Local investment fund accused of defrauding investors out of $700 million
By Karina Ioffee
Bay Area News Group
POSTED: 07/19/2014 04:51:39 PM PDT
In Walnut Creek, Calif., on Tuesday, June 10, 2014, John McGuire of Walnut Creek, has his photo taken next to letters and statements from a Lafayette based investment brokers firm that he and other investors say defrauded them out of more than $700 million. McGuire is one of 1,500 investors who say they were defrauded by a fund created by Walter Ng, a well-known Lafayette investment manager, and his sons Barney and Kelly, who they say ran a Ponzi scheme. (Doug Duran/Bay Area News Group)
Phyllis Christopher and her former husband spent years pinching pennies so they would be comfortable in retirement. As part of their financial plan, the couple invested their savings -- more than $600,000 -- into a fund run by Bar-K, a Lafayette company.
But when they tried to cash out in 2007, fund manager Walter Ng told them that the funds were not available because of "a minor cash flow problem." Christopher recalls sitting in the investment office and crying upon hearing the news. Her first thought: She would have to sell her house.
John McGuire of Walnut Creek, places his hand on letters and statements from a Lafayette based investment brokers firm as he talks about how he and other other investors were defrauded out of more than $700 million in Walnut Creek, Calif., on Tuesday, June 10, 2014. McGuire is one of 1,500 investors who say they were defrauded by a fund created by Walter Ng, a well-known Lafayette investment manager, and his sons Barney and Kelly, who they say ran a Ponzi scheme. (Doug Duran/Bay Area News Group)
It didn't take long for the "minor cash flow problem" to become a major crisis, not just for the Christophers but for an estimated 1,500 other Bay Area investors who had deposited millions with the company. Today, the 84-year-old Ng, youngest son Kelly, 57, and business associate Bruce Horwitz stand accused in a civil action of conning investors out of more than $700 million in IRA accounts, inheritances and other assets cobbled together over a lifetime -- in what may be one of the biggest Ponzi schemes in California's history.
Investors, most of them residents of Contra Costa and Alameda counties, have lost their savings and their homes. But despite the staggering losses, the managers who ran the fund have never been prosecuted for the alleged theft, leaving investors bitter and angry at a system they say failed them.
"When someone literally steals your money from you, it's a horrible feeling," says the 69-year-old Christopher, who lives in Rossmoor. "It's embarrassing and humiliating. But what is worse is that nothing has been done about it."
For decades, Bar-K Inc., one of several LLCs run by the Ngs, offered its clients what seemed like an easy -- and reliable -- return: It collected their cash, lent the money to local homebuyers and developers, and then paid dividends to investors from the loan proceeds. Investors received returns averaging 8 percent annually in exchange for a small fee, according to a class-action lawsuit investors have filed.
Bolstered by Walter Ng's standing as a trustworthy financier, investors flocked to Bar-K. But as the real estate market heated up in the early 2000s, the Ngs grew more ambitious, especially as Walter's older son, Barney, now 60, and Kelly took over the day-to-day operations and Walter spent more time on the golf course.
In 2002 the Ngs, together with Horwitz, a retired Orinda pediatrician, formed a new fund, called R.E. Loans. Rather than staying local, Walter Ng's sons began to lend money to developers for projects in at least 22 states, including condominiums in Atlanta and Las Vegas and a casino in Reno. They appraised the properties themselves, even though neither one was a certified appraiser. Doing so was a conflict of interest, attorneys say, since the Ngs stood to gain from higher appraised values.
In the increasingly profitable real estate market, business was booming. By 2007, R.E. Loans had raised more than $700 million and had more than $55 million in cash on hand, according to the lawsuit.
As a way of thanking investors, the Ngs held annual appreciation dinners. A string quartet entertained guests and Walter, Barney and Kelly Ng made speeches about how well the fund was performing.
"You could meet other investors, so it gave us all a very secure feeling," recalled Christopher, who met the Ngs through her former husband.
Dwight Christopher, 80, now suffers from Parkinson's disease and is worried about how he will afford his medical care after losing a significant portion of his savings.
THE END OF THE PARTY
In early 2007, R.E. Loans ran into trouble: Managers were told the fund was in violation of federal securities laws because more than half its investments were in out-of-state projects. The discovery meant they were prohibited from taking in new funds and had to contact investors, tell them about the violation, and offer to return their money.
Instead of disclosing the violation, the Ngs sent letters assuring clients their investment was safe. They did this even as the real estate market began its meteoric decline and more developers defaulted on their loans.
To stay solvent, the fund needed a new source of cash. On the advice of Greenberg Traurig, a global law firm with offices in Palo Alto and San Francisco, R.E. Loans applied for and received a $50 million loan from Wells Fargo Capital Finance in July 2007. Today, Greenberg is one of the defendants in the class-action lawsuit filed by investors in 2011, claiming the firm facilitated the fraud and delayed action that could have helped investors.
