The Securities and Exchange Commission brought charges against several executives of Cay Clubs Resorts and Marinas 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 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.” Cay Clubs was not named as defendant in the action against its CEO Fred Davis Clark Jr.; Clark’s wife, Cristal Coleman; sales director Barry Graham; investor-relations director Ricky Lynn Stokes; and CFO David Schwarz.
In its first stumbling block, the Securities and Exchange Commission failed to include a copy of the purchase agreement for the sale of the investments. The judge ruled in July 2013 that without that document the court could not apply the Howey test to see if the investment was an “investment contract.”
Apparently, the Securities and Exchange Commission fixed that mistake, but ran into a bigger stumbling block: time.
The SEC filed its charges over a year ago in January 2013. However, it appears that the investment sales had stopped in 2007. Several of the individuals had left Cay Clubs in October 2007. That’s more than five years and beyond the statute of limitations. Under 28 U.S.C. §2462 the SEC must bring an action for enforcement of any civil fine or forfeiture within five years from the date the claim first accrued.
Finding that the Securities and Exchange Commission “failed to meet its serious duty to timely bring” an enforcement action, the federal judge in Miami closed the case. He dismissed the action with prejudice, noting that “the SEC waited” despite an exhaustive seven-year investigation.
“In essence, the SEC’s argument in this case is that because the words ‘declaratory relief,’ ‘injunction,’ and ‘disgorgement’ do not appear in §2462, no statute of limitations applies.”
Judge King disagreed and cited the U.S. Supreme Court’s decision last year in Gabelli v. SEC.
We are not going to reach the substance of the case and the point of my original interest: were they selling “real estate” or were they selling “investment contracts.”
Resources:
- Dismmissal order (.pdf)
- SEC v. Graham Order Granting Motion to Dismiss (.pdf)
- SEC Complaint
- SEC v. Graham Amended Complaint
- Court Dismisses SEC’s $300 Million Ponzi Case On Timeliness Grounds by Jordan D. Maglich in Ponzitracker
- SEC Delay Extinguishes $300M Ponzi Allegations by Barbara Leonard in Courthouse News
- Update: SEC Charges Real Estate Executives with Investment Fraud But Fails to State a Claim
- SEC Charges Real Estate Executives with Investment Fraud (prior post)
- Revisiting the SEC’s Stance on When Real Estate is a Security (prior post)
- No Extra Time for the SEC (prior post)
