MayfieldGentry Realty Advisors mastered the one-two by disclosing to a client that the firm stole their funds on the evening before they were brought up on charges for a pay-to-play violation.
In May, 2012, the Securities and Exchange Commission charged former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley, and MayfieldGentry in a secret exchange of gifts to peddle influence over the city funds’ investment process. The SEC alleges that Kilpatrick and Beasley, who were trustees to the pension funds, received $125,000 worth of private jet travel and other perks paid for by MayfieldGentry. That would currently be a violation of SEC Rule 206(4)-5.
As long as the firm was going down, MayfieldGentry decided to also disclose that the firm had stolen $3.1 million. The SEC brought new charges against the firm for that theft.
In reading the complaint, assuming the facts are true, it looks like MayfieldGentry was as best sloppy and lazy. The firm had an agreement to buy two shopping centers for $7.4 million and obtained a bank loan for $4.3 million of the price. That left the firm needing $3.1 million of equity, but only had $200,000 of cash. The easy answer was to have its client, the Police and Fire Retirement System of the City of Detroit, fund the equity.
The problem is that MayfieldGentry didn’t bother to get approval from the pension fund. Even worse, it purchased the property in a subsidiary wholly-owned by MayfieldGentry. The firm didn’t transfer ownership of the subsidiary to the pension fund.
Apparently, the plan was to have another investor purchase the property and transfer the cash back to the pension fund’s account. Bad timing trapped the firm. The acquisition happened in March 2008. Then the financial markets imploded and the value of the shopping centers collapsed.
Since the case involved real estate, perhaps the SEC lacks jurisdiction? No, MayfieldGentry was registered with the SEC as an investment adviser.
Maybe the case was an instance of an adviser making a mistake, then failing to remedy the problem. Would the pension fund have agreed to investment? We don’t know. I assume the answer was “no”, otherwise the firm would have transferred the properties to the pension fund.