Equitybuild, a real estate investment company that promised returns of 15% to 20% on Chicago real estate, was actually a $135 million Ponzi scheme where early investors were getting paid back with new investors’ money, according to the Securities and Exchange Commission.
The SEC took action against Equitybuild, Equitybuild Finance, and the company’s operators, the father and son team of Jerome and Shaun Cohen, for allegedly defrauding at least 900 investors by promising guaranteed returns on real estate investments.
According to the SEC, Equitybuild and the Cohens raised at least $135 million by “by falsely promising investors safe investments, secured by income producing real estate, that generated returns of 12% to 20%.”
Most of the real estate that Equitybuild purchased were residential properties in underdeveloped areas on the South Side of Chicago.
The investor money supposedly went toward buying fractional interest in the properties, including buying, renovating, or developing the properties.
And while Equitybuild was actually buying the properties in question (unlike some other real estate Ponzi schemes), the company was using those properties to allegedly defraud its investors in a number of ways.
According to the SEC, Equitybuild and the Cohens concealed the fact that they were skimming 15% to 30% off each investment by taking undisclosed fees. The SEC claims that in many cases, they accomplished this by telling their investors that the properties being purchased cost substantially more than what they actually paid for them.
So, the investors were not only overcharged for the properties, but the real estate that was supposedly guaranteeing their investments was worth much less than they thought.
Additionally, the properties Equitybuild was buying did not generate the “impressive” returns that the company promised investors.
“The complaint also alleges that, contrary to defendants' representations, the real estate did not earn enough to pay the double-digit returns promised to investors,” the SEC said. “As a result, the defendants could only pay earlier investors by raising funds from unwitting new investors.”
According to the SEC, despite knowing that their company was generating the income it promised, the Cohens and Equitybuild continued to raise money from new investors and passed that money along to older investors to keep the entire scheme afloat.
Eventually, the scheme began to unravel.
According to the SEC, the Cohens even admitted in a video made available to their earlier investors that the companies were in financial distress, could no longer afford to make payments to investors, and were cutting staff to a “skeleton crew.”
But despite these revelations, the company still solicited new investors for various real estate funds, still offering double-digit returns, but did not disclose the “dire” financial condition of the company.
Late last week, the SEC obtained a temporary restraining order that, among other things, prevents the defendants from raising any more money from investors.
The SEC also obtained an order that appoints a receiver to secure the real estate and other assets that were purchased with investor money for the benefit of the defrauded investors.
The SEC complaint charges Jerome Cohen, Shaun Cohen, Equitybuild, and Equitybuild Finance with violating various provisions of federal securities law. The SEC's complaint also seeks injunctions against future securities laws violations, disgorgement of the defendants' ill-gotten gains, and civil penalties.
