Updates to our Terms of Use

We are updating our Terms of Use. Please carefully review the updated Terms before proceeding to our website.

Monday, April 22, 2024 | Back issues
Courthouse News Service Courthouse News Service

Realty Firm Accused of Fraud & Elder Abuse

SANTA ANA, Calif. (CN) - Argus Realty lured investors with commercial real estate securities it touted as "institutional grade," but it was "a rigged game in which the sponsors made millions in fees while taking savings from people earned over a lifetime," 11 plaintiffs claim in court.

Six LLCs, led by ARI-NBCC 2, and five people sued Argus Realty Investors, Argus Realty, and several affiliated companies and people, in Orange County Superior Court.

"The sponsors and entities behind this offering gorged themselves on unconscionable fees and costs associated with the offering and the management of the properties while placing the investors in a hopeless, fraudulent investment structure that had no chance of providing a reasonable return," the complaint states. "While the investment was touted as 'institutional grade,' it was anything but institutional grade. This TIC was no investment in any sense, but a rigged game in which the sponsors made millions in fees while taking savings from people earned over a lifetime.

"The offering and sale of securities by defendants promoted the sale of undivided fractional tenant-in-common interests in commercial real estate ('TIC interests'). TIC investments are often used to defer taxes on capital gain on 'like-kind' real property sales. Typically, the sale of an investment, including an investment in real estate, is a taxable event, and the seller is responsible for capital gains taxes on the appreciation of the investment. With a TIC investment, the gain realized by the tax payer investor on a sale of real estate can be invested on a tax-deferred basis in 'like-kind' property. As in this case, the TIC investment is usually made through a special purpose entity which effectively receives the ownership TIC interest, an undivided tenant in common percentage interest, in the real property exchange. These offerings are often directed at people in a later life stage who stand to realize very significant gains from real estate or assets held over a long period of time and who are directed to what they are told is a stable and secure investment that will also yield 1031 exchange-like benefits."

Section 1031 of the U.S. Internal Revenue Code allows for the exchange of certain types of property that may defer capital gains taxes due upon sale. The properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds and other properties are excluded.

According to the complaint, Argus sold undivided interests in three office buildings in Phoenix, described as "single-story class A back-office" buildings.

"Defendants arranged for the acquisition of the property for $51,375,000, and then through a series of sales of TIC interests, sold the securities to plaintiffs and other investors for a marked-up value of $58,240,000," the complaint states. "As will be shown at trial, this value was inflated and indefensible. And defendants knew it.

"The offerings and subsequent sale to plaintiffs of such TIC interests in the property was designed to fund defendants' acquisition of the property, while at the same time allowing defendants to liquidate their investment, limit their downside risks, realize an immediate and substantial gain from completing such investment contracts, as well as capture significant future revenues and profits from plaintiffs due to the structure of the offering.

"Defendant Argus Realty Investors, L.P. ('ARI LP'), the sponsor of the offering, represented to plaintiffs and potential investors that it had acquired over $1 billion of commercial real estate, had more than 9 million square feet under management, and offered investors 'the opportunity to participate in the ownership of institutional-grade commercial real estate, without the burden of individual property management, through its tenant-in-common and private exchange programs and real estate investment funds.' In fact, no serious institution would consider an investment like this. Defendants fabricated an aura of stability and sensibility that was intended to conceal a hopeless investment.

"Defendants misrepresented the transaction and the securities offered and sold, and failed to disclose numerous material facts which would have made the securities a less desirable option than simply paying capital gains taxes.

"Because the TIC interests were not as represented, plaintiffs suffered damage through the loss of their investment in June 2012 when the property was foreclosed upon."

The plaintiffs include five Delaware LLCs, Pine Meadows Townhomes LLC, of Oregon, and five people, from Washington, California and Georgia. They claim that Argus and its affiliates formed a company to buy the commercial real estate in Arizona, and used it as a vehicle to sell 100 percent of their ownership interest to investors.

They say one of the Argus companies, defendant ARI Commercial Properties, managed the property and collected property management fees.

The TIC investments were designed to be held for 10 years, after which the property would be sold, according to the complaint.

The plaintiffs claim that defendant Argus CEO Richard Gee and other Argus officers and sponsors participated in drafting the offering materials, which contained misrepresentations and omissions about the securities.

They claim the defendants misrepresented the returns to investors, falsely claimed the leasing and sales commissions were consistent with the fair market value of the services, and knew the investments in the property were not institutional-grade.

Argus also failed to disclose that a real estate brokerage commission paid to ARI Commercial was financed from the loan assumed by the investors, according to the complaint.

In October 2008, defendant Thompson National Properties (TNP) merged with Argus Realty Investors, and took over the management of the property, the plaintiffs say.

They claim that TNP sent quarterly statements which misrepresented that the economic downturn in Arizona was responsible for operating difficulties.

The lender foreclosed on the property in June 2012, and the plaintiffs lost their investments, according to the complaint.

The investors seek compensatory and punitive damages for intentional and negligent misrepresentation, securities fraud, aiding and abetting fraud or deceit, negligence, breach of fiduciary duty, elder abuse, and violations of the California Corporations Code and the Arizona Revised Statutes.

They are represented by Mark Slater with Slater Hersey & Lieberman, of Irvine.

Named as defendants are Argus Realty Investors L.P., Argus Realty LLC, ARI-Northgate Blackhawk Corporate Center, ARI Commercial Properties, ARI Financial Services, National Planning Corp., Thompson National Properties, Oscar Sasson, Argus CEO and Chairman Richard Gee, ARI President Timothy Snodgrass, and ARI investor Maxwell Drever.

Gee did not immediately return a request for comment.

Categories / Uncategorized

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.