I find looking at fraud cases instructive, seeing common themes, failures and techniques. Since my company is in real estate, real estate fraud catches my eye. Recently the SEC brought a case against Rosand Enterprises and one of its principals, Robert A. Anderson.
The Securities and Exchange Commission came in late. The Illinois Secretary of State had already filed an order against Rosand Enterprises, Rossetti and Anderson.
In the Illinois order, they alleged that the enterprise had solicited investors to loan them $2.735 million, with repayment at 15% per month for a six-month note or 20% for a twelve-month note.
The SEC found a broader network of $12 million solicited from 77 investors. (I wonder why the SEC did not include Mr. Rossetti their complaint.) The US Attorney also got involved and announce criminal charges.
Let’s look at some of the red flags.
Extremely high returns should be a big warning. Rosand was offering returns of 15% or 20% per month on loan payments. If the business is that profitable, why bother getting outside collateral. They are doubling their money every six months.
The money was guaranteed. Risk equates to reward. If money is in a safe investment, you should only get a small return. If there is a high rate of return then the investment is going to be risky. Any promised returns above 10% per year should immediately be suspect.
They were offering the notes to non-accredited investors. If you make less than $200,000 per year or have a net worth of less than $1 million you are non an accredited investor. That means you are not generally able to purchase unregistered securities like the notes offered by Rosand.
One aspect of real estate is that ownership is part of the public record. Anyone can walk into the registry of deeds and see who owns a piece of property and who they bought it from. In most places, you can also see the price paid. If Rosand was buying and rehabilitating houses, a potential investor could easily look up the information in the land records.
The Cook County Registry of Deeds is online. I ran a quick grantor/grantee search on “rosand.” No surprise, Rosand Enterprises has not bought or sold any real estate in the past 15 years.
Like most Ponzi schemes, eventually you will run out ways to get new money in the door to cover the money going out. Rosand stopped making payment in June 2008. Two years later, the State of Illinois and the SEC stepped in to protect investors.