“What’s up, Doc?” It may not sound like the start of a very effective sales pitch, but when Radical Bunny LLC (no relation to Bugs) talked, people listened, according to a recent article by John Emswhiller in the Wall Street Journal entitled “SEC Sues Four Over Real-Estate Deal.” At least 900 investors placed over $197 million with Radical Bunny in connection with a purported Phoenix commercial real estate venture. The Securities and Exchange Commission (SEC) says the money was funneled to Mortgages, Ltd., which made short-term, high-interest loans to real estate developers that were building malls, office parks, condominiums, and other projects. When the commercial real estate bubble burst, and the borrowers defaulted, Mortgages, Ltd, Radical Bunny, its principals and investors were left holding a big, empty bag. Bankrutptcy filings ensued, as did enforcement actions by the SEC against Radical Bunny and its principals. Mortgages, Ltd.’s chief executive committed suicide.
The SEC alleges that the defendants made material misrepresentations to investors, including making false claims about how the funds would be used and how safe the investments were, according to the article. Defendants “repeatedly overstated the safety of the investment and their knowledge of the underlying business to which they lent investor funds. Unbeknownst to investors, more and more of their money was being shifted into fewer and riskier loans,” according to an SEC statement. Defendants even told investors that an investment in Radical Bunny wasn’t subject to the securities laws. I can almost see and hear an exasperated Suze Orman now: Folks, if you hear something like that, please grab your wallet and run for the hills.
The SEC stated that Radical Bunny’s fund-raising efforts were mostly done through word of mouth among the defendants’ relatives and friends. That’s another lesson – securities fraudsters seek to cultivate trust and sense of obligation on the part of their victims, and who would be more trusting or obliging than relatives (well, some relatives).
The SEC is seeking an injunction against the defendants (ordering them to cease violating the securities laws), financial penalties and disgorgement of ill-gotten gains, which allows them to seize the houses, cars, art work, and other things defendants may have spent the money on.