In addition to the bank loan, fund managers also structured a transaction that exchanged investors' equity for promissory notes, essentially trading clients' shares in properties around the country for IOUs. Managers pitched the move as necessary in order to reorganize the fund. Attorneys for investors now say the real intent was to hide their securities violation and conceal the fund's quickly deteriorating financial situation.
"It was a combination of events -- a perfect storm, if you will -- that sunk the company," said Richard Brown, one of the attorneys in a class-action lawsuit. "The first was the inability of the managers to see the risk involved in their type of investments in an economy that suffered a large financial shock. The second was their loose appraisals, and the third was their securities violation because they depended heavily on new money to pay investors their dividends.
"So when the banking markets failed and their stream of money stopped, they were doomed."
After the Wells Fargo loan, things improved temporarily for R.E. Loans, but the company risked not being able to pay dividends to investors, some of whom collected a monthly or an annual payment.
In December 2007, managers created a new investment, called Mortgage Fund '08. Investors flocked again, depositing a total of $40 million in the first three months and another $40 million in the next year, attorneys say. But instead of investing the proceeds, the Ngs used them to pay dividends to R.E. Loans clients, creating a classic Ponzi scheme, attorneys allege.
"There were so many people who didn't want to believe that they had been had. It's incredibly disappointing," said Deborah Kurtin, 65, a Piedmont investor who lost more than $2 million. The money included a settlement the Kurtins received after their son, Jared, was struck and killed by a truck in 2005; the family hoped to use that money to set up a music therapy program in Jared's memory at a local children's hospital.
They received only two checks before being told the fund was insolvent.
By 2009, R.E. Loans and Mortgage Fund '08 had stopped paying dividends. By 2011, both had filed for bankruptcy.
Wells Fargo has declined to comment on the case, citing ongoing litigation. Greenberg Traurig issued a statement calling the litigation "meritless" and saying accusations were baseless and defamatory. Walter Ng said he could not comment, and numerous calls and emails to Walter Ng's and Kelly Ng's attorneys were not returned.
In 2009, the FBI began an investigation, then handed its files to the Department of Justice. But when it came time to prosecute, the DOJ brought only one charge against Walter and Kelly Ng: keeping cash withdrawals under $10,000 to avoid detection. Both the FBI and the DOJ have refused to comment on the case.
Kelly Ng was sentenced to 18 months in prison and is now at federal prison in Lompoc. Walter Ng was given five years probation and was ordered to participate in a mental health treatment program and pay a $1,100 fine.
Barney Ng has never been charged in the case.
Last year the Securities and Exchange Commission sued Walter Ng, Kelly Ng, Bruce Horwitz and Mortgage Fund '08, alleging they ran a "multimillion-dollar securities fraud." The agency has reached a settlement with the plaintiffs, but has not yet disclosed the details. But the SEC is a regulatory agency and can only impose fines, not prison sentences.
The minor penalties have bewildered investors.
"Bernie Madoff was sentenced to life in prison, but these guys got a slap on the wrist," said John McGuire, 51, a Walnut Creek investor who lost $300,000. McGuire, who uses a wheelchair, hoped the money would help his family once he could no longer work, and pay for his children's college. Instead, his older son went to a junior college and his mother-in-law, also an investor, was forced to move in with the family.
Investors' attorneys say without a criminal case, a class-action lawsuit against the institutional players -- Greenberg and Wells Fargo -- is the only chance to recoup the lost money. Regardless, it will be a small comfort to investors, most of them in their 70s and 80s, many now wondering how they will support themselves.
"Seven hundred million dollars goes up in smoke and nothing gets done?" said Jerry Clair, a retired banker who said he lost $700,000 to the Ngs. "It's just unreal."
Contact Karina Ioffee at email@example.com. Follow her on Twitter @kioffee.
WHERE DiD THE MONEY GO?
Investors claim that Walter Ng's Bar-K investment firm and affiliated funds lost hundreds of millions of their dollars to shaky real estate investments and poor management. Here is a timeline of events as recounted in a class-action suit filed by investors:
1975: Bar-K is created to loan money to local developers. The company draws clients, who are rewarded with an average return of 8 percent.
2002: The Ng family launches R.E. Loans, a high-liquidity fund that promises to let investors cash out any time. The company begins investing in out-of-state real estate projects.
2007: R.E. Loans faces a cash-flow crisis after attorneys tell fund managers that the company's sizable out-of-state real estate portfolio puts it in violation of federal securities law. The company secures a $50 million loan from Wells Fargo Capital Finance, which negotiates a clause calling for it to be first in line for repayment, before investors.
December 2007: Managers launch a new fund, called Mortgage Fund '08, and encourage investors to deposit their money, collecting an estimated $80 million. Walter and Kelly Ng, along with Bruce Horwitz, begin to transfer funds from MF '08 into other accounts.
January 2009: R.E. Loans stops making payments to its investors.
June 2009: Mortgage Fund '08 stops making payments to investors.
