U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20618 / June 13, 2008
Securities and Exchange Commission v. Real Estate Partners, Inc.; Real Estate Partners Income Fund I, LLC; Real Estate Partners Income Fund II, BT; Real Estate Partners Income Fund III, BT; Real Estate Partners Unit Investment Business Trust I; Real Estate Partners Unit Investment Business Trust II; Real Estate Partners Equity Fund, BT; Real Estate Partners Growth Fund, BT; Dawson Davenport; Michael P. Owens; Donald G. Ryan; Richard McGill; William L. Sanders; Michael Tuchman; and Danny Rayburn, Case No. SACV 07-1022 AG (MLGx) (C.D. Cal.)
Federal Judge Permanently Enjoins Five Unregistered Southern California Brokers in a $50 Million Securities Fraud Scheme
The Securities and Exchange Commission ("Commission") announced that on June 10, 2008, the Honorable Andrew Guilford, United States District Judge for the Central District of California, entered judgments against defendants Donald G. Ryan, age 42, of Irvine, Calif, Richard McGill, age 58, of Laguna Niguel, Calif., William L. Sanders, age 56, of Norco, Calif., Michael Tuchman, age 38, of Irvine, Calif., and Danny Rayburn, age 47, of Westminster, Calif. The judgments permanently enjoin all five defendants from committing future violations of the securities registration and broker registration provisions of the federal securities laws, and the judgment as to Ryan enjoins him from committing future violations of the securities antifraud provisions of the federal securities laws. The judgment also orders disgorgement of ill-gotten gains with prejudgment interest, but waives payments of those amounts based upon the five defendants' demonstrated inability to pay. Ryan, McGill, Sanders, Tuchman, and Rayburn each consented to the entry of the judgments against them without admitting or denying any of the allegations in the Commission's complaint.
The Commission's complaint, which was filed on September 6, 2007, alleges that between January 2003 and August 2006, the defendants raised $50 million from over 1600 investors nationwide by selling security interests in a series of seven offerings. The Commission's complaint alleges that defendant Real Estate Partners ("REP"), its related funds, and defendants Dawson Davenport, Michael Owens, and Ryan made several key misrepresentations to investors in the course of the fund offerings. First, the complaint alleges that these defendants misrepresented how REP would use investor funds, failing to disclose to investors that they spent over $26 million, or 52% of the money raised, on commissions to salespeople, including $10.9 million to two companies controlled by Owens and $3 million to a company controlled by Ryan.
The complaint further alleges that REP was running a Ponzi-like scheme. Specifically, the complaint alleges that REP paid investors annual dividends using money obtained from other investors. The complaint also alleges that the defendants falsely claimed that Coldwell Banker was associated with the funds, when, in actuality, Coldwell Banker had nothing to do with the fund offerings. The complaint alleges that the defendants enticed investors with baseless promises of high rates of return on their investments, and dangled the unlikely possibility of conducting a public offering by converting the funds and REP into a publicly-traded real estate investment trust.
Finally, the complaint alleges that the defendants conducted an unregistered offering of securities, and that defendants Owens, Ryan, McGill, Sanders, Tuchman, and Rayburn all sold REP's securities without being registered as broker-dealers, or associated with a registered broker-dealer.
The Commission's complaint alleges that REP, the funds, Davenport, Owens, Ryan, McGill, Sanders, Tuchman, and Rayburn each violated the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint also alleges that REP, the funds, Davenport, Owens, and Ryan violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint further alleges that Owens, Ryan, McGill, Sanders, Tuchman, and Rayburn violated the broker-dealer registration requirement of Section 15(a) of the Exchange Act.
Litigation of the charges against REP, the funds, Davenport, and Owens in this matter continues.
For more information, see Litigation Release No. 20274 (September 12, 2007).