U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21488 / April 15, 2010
United States Securities and Exchange Commission v. Integrity Financial AZ, LLC, Steven R. Long, Stanley M. Paulic, Walter W. Knitter, and Robert C. Koeller, No. 1:10-cv-00782 (N.D. Ohio)
SEC Charges Four With $8 Million Fraudulent Unregistered Offering Connected To Arizona Real Estate
The Securities and Exchange Commission today filed a civil injunctive action in U.S. District Court for the Northern District of Ohio, charging four individuals and an Arizona-based limited liability company with securities fraud for making false and misleading statements about the safety and performance of a real estate-based investment program. The Commission also charged the defendants with unlawfully selling securities in an unregistered offering and with failing to comply with the broker registration provisions of the federal securities laws.
The complaint in the Commission's action alleges that Steven R. Long and Stanley M. Paulic — who formed and owned Integrity Financial AZ, LLC — and Walter W. Knitter and Robert C. Koeller — two salesmen who helped attract investors — raised more than $8 million between February 2008 and September 2009, in a fraudulent unregistered offering of promissory notes purportedly secured by real estate in Tonopah, Arizona, a town 55 miles west of Phoenix.
The offering attracted at least 58 investors. More than half of the investors reside in northern Ohio, and several are associated with St. Paul's Croatian Church in Cleveland. The complaint alleges that Integrity Financial AZ, Long, Paulic, Knitter, and Koeller violated Sections 5 and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks permanent injunctions from further violations of those provisions, as well as judgments ordering payment of disgorgement, with prejudgment interest thereon, and civil penalties against each of the defendants.
The Commission's complaint alleges that the defendants promised investors "guaranteed" annual returns of between 10 and 20 percent and encouraged investors to use self-directed IRA, 401k, and other funds to build homes in Arizona that were to be inhabited by qualified tenants who could be converted to buyers. Investors were assured that their investments were "secured," "low risk," insured by the Federal Deposit Insurance Corporation (FDIC), and protected by homeowner's insurance. The complaint also alleges, however, that there was no FDIC or insurance protection for the investments.
Instead, the investments bore considerable risk tied to the floundering Arizona real estate market, which has been hard hit by the recession and declining property values. The complaint further alleges that investors were told that 100% of their investments would go to build homes, although, in reality, only a fraction of the money was used for that purpose and the bulk of it was diverted to Long's other real estate interests; commissions and other payments made to the defendants; and Ponzi-scheme-like payments to earlier investors.
See Also: SEC Complaint