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SEC & DOJ Charge Real Estate Fund Manager with Investment Misappropriation and Securities Fraud, Respectively

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Last week, the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) concurrently charged former real estate fund manager, Eric C. Malley, with investment misappropriation of over $7 million and securities fraud, respectively. The charges come on the tail of Malley’s arrest in relation to the DOJ’s criminal complaint. 

Hundreds are claimed to have been defrauded by Malley, acting in his role as CEO of MG Capital Management L.P., a private equity real estate management firm. Malley’s fund management scheme has allegedly been active since 2014. [1] The two funds in question, entitled MG Capital Management Residential Fund III and MG Capital Management Residential Fund IV, raised a total of $58 million on what the SEC and DOJ claim were false pretenses. Malley allegedly used false information to lure in investors, indicating experience in investment and a track record of successful investments. In truth, Malley is a real estate broker with no investment management experience and, as such, could not have had such a track record. [2]

Moreover, Malley apparently grossly exaggerated the security of the investments into Fund III and Fund IV. He claimed to have managed two real estate funds with a combined portfolio of $1.18 billion and that the fund outpaced the S&P 500 Index over the course of a decade. [3] Further misrepresentations include the claims that invested capital was “100 percent protected” from loss and secured by a $250 million balance sheet (which in fact did not exist). [4] As is apparently evidenced in the DOJ’s complaint, investors had access to no more than a $25,000 balance sheet as opposed to the alleged $250 million dollar one. [5]

Malley also extensively misrepresented the nature of the investment itself. When inducing investors to support Funds III and IV, Malley claimed that he and the rest of the funds’ managers had partnerships with “hundreds of prospective tenants with pre-signed, multi-year lease agreements.” [6] Instead, investors ended up placing their money in “mortgaged properties with individual tenants as opposed to corporate tenants.” [7] Following the receipt of these investments, Malley’s funds incurred millions of dollars in losses, all of which were kept secret from investors. [8]

The DOJ also claims that Malley deleted information relating to the fraud after stepping down from his position as CEO and discovering that he was under investigation by the SEC. Malley allegedly scrubbed 10,000 documents from MG Capital’s server, including closing information on fraudulent dealings and key broker information. [9] He was soon after arrested and is now awaiting trial.

Both cases will be tried in the Southern District of New York. You can read the SEC complaint here and the DOJ complaint here.

Sources:

[1] – “SEC Charges Real Estate Fund Manager With Misappropriating Over $7 Million From Retail Investors,” U.S. Securities and Exchange Commission, 12 Jan. 2021, https://www.sec.gov/news/press-release/2021-4, accessed 18 Jan. 2021.

[2] – Ibid.

[3] – Ibid.

[4] – Ibid.

[5] – Larsen, Keith, “Feds indict NY real estate exec in $50M fraud scheme,” The Real Deal, 14 Jan. 2021, https://therealdeal.com/2021/01/14/feds-indict-ny-real-estate-exec-in-50m-fraud-scheme/, accessed 18 Jan. 2021.

[6] – Op. Cit. n1.

[7] – Op. Cit. n4.

[8] – Ibid.

[9] – “Former CEO Of Real Estate Private Equity Investment Firm Charged With Securities Fraud,” Department of Justice – Southern District of New York, 12 Jan. 2021, https://www.justice.gov/usao-sdny/pr/former-ceo-real-estate-private-equity-investment-firm-charged-securities-fraud, accessed 18 Jan. 2021.

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