U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22365 / May 11, 2012
Securities and Exchange Commission v. Apartments America, LLC, Michael J. Stewart, John J. Packard, Randall A. Smith, Civil Action No. SACV 12-754 DOC (ANx) (C.D. Cal.)
SEC CHARGES APARTMENTS AMERICA AND ITS OWNERS IN SCHEME TO DEFRAUD INVESTORS
On May 10, 2012, the Securities and Exchange Commission charged a California-based real estate company and its owners with defrauding potential investors by boasting a false company track record to tout their purported real estate expertise while concealing the bankruptcy of their previous company.
The SEC alleges that Michael J. Stewart, John J. Packard, and Randall A. Smith created Apartments America, LLC to pool investor proceeds from an unregistered offering of securities and invest primarily in apartment buildings in Southern California and Arizona. They solicited potential investors through a website, Internet advertisements and postings, cold calls, solicitation letters, and advertising in a national newspaper. They boasted a track record of producing more than a 60 percent annual return on investment and creating more than $100 million in net equity.
According to the SEC’s complaint filed in federal court in Orange County, California, what potential investors did not know is that Apartments America was a new company with no assets and no track record. Stewart, Packard, and Smith were merely using the same investment strategy and selective statistics from their prior bankrupt company that had defaulted on $91.6 million in promissory notes held by 647 investors.
According to the SEC’s complaint, Stewart lives in San Clemente, California, and Packard and Smith each live in Long Beach, California. Together they formed Apartments America in September 2009, just three months after Pacific Property Assets (PPA) filed for bankruptcy. Stewart and Packard owned PPA and Smith worked for them. In the months prior to defaulting on its promissory notes, PPA was actively soliciting investor funds and promising an annual interest rate of 24 to 30 percent.
The SEC alleges that under Apartments America, whose securities have never been registered with the SEC, Stewart, Packard, and Smith similarly solicited investor funds with the same plan to purchase apartment buildings. But they engaged in a concerted scheme to distance themselves from PPA and its bankruptcy. In communications to potential investors, they selectively and misleadingly used some of PPA’s historic investments and touted them as Apartments America data. For instance, they arrived at their fabricated statistic of a 60 percent annual return on investment by cherry-picking PPA’s successful property investments while omitting the losses incurred on more than 50 properties in PPA’s portfolio at the time of its bankruptcy. Stewart, Packard, and Smith also misrepresented that they had created more than $100 million in net equity by calculating some of PPA’s property investments while omitting information about its bankruptcy and the losses on its bankrupt properties. They also falsely represented to potential investors that they were managing a property portfolio valued at more than $200 million when that in fact referred to PPA’s bankrupt property portfolio, which was actually being managed by the bankruptcy trustee.
The Commission’s complaint, filed in U.S. District Court in Orange County, California, charges all defendants with violations of Sections 5(c), 17(a)(1), and 17(a)(3) of the Securities Act of 1933. The Commission also seeks permanent injunctions against all defendants, and conduct-based injunctions against Stewart, Packard, and Smith, prohibiting them or any entity they own or control from offering unregistered securities. In addition, the Commission seeks disgorgement of ill-gotten gains with prejudgment interest and civil penalties against all defendants.