The U.S. Securities and Exchange Commission (SEC) has closed down Chicago-based real estate equity firms Equitybuild, Inc and Equitybuild Finance LLC for allegedly defrauding investors out of more than $135 million over the past eight years.
SEC said the firms run by the father and son team of Jerome H. Cohen and Shaun D. Cohen were, in reality, part of a real estate Ponzi Scheme where early investors received their returns from new investors' investments. It alleges the Cohens defrauded at least 900 investors with a promise of guaranteed returns on their real estate investments.
SEC's complaint charges the Cohens and their two firms with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, and Section 10(b)(5) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the registration provisions of Sections 5(a) and 5(c) of the Securities Act.
On August 17, the SEC obtained a temporary restraining order (TRO) that enjoined the defendants from raising any additional funds from investors, among other actions. It also obtained an order appointing a receiver to secure the real estate and other assets obtained with investor proceeds for the benefit of the defrauded investors.
The SEC's complaint also seeks injunctions against future securities laws violations, disgorgement of the defendants' ill-gotten gains, and civil penalties.
In its complaint, SEC said the Cohens raised the money by falsely promising investors safe investments generating returns of 12 percent to 20 percent, and fully secured by the income-producing real estate.
Since 2010, the Cohens sold promissory notes to at least 900 investors across the USA. The SEC complaint said the defendants made money for themselves by taking 15 to 30 percent of investors' funds as undisclosed fees. The Cohens hid those fees in their accounting books by reporting inflated acquisition costs.
SEC said the real estate sold by the Cohen's didn't earn enough to pay the double-digit returns promised to investors. Because of this, the Cohens could only pay earlier investors by raising funds from guileless new investors, which is the classic modus operandi of a Ponzi Scheme
The SEC is continuing its investigation into the Cohens and their companies. The investigations are being, conducted by Timothy Stockwell, Ariella Guardi, and Ann Tushaus, and supervised by C.J. Kerstetter. Benjamin Hanauer leads the SEC's litigation.
