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Commercial developer pleads guilty to securities fraud

Developers of commercial real estate may at times seek multiple investors for a development project or series of projects. These investors will provide the developer with necessary cash flow for their projects, while the developer will agree to provide the investor with some type of asset or benefit in exchange. Developers in these situations must hold up their end of the agreement.

A commercial real estate developer in California recently pleaded guilty to securities fraud. The developer sought investors to purchase notes in what he called the "Trust Deed Investment Program." In exchange for their investment, he promised to provide investors with a lien on specific property that would have priority over all other liens on the property. However, he failed to provide such liens and instead gave the investors smaller interests that did not have priority or allow the investors to foreclose on the property. He also sold property that investors had an interest in without their knowledge. In total, he defrauded over 50 investors for around $50 million.

Securities fraud is the making of false statements regarding investments or company values to induce others to make monetary decisions based on that information. Typically, securities fraud cases occur as a result of a corporation or a person acting on behalf of a corporation encouraging investment in their company by improperly inflating the value of the company. Securities fraud is also found in insider trading cases, where confidential or trade secret information is used to make investment decisions. As applied in the case above, the commercial real estate developer was providing false information to prospective investors by telling them that they would be receiving a first priority lien on property as a result of their investment, but never actually acquiring or providing the lien to the investors.

Commercial real estate developers must act in good faith and provide factual information to prospective buyers or investors. A failure to act in good faith could result in legal actions or disputes against the developer for fraud or misrepresentation. As evidenced in this case, the associated liability for such actions can be significant.

Source: Imperial Valley News, "Real Estate Developer Pleads Guilty to $50 Million Securities Fraud Scheme," May 8, 2014

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