LAS VEGAS (CN) – Owners of two Caribbean timeshares bilked 1,200 investors out of $163 million in a five-year Ponzi scheme that netted them $58.9 million in commissions, the SEC claims in Federal Court.
James B. Catledge and Derek F. C. Elliott, through their company Net Worth Solutions, paid themselves “exorbitant undisclosed sales commissions” from sales of securities for two resorts in the Dominican Republic, the SEC claims.
The two types of securities were known as “Residence” and “Passport” investments, for timeshare and timeshare ownership interests respectively,
The men promised annual returns of 8 percent to 12 percent on Residence investments and 5 percent annually on Passport investments, according to the complaint.
Investors were told their returns were guaranteed. “Nevertheless, only a very small percentage of investor funds were actually used to renovate and construct the properties,” the SEC says in the complaint. Instead, defendants skimmed undisclosed commissions and used new money to pay off earlier investors, the SEC says.
Catledge, 44, of San Diego, founded “a series of multi-level marketing entities that sold investments in Elliott resorts,” the first of which was used for Impact America, followed by Impact Net Worth and Net Worth Solutions, according to the complaint.
Elliott, 41, of Hillsburgh, Ontario, was the company’s president.
Catledge and his father bought the Cofresi resort in the Dominican Republic in 2003, but by 2004, “they needed additional funds to finish construction and make repairs,” the complaint states. They hired Catledge to raise money for the resort, the SEC says.
EMI Sun Village Inc., which owned the resort, targeted investors in the western United States to buy Residence resort investments.
A purchaser of such investment could occupy a room at the resort based on his or her investment. The investor was to get a so-called “no-use fee” [NUF] of 8 to 12 percent of the amount invested, paid quarterly, if he or she did not use the time share.
At the end of five years, investors were told, they could get their investment back or roll it over for another five years for an increased “no-use” fee.
“These representations, coupled with the fact that the NUF rate was much higher than was available at a traditional lending institution at the time, made the Residence investment extremely attractive to investors,” according to the complaint.
Although Cofresi still was not completed, Elliott and his father bought Sun Village Juan Dolio, another hotel in the Dominican Republic, in 2005 for $12.6 million, “consisting of the assumption of $8.75 million in existing bank debt and a down payment of approximately $4 million,” the SEC claims.
The two at first raised money from investors in Juan Dolio by selling Residence investments “that had been used to raise money for Cofresi,” the SEC says.
By October 2005, the two began marketing another type of investment, called the Passport, which is a fractional ownership interest rather than a timeshare.
“Like the ‘Residence’ investment, it was sold as a fixed income investment, but instead of an NUF fee the investor was promised a return of 5 percent annually on his investment, paid quarterly, until Juan Dolio opened,” the SEC says.
After that, the investor would “split the rack,” or split equally the net rental proceeds for the unit with the hotel.
Investors were required to invest half in cash and half by promissory note, at 8 percent interest. But investors were not told that the commissions of up to 40 percent would be deducted from their cash investment, the SEC says.
For example, if an investor put down $100,000 – $50,000 in cash and $50,000 in the form of a note – $40,000 would be taken from the down payment, leaving only $10,000 cash for construction or other expenses.
Construction at Juan Dolio was never completed, and it never opened to guests, the SEC says.
In 2005, Catledge formed another company called DRCI (Dominican Republic, Cook Islands) to funnel more commissions to himself independently of Net Worth, the SEC says, totaling “in excess of $15 million through 2009.”
“In 2006 Elliott became interested in developing yet another resort in the Dominican Republic, even though Cofresi was losing money and Juan Dolio was still under construction,” the SEC says.
The oceanfront property on the northeast coast of the island was to be called Miches.
Nearly $7.5 million of Juan Dolio investor money was used to fund the down payment for the land, but investors were never told of this, the SEC says.
Idaho’s attorney general got involved in 2007, and after an investigation, the parties entered into a consent decree and agreed to make rescission offers to all investors in Idaho. But the offers were never rescinded, and the attorney general filed a complaint in 2009, alleging that the $3.4 million Net Worth raised in Idaho from 2005 and 2007 violated Idaho securities laws.
Defendants bought about $72.6 million worth of investments in Cofresi and $91.2 million in Juan Dolio, the SEC says. And although $91.2 million was raised for Juan Dolio, Elliott spent only $8 million on its construction, “of which $1.8 million or more was classified as construction payroll,” the SEC claims.
“Therefore, only 9 percent of the money raised from Juan Dolio investors was spent on construction,” the SEC says. “Instead, investor funds were funneled to the payment of commissions, to Net Worth, Catledge and Elliott and his related entities.”
In total, $21.1 million was paid in commissions from the $73 million invested in Cofresi, the SEC says. About $37.8 million of the invested $91 million raised for the Juan Dolio project went to commissions, according to the complaint.
While defendants were taking their commissions, Cofresi experienced “millions of dollars in losses from operations” every year through 2008, the SEC says.
Lenders foreclosed on both properties in 2009.
Juan Dolio investor money was used to pay Cofresi’s expenses, “to buy a yacht as an amenity for the resort, and to buy the Miches property,” the SEC says. Juan Dolio investor money also was used to pay “NUFs” to Cofresi investors.
Investors were not told of any of this, the SEC says.
The SEC seeks disgorgement, penalties, and an injunction.