SEC Charges Four Arizona-Based Promoters in $197 Million Mortgage Lending Scheme
FOR IMMEDIATE RELEASE
Washington, D.C., July 28, 2009 — The Securities and Exchange Commission today charged four promoters and a Phoenix-based company with securities fraud for orchestrating a mortgage lending scheme that attracted hundreds of investors by making false and misleading statements about the safety and performance of the investments.
The SEC alleges that the foursome — which includes two certified public accountants, a pharmacist, and a grade school principal — raised more than $197 million from investors nationwide primarily through word of mouth between their friends and relatives. Through their company, Radical Bunny LLC, they pooled investor funds to make loans to Mortgages Ltd., a Phoenix-based originator of high-interest, short-term loans to real estate developers.
According to the SEC's complaint, the four promoters misrepresented how Mortgages Ltd. could use money loaned by Radical Bunny LLC by falsely telling investors that their funds could only be used for commercial development when there were no such restrictions. They also misrepresented to investors that they were closely monitoring Mortgages Ltd.'s financial condition, but they were caught completely unaware of the circumstances that ultimately led to its bankruptcy. Furthermore, they misrepresented to investors that the offering was not subject to the federal securities laws when, in fact, legal counsel had advised them otherwise on at least three separate occasions.
"These promoters promised investors more than they could possibly deliver," said Rosalind Tyson, Director of the SEC's Los Angeles Regional Office. "Even to friends and family, they repeatedly overstated the safety of the investment and their knowledge of the underlying business to which they lent investor funds. Unbeknownst to investors, more and more of their money was being shifted into fewer and riskier loans."
The SEC's complaint, which was filed in federal court in Phoenix, charges Radical Bunny LLC and its four managing members: Tom Hirsch of Paradise Valley, Ariz.; Harish Shah of Phoenix; and Howard Walder and Berta "Bunny" Walder, both of Phoenix. Hirsch and Shah operate an accounting practice together and obtained many investors through their accounting firm. Husband and wife Howard and Berta Walder are by profession a pharmacist and grade school principal, respectively.,
According to the SEC's complaint, the foursome primarily communicated with investors through semi-annual meetings held at a luxury golf resort in Scottsdale, Ariz. Investors were provided with presentations about the status of their investments, and they were permitted to invite their friends, family, and others to the meetings as potential investors. Shah particularly solicited investors of South Asian descent, raising approximately $40 million from about 150 families.
The SEC alleges that Hirsch, Shah, and the Walders each made false and misleading statements to persuade people to invest in Radical Bunny, and they falsely represented that Radical Bunny held a secured interest in Mortgages Ltd.'s assets even after their attorneys advised them that such documentation was either non-existent or defective. They also falsely represented that they (particularly Hirsch) had unfettered access to Mortgages Ltd.'s books and records, allowing them to monitor Mortgages Ltd.'s financial condition. However, they ignored the fact that most of Radical Bunny's funds were being shifted into Mortgage Ltd.'s riskier projects to the detriment of the Radical Bunny investors.
The SEC's complaint further alleges that Hirsch received at least $3 million, the Walders received at least $2 million, and Shah received at least $700,000 as part of a "vendor fee" that they claimed to have earned for maintaining accounts for the Radical Bunny investors and facilitating loans to Mortgages Ltd.
Radical Bunny was not registered with the SEC in any capacity and did not register any offering under the securities laws. Therefore, in addition to the securities fraud charges, Hirsch, Shah, and the Walders were charged by the SEC with offering and selling unregistered securities and for acting as unregistered broker-dealers in violation of the federal securities laws. Radical Bunny also was charged with offering and selling unregistered securities.
In its federal court action, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and financial penalties against all of the defendants.
# # #
For more information, contact:
Michele Wein Layne
Associate Regional Director, SEC's Los Angeles Regional Office
Assistant Regional Director, SEC's Los Angeles Regional Office
Regional Trial Counsel, SEC's Los Angeles Regional Office