Real Estate News & Commentary

Breaking News: Real Estate Fund Manager Charged With Misappropriating Funds, Misleading Investors

Expertise: Mortgages & Creative Financing, Real Estate Marketing
13 Articles Written
Businessman in suit in handcuffs

The Securities and Exchange Commission announced Tuesday that real estate fund manager Eric C. Malley of MG Capital has been charged with defrauding investors and misappropriating funds. Malley, who is a licensed real estate broker, allegedly misappropriated more than $7 million, while lying to investors about his investment management experience, their exposure to risk, and the firm’s capabilities.

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According to the Securities and Exchange Commission (SEC), Malley and his firm’s deceptions originally began in 2014. Using blatant misrepresentations, the firm was able to attract a total of $58 million from investors, promising them that their capital was “100% protected from loss.”

To solicit investors, Malley and MG Capital reportedly claimed they had previously managed two real estate funds with a portfolio valued at over $1 billion. Malley asserted that the fund was able to significantly outpace the S&P 500—the standard benchmark for investors—and also purported the capital was secured via a balance sheet valued at more than $250 million. Six years after the initial misrepresentations began, the SEC alleges that none of these claims were true—investors’ capital was indeed at risk and Malley did not have the successful experience he claimed.

Related: Survey Says: These Are the Best & Worst Investments for 2021

Notably, the complaint also alleges that Malley and MG Capital had misappropriated more than $7 million in investor capital. To cover it up, the SEC accuses the firm of having deliberately falsified financial reports and attempted to deceptively conceal “huge losses.”

According to Richard R. Best, active director of the SEC’s New York regional office, “As alleged in the complaint, Malley and MG Capital defrauded investors who thought they were entrusting their money to a fund manager with a long, successful track record.”

Many investors were initially shocked that Malley, a man who represented himself to be both experienced and transparent, deliberately lied about his firm’s finances in order to attract more investors. Director Best later stated, “This case demonstrates our commitment to hold accountable perpetrators of offering frauds for the harm they inflict on retail investors.”

The SEC is confident it has the evidence needed to obtain a conviction. Specifically, the Commission is charging Malley and MG Capital with violating anti-fraud provisions established in the Securities Act of 1933 and the Securities Exchange Act of 1934. Both of these acts were established shortly after the Great Depression, a catastrophic event that was—at least in part—triggered by misrepresentations throughout the securities industry.

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In a statement issued by the SEC, it “seeks injunctive relief, civil penalties, and disgorgement of ill-gotten gains plus prejudgment interest.”

All Eyes on Sponsors

This instance is one of many fraud cases that has been recently filed by the SEC. The events leading up to the housing crisis of 2008 have caused the SEC to pay particularly close attention to firms involved in the real estate industry. Furthermore, with real estate investment opportunities being extended to the general public via the JOBS Act in 2012, malicious and predatory fundraising methods are being taken exceptionally seriously.

Malley’s case, and others like it, offer a clear message for real estate sponsors hoping to raise capital: Firms must honestly represent their experience, offer transparency on their balance sheets, and be realistic about their prospective investor’s exposure to risk.

Watch as Adam Gower discusses with attorney Mark Roderick how to build trust through authenticity in this short video segment.

Related: Home Lending to Shatter Records in 2020—With 9 Million Refinances and $4.4 Trillion in Mortgages

Best Practices in Crowdfunding

Among the many lessons to be learned from this unfortunate situation, here are four immediate takeaways all sponsors crowdfunding their deals need to keep in mind:

  1. There are no guarantees in real estate.
  2. Never exaggerate your track record or claim to have one by association with a partner.
  3. Be honest about your weaknesses and explain how you compensate for them.
  4. Be transparent even if the news you are delivering is not great.

Your investors expect and deserve that you will always remain forthright. Provided you are, you will mitigate the risk of being sued and increase your chances of prevailing.

Access the full SEC release here.

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Questions? Comments?

Join the discussion below.

