Another Real Estate Ponzi Scheme

The Securities and Exchange Commission is claiming that Wayne L. Palmer and his firm, National Note of Utah, were operating a real estate-based Ponzi scheme that bilked $100 million from investors. U.S. District Judge Bruce Jenkins issued a temporary restraining order, froze the assets of National Note, and appointed attorney Wayne Klein as a receiver to take over the company’s operations.

So far, the statements in the SEC complaint have not been proven and Mr. Palmer is contesting the charges. As I have with other cases, I look at lessons from the filings, assuming they are true, to highlight issues that should be warning.

A first warning is the use of bank account names.

National Note investors initially deposit their funds into an account at JP Morgan Chase Bank titled “investor trust account.” National Note immediately wires nearly all these investor funds to an account at Wells Fargo titled “investor interest account.” National Note’s internal accounting classifies the investor funds as income upon transfer to the Wells Fargo investor interest account. From the Wells Fargo investor interest account, the funds are used to pay returns to other investors.

Why the need to fund interest payments? According to the SEC complaint, the Palmer companies only generated $300,000 in revenue and was obligated to pay $1 million in interest to not holders. Palmer was selling notes that paid a 12% interest rate.

Another warning sign is that the notes were marketed as guaranteed, with a complete safety of principal. The safest investment is US treasuries and it pays less than 2%. You can’t expect a 12% return to not have significant risk.

Another is his use of EMS  and CCFMB after his name. They are impressive acronyms, but I can’t figure out what they stand for. EMS typically stands for Emergency Medical Services, but that doesn’t sound right for a real estate professional. I searched LinkedIn for CCFMB and Mr. Palmer was the only person who came back.

Another warning is where the money from the sale of notes is being deployed. The claim is that it purchases real estate notes and real estate equity that generates returns of 15% to 20 annually. According to the complaint all of the capital is being deployed into related entities controlled by Palmer.

It looks like Palmer’s scheme unraveled in October 2011 when it failed to make interest payments. The complaint does not point out when Palmer’s business went from legitimate to Ponzi. The SEC goes as far back at 2009 when the scheme raised $18.6 million while paying back $14 million in investors.  Palmer has been in the real estate business for many years. So I’m skeptical that his operation has been a fraud from the outset. I would guess that he ran into trouble in 2008, just like everyone else on the planet. Rather than be honest and open about losses, he tried to cover them up and hope things would recover fast enough to dig him out of his hole.

Scott Frost, Paul Feindt, Matthew Himes and Alison Okinaka of the SEC’s Salt Lake Regional Office conducted the investigation; Thomas Melton will lead the litigation.