SEC Charges Operators of Multi-Billion Dollar Real Estate Enterprise With Fraud

sec-sealThe SEC charged Oregon-based Sunwest Management Inc. with securities fraud and is seeking an emergency court order freezing its assets.

According to the SEC Complaint, the recent collapse of a real estate enterprise once valued at approximately $2 billion in assets, run by Sunwest Management Inc.and its CEO, Jon M. Harder, revealed a massive fraud that led to losses of hundreds of millions of dollars for investors. Sunwest, Harder and certain related entities operated several hundred retirement homes nationwide. From January 2006 through June 2008, they raised at least $300 million from more than 1300 investors, primarily through the sale of tenancy-in-common interests (“TICs”). The company represented that individuals were obtaining an interest in a specific property which would generate a steady income stream. Instead the defendants ran Sunwest as a single enterprise, commingling all investor funds and operational revenue into a single fund from which all operating expenses and investor returns were paid. Sunwest paid investors steady returns on their investments from cash generated in the operations of other facilities, from funds obtained in refinancings, and from funds raised through offerings to new investors. With the credit crisis, new funding sources began drying up. Despite the dire financial condition, defendants continued to raise additional money from investors. By June 2008, they operated Sunwest virtually as a Ponzi scheme. The money they raised in the final offerings (supposedly for new properties) was used to pay old investors their 10 percent return and fund operations at existing facilities. As of January 2009, over 100 retirement homes have been placed in foreclosure, receivership or bankruptcy, resulting in the effective elimination of the TIC investors’ interests in them. Approximately 32 facilities have filed for bankruptcy.

The Commission’s complaint charges all of the Defendants with violating the antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

On December 31, 2008, Jon M. Harder filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). The case was assigned case number 08-37225 (the “Bankruptcy Case”) and is currently pending before the Honorable Trish M. Brown in the United States Bankruptcy Court for the District of Oregon.

The SEC complaint include a pleading to freeze assets and appoint a receiver to oversee Sunwest and related entities. According to a press release from Sunwest, both requests were denied by the court. Sunwest welcomes serious discussions with the SEC about a form of cooperative receivership that would allow the current Sunwest restructuring to continue.

“The judge denied the temporary restraining order motion in its entirety including denial of the appointment of a receiver,” said Stephen English, special counsel for Jon Harder. “We see this as a big win for the restructuring work at Sunwest.”

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