Real Estate Fund Manager Charged With Misappropriating Funds

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.

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.

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.

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.

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:

There are no guarantees in real estate.
Never exaggerate your track record or claim to have one by association with a partner.
Be honest about your weaknesses and explain how you compensate for them.
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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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.