A proposed class action claims real estate firm EquiAlt, LLC and a number of co-conspirators have scammed more than 1,100 mostly senior-citizen investors across three states in what the plaintiffs call a “classic Ponzi scheme” that’s caused the loss of more than $170 million.
Filed in Florida, the lawsuit alleges that the defendants, despite promising investors that their money would be used to purchase real estate, instead misappropriated the funds to pay other investors, grant substantial commissions to unregistered sales agents, cover undisclosed and excessive fees, and fund EquiAlt executives’ lavish lifestyles. More specifically, the lawsuit—which names as defendants EquiAlt’s top executives, four EquiAlt funds, and the company’s sales agents—claims the funds’ investors were falsely told that the bulk of their money would go toward distressed real estate markets and yield “generous returns” of between eight and 10 percent per year.
Most EquiAlt investors were elderly consumers across Florida, Arizona and California who used their retirement funds to purchase three- or four-year term debentures based on representations that the investments would be “secure,” “safe,” “low risk,” and “conservative,” the case says. Although investors were told that the debentures were exempt from registration with the U.S. Securities and Exchange Commission (SEC), they were, in essence, unregistered securities, the lawsuit alleges.
Despite the defendants’ representations and strict restrictions on use of the funds as stated in the investments’ private placement memorandums (PPMs), EquiAlt allegedly misused investor money in a variety of ways, including, perhaps most notably, by using money from one fund to purchase real estate for or pay investors in another fund. According to the case, paying investors with other investors’ money is the mark of a classic Ponzi scheme.
Moreover, the suit claims the defendants further depleted the funds’ resources by paying extravagant commissions to the defendant sales agents, who the suit says were unregistered as such. The lawsuit stresses that although the PPMs provided to investors stated that the funds “may” pay commissions, the reality was that the funds always paid between 10- and 14-percent commissions to real estate brokers. Similarly, money from the funds was allegedly used to pay various due diligence fees, management fees, success fees, auction fees, underwriting fees, purchase discount fees, and bonuses that the case says were never disclosed nor authorized under the funds’ PPMs.
Perhaps most egregious, however, was the executive defendants’ alleged use of investors’ money for “their own personal use and benefit.” According to the lawsuit, EquiAlt’s chief executive officer, managing director, and chief investment officer improperly took from the funds millions of dollars in cash distributions to purchase “high-end personal items” such as luxury cars and charter private jets, even using some money to pay personal income taxes owed to the IRS. The case claims the executives misused millions in investor money over a period of several years despite being well aware that they were running an illegal Ponzi scheme.
According to the case, the defendants, through false assurances of the funds’ financial health, continued to urge investors to pour money into the scheme until as recently as January 2020 while failing to disclose that the funds were in “a precarious financial condition.” The lawsuit alleges that although proposed class members—anyone who hasn’t been fully repaid by debentures issued by any of the EquiAlt funds—poured $170 million into the real estate firm, EquiAlt currently owns only $55.3 million in real property.
In February 2020, the SEC filed an action against EquiAlt after becoming aware of the company’s allegedly fraudulent investment activities. EquiAlt’s assets have been frozen while the investigation is in progress.