Mortgages Ltd. stopped paying interest payments to the 18 investors, who sued as Victims Recovery, and delayed their requests to return their investments on its revolving opportunity loan program, according to the complaint in Maricopa County Court.
The plaintiffs claim that Mortgages Ltd. ran an “almost $1 billion fraud” from 2004 to 2008.
Mortgages Ltd. “made, negotiated, or offered … short-term bridge loans, which were evidenced by promissory notes and deeds of trust, to real estate developers and builders for projects such a multifamily residential complexes, office buildings and underdeveloped mixed-use properties in Arizona,” according to the complaint.
Victims Recovery claims that Mortgages Ltd. induced its members to invest by claiming that its revolving opportunity loan program “was geared towards high net-worth investors requiring higher minimum investment accounts … than its other loan programs.”
Mortgages Ltd. falsely the investors that it “had never failed to pay back principal to its investors in its 40-plus year history,” that the rate of return was “higher than normal,” and that their investments were secured, according to the complaint.
Under its loan program, Mortgages Ltd. was required to repay each of the Victims Recovery investors their entire investment within 90 days – later changed to 120 days due to the investment group’s money troubles, the complaint states. The investors say they had the option to roll over their investment into other Mortgages Ltd. loans after the 120 days.
When Mortgages Ltd. became overextended, it entered upon “various Ponzi schemes of selling even more loan programs to existing and new investors,” including the plaintiffs, according to the complaint.
By mid-2007 it had stopped writing new loans, canceled the revolving opportunity loan program and stopped paying interest payments to the Victims Recovery investors, according to the complaint.
The investors claim that Greenberg Traurig knew Mortgages Ltd. was funded through illegal securities sales, but prepared misleading private-offering memoranda for investors. Defendant Robert Kant, a Greenberg Traurig partner, allegedly said that “he knew such sales were illegal.”
Ten of the 11 memoranda prepared by Greenberg Traurig failed to include information that Mortgages Ltd. “was actually insolvent and, therefore, unable to fund its loan commitments and to honor requests from investors … to redeem their investments as required,” according to the complaint.
The risk disclosures in the memoranda “were actually so generic and standardized” that the language “was repeated almost verbatim” from all the memoranda previously prepared for Mortgages Ltd., the lawsuit claims.
In January this year, Mortgages Ltd. agreed to an SEC order revoking its registration as a securities dealer. The SEC settlement did not return any money to investors; the SEC found it did not have the money available.
During the SEC investigation, Greenberg Traurig “never did anything to amend, update or make any changes” to the memoranda, Victims Recovery claims.
Accounting firm Mayer Hoffman McCann’s financial statements allegedly failed to disclose that Mortgages Ltd. improperly accounted “for a $58 million transfer of loans under its RevOp [revolving opportunity] Loan Program,” resulting in “a huge misstatement” of the values of mortgages it held for investment and sale. The accounting firm should have known that Mortgages Ltd. did not follow standards in making loan underwriting decisions, the investors claim.
Mayer Hoffman McCann was required to disclose that there was doubt about Mortgage Ltd.’s “ability to continue … based on its deficient working capital, negative cash flows, adverse financial ratios and other indications of its financial difficulties,” the lawsuit claims.
Mortgages Ltd. CEO Scott Coles is dead, an apparent victim of suicide in June 2008, just before Mortgages Ltd. filed for bankruptcy. He was reported to have died of an overdose of pills and alcohol, dressed in a tux, surrounded by a “shrine” to his wife.
Victims Recovery seeks $52.3 million in compensatory damages, plus punitive damages and interest, alleging fraud, negligence and civil conspiracy. It is represented by William A. Miller of Scottsdale.
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