SEC Charges Hard Money Lender and Real Estate Developer for Multiple Offering Frauds Connected to Drug Rehabilitation Facility
Litigation Release No. 24992 / December 21, 2020
Securities and Exchange Commission v. CapSource, Inc. et al., No. 2:20-cv-02303 (D. Nev. filed December 21, 2020)
Securities and Exchange Commission v. Michael B. Zipprich et al., No. 2:20-cv-02308 (D. Nev. filed December 21, 2020)
The Securities and Exchange Commission today charged Las Vegas-based hard money lender CapSource, Inc., its principals, Stephen J. Byrne and Gregory P. Herlean, Arizona-based real estate developer Michael B. Zipprich, and several entities Zipprich controlled for fraud and registration violations in connection with multiple, related securities offerings.
According to the SEC's complaints, from approximately January 2015 through May 2019, CapSource, Byrne, and Herlean, acting as unregistered brokers, offered and sold over $151 million of securities in unregistered offerings to finance various real estate projects, including $28 million for entities related to Zipprich's drug rehabilitation business, America's Rehab Campuses, LLC (ARC). The complaints allege that by approximately May 2017, ARC had experienced significant financial difficulties and cost overruns in connection with retrofitting its primary treatment facility. According to the complaints, CapSource, Byrne, and Herlean knew, or were reckless in not knowing, that Zipprich was keeping ARC's primary treatment facility afloat by improperly diverting to ARC millions of dollars raised through CapSource for various other projects he managed. The complaints further allege that Zipprich defrauded investors by raising approximately $10 million in additional funds through CapSource purportedly to pay for future renovations to ARC's primary treatment facility, while instead using a substantial amount of those proceeds to partially repay and conceal the previous diversion of investors' funds.
CapSource, Byrne, and Herlean have consented to entry of judgments that, among other things, permanently enjoin them from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act, the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the broker-dealer registration provisions of Section 15(a) of the Exchange Act. The judgments order Byrne to pay disgorgement of $1,538,990 with prejudgment interest of $200,844 and a civil penalty of $192,768 and order Herlean to pay disgorgement of $760,303 with prejudgment interest of $90,319 and a civil penalty of $192,768. CapSource agreed to monetary relief against CapSource to be determined by the court at a later date. The settlements are subject to court approval. The SEC's litigated complaint against Zipprich and his ARC-related entities charges them with violating the antifraud and registration provisions of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
The SEC's investigation, which is continuing, has been conducted by J. Lee Robinson and supervised by Ian S. Karpel and Jason J. Burt of the SEC's Denver Regional Office. The SEC's litigation against Zipprich and his ARC-related entities is being led by Terry R. Miller and supervised by Gregory A. Kasper.