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NY developer charged with running Ponzi-type scheme

A developer and landlord in western New York is charged with running a fraud scheme that prosecutors say cost investors millions.

One of the largest landlords in the country has been charged with operating a Ponzi-like scheme that used millions in investor funds to make interest and principal payments to prior investors, and to cover up other fraudulent conduct.

Robert Morgan, Frank Giacobbe, Todd Morgan and Michael Tremiti were indicted May 21 on 114 counts, charged with conspiracy to commit wire fraud and bank fraud for their roles in what prosecutors describe as a half-billion dollar mortgage fraud scheme. The defendants each face various additional charges such as wire and bank fraud and money laundering. Robert Morgan and Todd Morgan are also charged with wire fraud conspiracy to defraud insurance companies.

The charges carry a maximum penalty of 30 years in prison and a fine of twice the loss caused by the crimes, which is currently estimated to exceed $25 million.

In a related civil case, the Securities and Exchange Commission alleges that Robert Morgan, Morgan Mezzanine Fund Manager LLC and Morgan Acquisition LLC, all of Pittsford, NY, made a series of fraudulent private securities offerings that operated in a “Ponzi scheme-like manner” by using new investor funds to repay prior investors.

Robert Morgan was the managing member and CEO of Morgan Management and controlled a large portfolio of properties, according to prosecutors. Morgan and his companies developed residential and commercial real estate projects, with most of its properties located in western New York and Pennsylvania. According to the SEC complaint, between 2013 and September 2018, Morgan and the related entities raised more than $110 million by selling securities directly to investors.

The money was supposed to be used to acquire multifamily residential properties and engage in other real estate development projects. Investors were promised 11 percent returns. More than 200 investors in at least 17 states poured money into Morgan’s notes funds.

According to the criminal complaint, Morgan Management provided property management, accounting and financial reporting services for properties owned by limited liability companies controlled by Robert Morgan. The defendants are accused of conspiring to manipulate income and expenses for properties to meet financial ratios required by lenders.

“The manipulation included, among other things, removing expenses from information reported to lenders and keeping two sets of books for at least 70 properties, with one set of books containing true and accurate figures and a second set of books containing manipulated figures to be provided to lenders in connection with servicing and refinancing loans,” according to the U.S. Attorney’s Office for the Western District of New York.

Prosecutors say that, between 2007 and June 2017, the defendants conspired with others to fraudulently obtain money, securities and other property from financial institutions and government-sponsored entities like Freddie Mac and Fannie Mae. The defendants are accused of providing false information overstating the incomes of properties owned by Morgan Management or certain principals of Morgan Management.

Many of the projects did not generate sufficient cash flow to repay both their secured lenders and the notes funds, according to the SEC. As a result, the defendants used the notes funds as “a single, fraudulent slush fund, repeatedly using the funds for purposes inconsistent with the representations and disclosures made to investors,” according to the complaint. “To conceal their fraudulent conduct, and to mislead their auditors, defendants papered these transfers using sham loan documents designed to make the transfers appear legitimate.”

Investors are owed more than $63 million, according to the complaint, and the notes funds have few if any assets aside from the receivables for the loans they have made to affiliated borrowers.

Both the criminal case and the SEC’s civil case are being heard in U.S. District Court for the Western District of New York.

For more information:

https://www.justice.gov/usao-wdny/pr/robert-morgan-three-others-indicted-multi-million-dollar-mortgage-fraud-scheme

https://www.sec.gov/litigation/complaints/2019/comp24477.pdf