SEC Sues MN Atty. Over Real Estate Lending Fraud
The U.S. Securities and Exchange Commission (SEC) filed a civil complaint on Tuesday accusing a local attorney of defrauding investors in a real estate lending fund by not disclosing that the fund's sole business partner had defaulted on its loans.
In addition to Todd Duckson, a 44-year-old man from Prior Lake, the suit names Michael Bozora and Timothy Redpath-both from California-as defendants in the case.
Scott Carlson, an attorney representing Duckson, wrote in an e-mailed statement that the SEC's claims are “completely unfounded and unsupported,” and said that he and his client plan to “vigorously contest” them. “We look forward to correcting the SEC's allegations and resolving this matter.”
The accusations involve the Capital Solutions Monthly Income Fund, which made mezzanine real estate loans to a sole borrower, real estate lender Hennessey Financial, LLC. Duckson served as an investment advisor for the fund, and Bozora and Redpath owned the fund's distributor.
Hennessey Financial experienced “severe financial difficulties” beginning in late 2007, according to the SEC. In March 2008, Hennessey Financial's borrowers-which were affiliates of the company-defaulted on their loans and Hennessey Financial foreclosed on them.
Following the foreclosure, Hennessey Financial itself defaulted on its obligations to the Capital Solutions Monthly Income Fund in May 2008, and the fund foreclosed on the company's real estate interests.
According to the complaint, the fund raised about $74 million from roughly 450 investors-including some in Minnesota-from January 2005 to August 2009. From March 2008 to August 2009-which the SEC refers to as “the period of the fraud”-the fund raised about $21.6 million.
Following the default of Hennessey Financial, the SEC alleges that the fund, which had a single purpose of making real estate loans to Hennessey Financial, had “no meaningful income and was using new investor funds to pay existing investors.”
“The fund's real estate lending strategy failed due to the collapse of the fund's sole borrower,” Robert J. Burson, SEC senior associate regional director, said in a statement.
The SEC claims that Bozora, Redpath, and Duckson not only hid the fact that its borrower had defaulted, but also misled investors by saying that the fund was positioned to profit from the real estate market downturn.
“Investors were entitled to know true facts rather than the misleading positive spin that Bozora, Redpath, and Duckson provided,” Burson said.
Duckson is CEO of Minneapolis-based True North Finance Corporation-which merged with the fund in 2009 and which the SEC also accuses of fraud. Bozora was previously True North's president and Redpath was its CEO.
The company's current chief financial officer, Owen Mark Williams, was also named as a defendant in the case. Between 2008 and 2009, Williams allegedly overstated True North's revenues by as much as 99 percent.
The SEC seeks “civil penalties” and repayment of ill-received gains acquired through the fraud. The suit also requests that Duckson, Bozora, Redpath, and Williams be barred from serving as directors or officers.