{"id":158085,"date":"2023-09-11T13:59:43","date_gmt":"2023-09-11T19:59:43","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=158085"},"modified":"2024-02-29T17:55:13","modified_gmt":"2024-03-01T00:55:13","slug":"grant-cardone-class-action-lawsuit","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/grant-cardone-class-action-lawsuit","title":{"rendered":"Update on Grant Cardone Class Action Lawsuit"},"content":{"rendered":"\n

Update: A judge dismissed the lawsuit against Grant Cardone on October 4, 2023. Click here<\/a> to read more about the decision.<\/em><\/p>\n\n\n\n

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Entrepreneur, author, and real estate investor Grant Cardone is facing legal trouble related to his social media marketing tactics, which has <\/span>implications<\/span><\/a> for other syndicators who double as social media influencers.<\/span><\/p>\n\n\n\n

What\u2019s It All About?<\/span><\/h2>\n\n\n\n

A class action lawsuit filed in Los Angeles Federal Court alleges that Cardone, who showcases his lavish lifestyle on social media, misled investors with promises of high returns while failing to disclose the risks of investing in his real estate fund. <\/span><\/p>\n\n\n\n

Although Cardone included legal disclaimers on his website, the suit argues these weren\u2019t sufficient, given the exaggerated nature of his boastful claims. An example: \u201cYou\u2019re gonna walk away with a 15% annualized return,\u201d says the former salesman in a 2019 video. \u201cIf I\u2019m in that deal for 10 years, you\u2019re gonna earn 150%. You can tell the SEC that\u2019s what I said it would be.\u201d Cardone goes on to say, \u201cThey call me Uncle G, and some people call me Nostradamus, because I\u2019m predicting the future, dude. This is what\u2019s going to happen.\u201d<\/span><\/p>\n\n\n\n

The suit is brought by Christine Pino, who is proceeding with a claim brought by her deceased father, Luis Pino, in 2019. Luis Pino invested $5,000 in a Cardone Capital real estate fund after attending one of Cardone\u2019s 2019 \u201cBreakthrough Wealth Summit\u201d events. Though the case was initially dismissed in 2021, an appeal reinstated the case in 2022. <\/span><\/p>\n\n\n\n

Cardone was able to solicit investments from his social media following directly, thanks to Registration A+ offerings, which were signed into law with the JOBS Act of 2015. These small securities don\u2019t require as much oversight as traditional offerings and enabled Cardone to appeal to everyday people with as little as $1,000 to invest.<\/span><\/p>\n\n\n\n

Cardone then used the pooled capital to purchase undervalued properties with large loans and drive up rents, taking up to 20% of the profits along the way. Meanwhile, residents of the buildings dealt with rent hikes and poor maintenance, <\/span>The New Republic<\/span><\/em> <\/span>reports<\/span><\/a>. <\/span><\/p>\n\n\n\n

Cardone\u2019s confidence may have garnered millions of social media followers, but the lawsuit says his statements were materially misleading and omitted essential disclosures, violating the Securities Act of 1993. Cardone\u2019s habit of overpromising continued even after a warning from the Securities and Exchange Commission (SEC) in 2018 about his social media marketing material, the suit argues. <\/span><\/p>\n\n\n\n

The Lure of Real Estate Influencers<\/span><\/h2>\n\n\n\n

U.S. Appeals Judge Barbara Lynn, who allowed the Cardone case to move forward, <\/span>wrote<\/span><\/a>, \u201cPino fairly alleges that the nature of social media presents dangers that investors will be persuaded to purchase securities without full and fair information.\u201d <\/span><\/p>\n\n\n\n

That danger is becoming widespread as more real estate influencers leverage their followings not only to sell educational material but also to lure investors to buy into their funds. They put their own wealth and success on display and imply (or directly promise) that anyone can build wealth by following in their footsteps. For example, influencer <\/span>Kris Krohn<\/span><\/a> makes the following claim to potential investors who partner with him: \u201cMultiply your wealth 27X faster.\u201d <\/span><\/p>\n\n\n\n

But handing over money to real estate syndicators comes with serious risks, which real estate influencers often fail to explain on social media, even if they are running legitimate businesses. Analysts now predict that many of the thousands of real estate syndicators will default on loans with floating interest rates due to the Federal Reserve\u2019s rate hikes and the pressures of inflation, <\/span>The<\/span><\/em> <\/span>Wall Street Journal <\/span><\/em>reports<\/span><\/a>. <\/span><\/p>\n\n\n\n

That\u2019s what happened to <\/span>Jay Gajavelli\u2019s company, Applesway Investment Group<\/span><\/a>. Gajavelli was a YouTube personality whose company became one of Houston\u2019s largest landlords after he built an empire buying rental properties with capital collected from small investors and upgraded the units to increase rents, much like Cardone\u2019s scheme. Those investors lost millions when more than 3,000 of the company\u2019s rental units in four complexes were taken in foreclosure. <\/span><\/p>\n\n\n\n

Cardone himself posted a video in March 2020 telling his followers he feared bankruptcy. He later deleted the video and claimed it had been a joke. He continues to solicit funds from new investors, but his empire rests on debt. There\u2019s a risk he\u2019ll lose too many tenants with his poor management practices and face too much financial pressure when the interest-only period on his <\/span>loans<\/span><\/a> comes to completion. <\/span><\/p>\n\n\n\n

But some real estate social media influencers aren\u2019t just overly confident about their funds\u2019 potential return\u2014they also face accusations of fraud. Clayton Morris, who used his social media following to sell rental properties to out-of-state, newbie investors and charge up-front rehab fees, is <\/span>accused<\/span><\/a> of running a Ponzi scheme with his business partner, Bert Whalen, in multiple lawsuits. Many of the 700 houses they sold were never repaired or sat vacant, while Morris and Whalen used fake leases and other tactics to deceive investors. <\/span><\/p>\n\n\n\n

Even novice investors just looking for coaching or education can easily be scammed by real estate social media personalities. An <\/span>FTC lawsuit<\/span><\/a> against a real estate investment training company, Response Marketing Group, LLC, resulted in a $16.7 million judgment earlier this year. Response Marketing held free events across the country to persuade real estate investment hopefuls to purchase training and coaching programs costing as much as $30,000. However, most customers did not even recoup the cost of the program.<\/span><\/p>\n\n\n\n

How Investors Can Protect Themselves<\/span><\/h2>\n\n\n\n

Promises of high returns on social media that sound too good to be true are most likely not going to be good opportunities. But even real estate syndicators who don\u2019t post pictures of their exotic sports cars or claim to be clairvoyant can be bad actors, and even those who seem relatively transparent, honest, and straightforward can lose your money. That\u2019s why <\/span>due diligence<\/span><\/a> is essential before investing even a small amount of money in a syndication deal. <\/span><\/p>\n\n\n\n

You\u2019ll want to evaluate the following:<\/span><\/p>\n\n\n\n