Feds Sue to Halt Alleged Chicago Ponzi Scheme

(CN) – Hundreds of investors are falling into an ongoing fraud scheme that captures funds from investments in Chicago real estate projects in order to cover earlier fraud, according to a lawsuit filed Friday in federal court in Nebraska by the U.S. Securities and Exchange Commission.

EquityBuild, a Florida corporation with an office in Chicago, began soliciting investments in 2010, promising 12 to 20 percent returns generated by the purchase, renovation and development of real estate on Chicago’s South Side.

The scheme involved building an attractive social media marketing presence that raised at least $135 million from more than 900 investors and continues to attract investment, the lawsuit said.

In an 18-page complaint, the SEC said they brought the lawsuit against father and son Jerome Cohen and Shaun Cohen – and their companies EquityBuild, Inc. and EquityBuild Finance – to “halt an ongoing Ponzi scheme.”

Jerome Cohen, 63, is CEO and president of EquityBuild. He is a resident of Naples, Florida. His son Shaun, 39, is both president and vice president of EquityBuild Finance and lives in New York City.

A spokesperson for EquityBuild did not immediately respond to a request for comment Friday afternoon.

The lawsuit said defendants intentionally hid information from investors, particularly the 15 to 30 percent cut they skimmed from each investment as part of undisclosed fees.

“In many cases they did this by telling investors that the properties being purchased cost substantially more than what Defendants actually paid for them,” the lawsuit said. “This meant that investors were not only overcharged, but the real estate supposedly securing their investments was worth much less than what Defendants told investors.”

The Chicago developments sustained heavy losses and earned nowhere near the double-digit returns promised to investors.

The Cohen’s continually assured investors that if their plan ever slid into default, they could sell the property in a quick sale and get their money out of the investment, the complaint said.

As a result of the continued losses, defendants’ investment program “devolved into a Ponzi scheme” wherein they could only pay earlier investors by raising funds from new investors.

Defendants then changed their business model by offering investments in pooled investment funds, but failed to disclose that the funds were being directed to the very same projects as before.

Investors were then forced them to restructure their plans with defendants pushing back the time frames for repayment, the complaint said.

As the scheme started to collapse, defendants “started coming clean about their financial distress and inability to repay investors,” yet they continue to solicit investments with “guaranteed” rates of return.

The SEC seeks a jury trial, an injection to stop defendants’ operation and an order requiring them to “disgorge the ill-gotten gains.”

SEC is represented by staff attorney Benjamin Hanauer.

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