KANSAS CITY, Mo. (CN) - Much-sued Sunwest Management's CEO Jon Harder ran the chain of retirement homes "virtually as a Ponzi scheme," defrauding investors of "hundreds of million of dollars" and sucking tens of millions of dollars from it for himself as the house of cards collapsed, the SEC claims in Federal Court. More than 100 of its retirement homes have been foreclosed upon or placed in bankruptcy.
Sunwest Management has been sued more than 60 times on such allegations in the past two years, according to the CNS database.
"Investors in the TICs [tenancy in common interests] were told they were ownership interests in a specific retirement home that would generate enough profit to pay a 10 annual return, and that Sunwest had a history of never missing a payment," according to the complaint. "These representations misstated the true nature of
the investment, and concealed the risk to investors from Sun 's precarious financial position.
"Contrary to representations that individuals obtaining an interest in a specific property which would generate a steady income stream, defendants ran Sunwest as a single, integrated enterprise, commingling all investor funds and revenue into essentially a single fund from which all operating expenses and investor returns were paid. Contrary to Defendants' representations, including written representations and pitches, Sunwest paid investors steady returns on their investments not from successful management of a particular property, but from cash generated in the operations of other facilities, from obtained in refinancings, from loans from Harder and Harder's friends, and from funds raised offerings to new investors. None of these facts were disclosed to investors.
"By misrepresenting the true nature of the operation, Sunwest and Harder concealed the fact that the supposed profitability of each TIC investment was largely dependent on the success of other properties, the continuing availability of credit for future refinancings, and Harder's ability to raise new money or borrow from friends. More significantly, by commingling the operating funds and money raised from investments and financings, Sunwest hid the fact that, far from consistently turning a profit, more than half of the properties were losing money, making Sunwest a far riskier proposition than investors were led to believe.
"As the national credit markets tightened in 2007 and 2008, the house of cards Harder had built came crashing down on unsuspecting investors. Despite the dire financial condition, defendants continued to raise additional money from investors. By June 2008, they operated Sunwest virtually as a Ponzi scheme: money raised in the final offerings, supposedly for new properties, was used to pay old investors their 10 percent return and otherwise fund operations at existing facilities. Despite Sunwest's dire financial situation, Harder took tens of millions of dollars out of the enterprise.
"As of January 2009, over 100 retirement homes have been placed in foreclosure, receivership or bankruptcy, resulting in the effective elimination of the TIC investors' interests in them. For instance, in November 2008, seven TIC investor homes were sold in bankruptcy. The proceeds from those sales were used to pay certain Sunwest creditors while the TIC investors received nothing. Because there are multiple legal proceedings in several different jurisdictions, there is a significant risk that the piecemeal resolution of the myriad of state and federal proceedings will impinge on the ability of investors to recover."
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