See Adam’s new book SYNDICATE here and his website GowerCrowd here. Adam Gower, Ph.D., builds digital marketing systems for real estate professionals who want to find more investors so they can raise more money. He is known as the creator of the Investor Acquisition System and combines a lifetime of experience in real estate investment and finance with best-of-class digital marketing tactics, techniques, and strategies to help crowdfund real estate syndications. Visit his BiggerPockets profile here.
    Max T. Investor from Philadelphia, Pennsylvania
    Replied about 2 months ago
    What’s he gonna get - couple years? Compare that to what you’d get for stealing from a store. White collar crime is so much more damaging, yet less frequently prosecuted and less harshly punished.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied about 2 months ago
    I suspect this is unfortunately because they plead down and the prosecutor accepts it because such cases are often very complicated and intricate and require a ton or resources whereas someone robbing a store is simple and straightforward.
    Kurt Pauley Realtor from Minneapolis, MN
    Replied about 2 months ago
    So damn true.
    Matthew Joseph
    Replied about 2 months ago
    From the SEC's statement on Malleys' case " The SEC seeks injunctive relief, civil penalties, and disgorgement of ill-gotten gains plus prejudgment interest." I would have expected to see criminal penalties being pursued....
    Amy Pfaffman
    Replied about 2 months ago
    Thanks for saying that, Max! So true! I hope punishments will begin to be in proportion to dollar amounts stolen. Stealing a loaf of bread (probably because you're hungry) is a bit different from stealing $7M from investors.
    Brant A Van Dyke
    Replied about 1 month ago
    They are Amy, there are levels of crimes and higher dollar thefts are typically a felony and in my state, a theft over 100,000 is an even higher felony.
    George Joy from Farmington, New Mexico
    Replied about 2 months ago
    Actually, retail theft, theft in general and property crimes are treated very leniently by the courts, especially in New Mexico. People crimes aren't much better. Vehicular homicide or even homicide frequently results in less than 10 years in prison and often much less. Sad.
    Amadou Sow from Davie, FL
    Replied about 2 months ago
    He will open another firm in the very near future...Law and punishment is for the poor souls...smh
    Thomas Moran Rental Property Investor from Raleigh, NC
    Replied about 2 months ago
    The SEC needs to do Grant Cardone’s funds next
    Paul Schu Rental Property Investor from NC, IL
    Replied about 2 months ago
    I have always gotten my distributions from Cardone Capital. The return has been lower than expected but so far so good. Looking back I would go in another direction though. Are you invested with them?
    Tim Jensen Rental Property Investor from Rockford, IL
    Replied about 2 months ago
    What is your return? If you don't mind sharing.
    Rony Calixte
    Replied about 2 months ago
    They also need to go after Jay Morrison and his fake Tulsa Real Estate firm.
    Mike Arman
    Replied about 2 months ago
    And this is a surprise . . . ?
    Paul Schu Rental Property Investor from NC, IL
    Replied about 2 months ago
    Well if you believe a claim like “100% protected from loss.” then you are an idiot.
    Brandon C Investor from west palm beach, FL
    Replied about 2 months ago
    Wonder when the SEC will go after the online crowdfunding, such as POL? These were scams from the get go with very limited disclosure to their investors and total losses in many cases, due to their over promising and lack of experience. They were just grabbing money and handing it out like candy. Hopeful to see justice soon in that arena.
    Michael Kissi from Baltimore, MD
    Replied about 2 months ago
    Interestingly, Malley solicited using a popular online crowd funding site. Who were repeatedly warned that this guy was bad news. They did nothing about it.
    Paul Schu Rental Property Investor from NC, IL
    Replied about 2 months ago
    That’s interesting what site did he use? I am surprised the due diligence on the site didn’t catch it.
    Justin Brennan Investor from San Diego, CA
    Replied about 2 months ago
    Great article.
    Adam Gower Specialist
    Replied about 2 months ago
    Thanks Justin.
    Todd Shiflett
    Replied about 2 months ago
    caveat emptor. bernie madoff. do your due diligence.
    Rony Calixte
    Replied about 2 months ago
    The SEC needs to go after Jay Morrison. Both him and his wife have mislead the black community with their fake track record. This guy has raised $10M in order to finance his lifestyle. Google his name and his unethical business dealing.
    Paul Schu Rental Property Investor from NC, IL
    Replied about 2 months ago
    Quite a bit on the BBB site. Looks like a typical guru selling courses when you could get all the info and more on BiggerPockets
    Allen Lucas from Hyattsville, MD
    Replied about 2 months ago
    This actually just happened to me and a close friend of mine. I lost $30k and he lost $360k. He embezzled money from his job to start up his scam and he misappropriated about $7million as well all together. He’s facing 20 years in prison. Still hoping to receive at least a portion of my money back.
    Dave G. Investor from Phoenix, Arizona
    Replied about 2 months ago
    Never give money directly to the solicitor, this is how your dollars wind up “funding” the deceptor’s lifestyle. Use 3rd party escrow. If the person is legit, they won’t have a problem with this.
    Brad Shepherd Syndicator from Austin, TX
    Replied about 2 months ago
    It's always a solid effort to build trust with potential investors. Bad actors like this make it that much harder for everyone else. So disappointing to see, but I'm glad he got caught. @adamgower, do you the potential fraud being higher in funds like this as opposed to syndicators who are raising capital for a single specific asset?
    Adam Gower Specialist
    Replied about 2 months ago
    I am a strong believer in innocence until proven guilty, so outside of the context of this article I'll answer your question like this... While there are some steps you can take to insulate your investments from these kinds of risk, there isn't very much you can do to protect yourself from a criminal who is intent on fraud. Doesn't matter whether it's a single asset or a fund.
    Zander Kempf Developer from Amherst, NH
    Replied about 2 months ago
    Truly amazing that people can have the audacity to lie like that. Being upfront and honest with your investors it 100% top priority.
    Roger Webster
    Replied about 2 months ago
    Adam, Is there a web site, or any place where we could post the name(s) of someone who has committed fraud and bilked money out of unsuspecting investors. Thanks, Roger
    Alan Mackenthun from Prior Lake, Minnesota
    Replied 22 days ago
    Report to the state attorney general or the SEC if it's a syndication or fund.
    Adam Gower Specialist
    Replied about 1 month ago
    I'm afraid I do not know about such things, Roger.
    Marian Smith Real Estate Investor from Williamson County, Texas
    Replied about 1 month ago
    58m wow! Lot of wanna believers. A guy here bought up a bunch of land in a syndicate. Had photos of himself on signs all over on large well located parcels of land. Threw his daughter 100k wedding...20 years ago. Years later I read Investors complained they didn't end up making near the profit they were promised. Turns out the guy had sold the raw land investments to his own companies at well below market value. I guess someone tracked down the owners of the LLC s who purchased the land and figured out it was him. I can't remember his name but he had a big smile on those signs. That land is covered with houses today...huge subdivision with parks, schools, etc.