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Saturday, February 24, 2024
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Wells Fargo, Greenberg Traurig Aided|and Abetted Ponzi Scam, Investor Says

OAKLAND, Calif. (CN) - A class action claims that a brokerage firm's Ponzi scheme, aided and abetted by Wells Fargo Capital Finance and the Greenberg Traurig law firm, cost investors "hundreds of millions" of dollars.

Lead plaintiff David Nolan sued Wells Fargo Capital Finance, Wells Fargo Foothill and Greenberg Traurig, of New York, in Alameda County Court.

Nolan alleges seven causes of action, including fraud by concealment, fraud by misrepresentation, aiding and abetting fraud and breach of fiduciary duty, and secondary liability for securities fraud.

From 2002 to 2007, Nolan says, he and other investors saw great returns on their investments in the now-bankrupt RE Loans, a brokerage firm that secured developer loans by holding liens on real estate throughout California. The developer loans were funded by Nolan and other investors who purchased membership interests in RE Loans' fund.

In early 2007 the fund had 1,400 investors and was worth more than $700 million, but it had to stop accepting new money because it had violated state and federal securities laws, according to the complaint.

Rather than notify its investors of this, and of its impending illiquidity, RE Loans turned to Greenberg Traurig and Wells Fargo to help hide the problems, Nolan says.

"To that end, the [RE Loans] managers, actively aided by Greenberg, procured unauthorized third party financing from Wells Fargo," the complaint states. "This third party financing was secured to enable the fund to make certain preferential payments while creating the illusion of fund liquidity sufficient to continue to pay a return to its investors. Greenberg arranged for its other client - Wells Fargo - to issue a $50 million line of credit.

"Moreover, Wells Fargo demanded that the [RE Loans] managers collateralize the $50 million line of credit with all of RE Loan's assets - an amount in excess of $700 million - and demanded that its security interest take priority over any security interests held by members. Wells Fargo also required that RE Loans endorse and deliver over $250 million of notes receivable to Wells Fargo. The line of credit from Wells Fargo was funded in or about July 17, 2007.

"Defendants Greenberg and Wells Fargo - which was [sic] clearly conflicted - knew and deliberately and recklessly disregarded the fact that the Wells Fargo line of credit itself contravened the expressed provisions of published offering circulars that had previously been issued to and used to solicit funds from the RE Loans investors. These offering circulars limited the fund's sources of operating capital to cash subscriptions from new investors, existing mortgage loans of the developer borrowers and mergers with existing partnerships or LLCs - prohibiting RE Loans from raising capital through third party borrowing."

Nolan says Wells Fargo's line of credit was "substantially exhausted" almost immediately after it was established in July 2007, exacerbating the fund's liquidity crisis.

Nolan claims that Greenberg Traurig wrote "formal Exchange Offering documents" for an "Exchange Transaction," which was sent to investors on and after Oct. 8, 2007.

"Among other documents, the Exchange Offering materials included a so-called 'Confidential Memorandum' issued to the fund's investors with copies of a proposed 'Exchange Agreement' and an 'Operating Agreement.'

'The Confidential Memorandum intentionally concealed the deteriorating financial condition of RE Loans and the insolvent shell that would remain after the Exchange Transaction," according to the complaint.


"The Confidential Memorandum falsely assured the investors that all was 'well' with RE Loans through misleading statements that '[t]he loan portfolio continues to perform well,' the properties securing those loans '[are] adequate in value to preserve the fund's economic interests,' or it was 'likely ... that the fund will be able to pay principal and interest on' the investor notes, and conveyed a message that the investors would be better off after the proposed reorganization and exchange of their membership interests," according to the complaint. (Brackets and ellipsis in complaint.)

But Nolan says: "In fact, through the Exchange Offering, the fund managers-knowingly aided and abetted by Greenberg and Wells Fargo-eliminated the RE Loans' harmed investors' equity interests and their rights in RE Loans by duping them into tendering their membership interests in RE Loans in exchange for promissory notes: an exchange that in reality, was a subterfuge to (1) persuade the plaintiff and harmed investors to unwittingly agree after-the-fact to the unauthorized line of credit loan and (2) unwind or legitimize the managers' past violations of the law."

Nolan claims that "Wells Fargo was aware of the false and misleading statements in the Exchange Offering documents, which Wells Fargo had insisted upon and required as a condition of the line of credit. And both Wells Fargo and Greenberg knew that the representations contained in the Exchange Offering documents were false and misleading as they each possess knowledge of the true financial condition and affairs of RE Loans and that it did not have the authority to have obtained third-party financing from or pledge its assets as collateral to Wells Fargo.

"As a consequence of the foregoing misrepresentations, RE Loan investors were induced and coaxed into approving the reorganization on November 1, 2007. Consequently, their membership interests in RE Loans were replaced with promissory notes, converting plaintiff and investors in RE Loans into noteholders.

"These transactions had a devastating impact on the rights and interests of the RE Loans members and resulting noteholders - the harmed investors. They were stripped of effective recourse to RE Loans' assets and were placed by the assignment in a subordinated position to Wells Fargo. In one transaction orchestrated by the managers, Greenberg, and Wells Fargo, the plaintiff and RE Loans members lost all the rights they previously held and enjoyed as equity shareholders in RE Loans and were relegated to second-tier creditors with junior security interests."

Then, Nolan claims, the defendants created a new investment vehicle called Mortgage Fund '08 (MF'08). He claims the RE Loans manager and Greenberg created "false and misleading solicitation materials" for MF'08, which "falsely represented the true condition of MF'08. "Greenberg prepared these materials, and along with Wells Fargo, know that MF'08 was in essence a Ponzi-scheme entity that was largely targeting then-existing RE Loans investors and duping them into investing money in MF'08 that was being channeled to hide the defendants' unlawful misconduct respecting RE Loans. To that end, and without adequate disclosure to the investors, money raised by the managers from the MF'08 investors was being 'loaned' to RE Loans in order to pay, in material part, loan obligations to Wells Fargo."

Nolan says RE Loans began defaulting on its Wells Fargo obligations within a few months of the exchange transaction. He claims Wells Fargo amended the operative loan documents no less than seven times between late 2007 and 2010, imposing "onerous collateral requirements, higher interest rates, and other restrictions to gain further control over the assets" of RE Loans."

"By March 13, 2010, the debt to Wells Fargo had climbed to $65 million," the complaint states. "Subsequently, Wells Fargo, which had previously acted overtly to facilitate the fund managers' self-dealing to the prejudice of plaintiff and the harmed investors, came in for the kill. In August-September 2011, Wells Fargo began exercising its rights as a secured creditor with respect to the collateral assigned by RE Loans and is in the process of liquidating the underlying properties. ...

"While defendants have profited, investors have been gravely harmed. Many of these investors are elders. Many invested all of their retirement funds. Others invested their entire life savings. Many of those investors were induced or convinced to mortgage their homes to invest with RE Loans. Others are now destitute. All harmed investors were victims of fraud, intentional breaches of fiduciary duty, and violations of the law.

"Plaintiff now seeks relief on behalf of himself and the harmed investors, who have collectively lost hundreds of millions of dollars arising from the intentional fraud, misconduct and self-dealing complained of herein, and as aided and abetted by Wells Fargo and Greenberg. These claims are direct, not derivative, because the wrongs were directed toward and injured plaintiff and the harmed investors."

Nolan and his putative class are represented by Stephen Basser and Samuel Ward, with Barrack, Rodos & Bacine, of San Diego.

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