Daily Dose of Ponzi Schemes

[Chris Seveney]

Good morning all. I do like to share these as there are active and passive investors here on biggerpockets and these stories hopefully those may get some education on what to look for, or not to look for. While we never wish for anyone to take on any losses, some of these stories are mind blowing.

In today's edition we welcome Kumar Arun Neppalli who raised money from investors. What was his pitch.... Get this:

He worked for the town of Chapel Hill and convinced people he had insider knowledge of development plans for future real estate deals - and would ask for money and get them to sign a NDA. 

OK so some takeaways - 

1. If someone is raising funds and has you sign a NDA to not disclose, that is a red flag.

2. More importantly, insider information is really not legal, so how ethical do you think someone is that is like "hey I got a good tip on XYZ, lets invest and make $". That should already be a sign.

[Chris Seveney]

Quote from @Stuart Udis:

Sadly this story will become all too familiar. The internet and social media are powerful tools that enable these bad actors to get in front of their victims. There was a time when the less sophisticated or those with limited means solely invested in "friends and family" deals. They invested with people where prior relationships existed and had a lifetime to vet. Sure there were still bad actors but it was harder to run a scheme.  Perhaps the deals didn't profit, but for the most part the parties had good intentions.  Now these check writers are unfortunately being targeted by individuals with bad intentions. 

Not to change topics, but what I find most alarming is a popular movement of syndicators educating other want to be syndicators on how to raise money and syndicate multi-family deals and other investments. I was shocked to learn in many cases the students are taught to associate with other GP's and provide services such as capital raising, dilligence etc.  in return for being allowed to promote the projects on their websites, hold themselves out as the co-gp etc. This is the gray area that I find to be most troubling as individuals with no experience are being taught to work in this gray area to raise money from individuals who likely believe the sponsor credentials are more robust than they are. Even if the intentions are good once these syndicators are capitlized with outside money, there will be carnage as they don't have the operational expertise to deploy and manage the assets they acquire. Watch out for this in the coming years. 

 Oh I agree. As a hypothetical example - If I engaged you for legal services and made you a co-gp for those services. All of a sudden you now put on your website that you have approx. $50M AUM from as a debt fund sponsor and want to raise money for your new fund. 

Savvy investors will see right through this but others will be like "oh they are experienced let me invest"...

But others will not, and lets be real, someone providing a service or raising money for a sponsor is not equate to being able to manage a fund/syndication.