{"id":134439,"date":"2021-01-14T15:42:17","date_gmt":"2021-01-14T22:42:17","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=134439"},"modified":"2021-03-17T07:03:53","modified_gmt":"2021-03-17T13:03:53","slug":"fund-manager-charged-misleading-investors","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/fund-manager-charged-misleading-investors","title":{"rendered":"Breaking News: Real Estate Fund Manager Charged With Misappropriating Funds, Misleading Investors"},"content":{"rendered":"

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\u2019s capabilities.<\/p>\n

According to the Securities and Exchange Commission<\/a> (SEC), Malley and his firm\u2019s 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 \u201c100% protected from loss.\u201d<\/p>\n

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\u2014the standard benchmark for investors\u2014and 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\u2014investors\u2019 capital was indeed at risk and Malley did not have the successful experience he claimed.<\/p>\n

Related: <\/em><\/strong>Survey Says: These Are the Best & Worst Investments for 2021<\/a><\/em><\/p>\n

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 \u201chuge losses.\u201d<\/p>\n

According to Richard R. Best, active director of the SEC\u2019s New York regional office, \u201cAs 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.\u201d<\/p>\n

Many investors were initially shocked that Malley, a man who represented himself to be both experienced and transparent, deliberately lied about his firm\u2019s finances in order to attract more investors. Director Best later stated, \u201cThis case demonstrates our commitment to hold accountable perpetrators of offering frauds for the harm they inflict on retail investors.\u201d<\/p>\n

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\u2014at least in part\u2014triggered by misrepresentations throughout the securities industry.<\/p>\n

Related: <\/em><\/strong>How 2020 Changed Real Estate (and What 2021 Might Look Like)<\/a><\/em><\/p>\n

In a statement issued by the SEC, it \u201cseeks injunctive relief, civil penalties, and disgorgement of ill-gotten gains plus prejudgment interest.\u201d<\/p>\n

All Eyes on Sponsors<\/h2>\n

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.<\/p>\n

Malley\u2019s 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\u2019s exposure to risk.<\/p>\n

Watch as Adam Gower discusses with attorney Mark Roderick how to build trust through authenticity in this short video segment.<\/em><\/p>\n