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

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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.




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

  1. DPTX July 25, 2013 at 1:31 pm #

    Doug, given that the SEC only has until next Tuesday to try again, any opinions or thoughts on them throwing in the towel vs going purchase agreement hunting?

    • Doug Cornelius July 26, 2013 at 8:26 am #

      It seems to me that if they had a copy of the purchase agreement, they would have submitted it. That would lead me to believe that they are cannot find the missing piece.

  2. Richard Schaefer November 15, 2013 at 6:38 pm #

    What I have to say is. HELLO those units where fraudulently assessed There is NO WAY that they where worth what the appraisers said they where worth. For instance, I paid almost $500,000.00 and when it sold, it sold for, I believe, 60-65 Thousand. If that’s not a red flag, then I don’t know what is. Come on even after the bubble burst, it certainly would not have dropped that much. So that needs to be further investigated. Anybody of any intelligence would no that.

  3. Doug Cornelius November 15, 2013 at 6:48 pm #

    Richard –

    I’m sorry that the investment was a bad one for you.

    I assume there are a great deal of underlying problems or the SEC would not have brought the case. You see bad appraisal all the time in real estate fraud. They are meant as a control for lenders so developers work to increase the appraised value to create bigger selling prices.

    The issue is the the SEC only has jurisdiction over securities fraud and real estate is not a security. The SEC failed to make its case that the investment was a security and therefore loses its jurisdiction over the fraud.

    That probably leaves it up to the state prosecutors or the individual owner like you to bring the case.