The Hard Rock case is still under appeal and the Boutique Hotel case is still running its course, so those are ones to keep en eye on.

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