2011: Both funds file for bankruptcy.
WOSP Gentrification Scheme Was Passed By Oakland City Council
by Lynda Carson ( tenantsrule [at] yahoo.com )
Wednesday Jul 16th, 2014 6:28 AM
Oakland - On Tuesday evening July 15, Oakland's City Council voted for the first reading on the West Oakland Specific Plan (WOSP) and it's companion legislation, that is spearheaded by some wealthy investors planning to gentrify the old Oakland Army Base, and parts of West Oakland that are being called Opportunity Sites.
According to KCBS news this morning, the Oakland City Council gave the green light to move forward with WOSP and iit's companion legislation to gentrify West Oakland, and according to Oakland's city records the City Council has to vote again on WOSP for a second reading of the legislation, for a final passage on July 29th.
Millionaire Phillip Tagami, and wealthy Wall Street investors Hamid Moghadam, Douglas D. Abbey, and T. Robert Burke have teamed up together for the massive gentrification projects. These are the wealthy investors who are the movers and shakers in the combined redevelopment schemes to gentrify the old Oakland Army Base, and West Oakland.
The AMB Company founded by Hamid Moghadam, Douglas D. Abbey, and T. Robert Burke, which is presently called Prologis Inc., and the California Capital Investment Group founded by millionaire Phillip Tagami is the master development team that is working with the Oakland Redevelopment Agency (Agency) and the Port of Oakland, to develop the the entire former Oakland Army Base under one vision. As part of the same gentrification vision the Agency has also been taking steps to gentrify major parts of West Oakland, and what are being called the Opportunity Sites.
The massive #1 Opportunity Site in West Oakland stretches all the way from around East 14th Street to Emeryville, and from Adeline Street to Interstate 880, as part of the major plan WOSP gentrification scheme being planned. There are four other Opportunity Sites in West Oakland being effected by WOSP.
Once WOSP becomes the law of the land, the plan is to target the Opportunity Sites for redevelopment and maximum exploitation by wealthy developers. WOSP will be used as a marketing tool to attract developers to the Opportunity Sites. Low-income people need not apply, and have been abandoned to fend for themselves once this gentrification scheme gains traction.
The WOSP is also being designed as a sneaky way for developers and the City to get around complicated Environmental Impact Reports and zoning regulations, in the effort to develop the Opportunity Sites as quickly as possible. Additional Specific Plans similar to WOSP exist to redevelop the Coliseum area, and the Lake Merritt area.
In the pocket of wealthy investors from Oakland and Wall Street, Oakland's Mayor Jean Quan and the City Council is rapidly moving forward on the massive gentrification scheme that is destined to displace thousands of West Oakland's low-income households.
Known by locals as the WOSP gentrification scheme, it will result in major rent increases for the low-income and working poor residents throughout West Oakland, and will displace many of them from their housing in the process. According to public records 78% of households in West Oakland are renter occupied, with the median income being $28,055 for the average three person West Oakland household in 2011.
The high stakes controversial plan has met with resistance and protests against the massive gentrification scheme by local groups including Justa Causa/Just Cause, Against The Struggle, and such luminaries as Elaine Brown a former member of the Black Panther Party, according to reports.
In a July 15 email, Robbie Clarke of Just Cause writes: "A large public turnout is expected as opponents fight to maintain relevance to proposals in the plan. The recently released draft plan of WOSP outlines a number of areas ripe for development in West Oakland and calls for incentives for investment in these areas. Organizers against say the plan will displace working families who have lived in West Oakland for years and that it was not created to keep current working-class residents/families of color in the neighborhood."
Indeed, in all of Oakland's specific plans for WOSP city officials and staff have refused to adopt any affordable housing requirements, claiming that it would disincentivize developers from investing in each respective neighborhood, and creating lopsided development throughout the City.
With high concentrations of poverty in West Oakland that surpasses most other parts of the City, 33% of it's residents are living below the poverty level. The WOSP gentrification scheme will pave the way for the construction of thousands of condominiums, and market rate housing apartments that poor people will not be able to reside in. Tenants moving in the new developments will not have Just Cause renters protections. Additionally, the new market rate housing developments will compel the rents to skyrocket throughout West Oakland as a direct result, eventually forcing the existing poor out of their rental units when their landlords decide to demand higher rent increases.
The coordinated policies and leveraged investment activities about to take place will eventually leverage $243 million in State Trades Corridor Improvement Funds, $32 million in local agency funds, and as much as an additional $200 million in funding from various federal agencies to gentrify West Oakland. All of this funding will end up being used as a force and marketing tool to displace the poor from their housing in West Oakland, in the name of gentrification.
In a coordinated campaign to gentrify West Oakland, among the supporters of the WOSP scheme that have submitted letters during August of 2010 include the following: The Alameda Labor Council/AFL-CIL, Laney College, East Bay Asian Local Development Corporation a so-called affordable housing developer, West Oakland Commerce Association, Port of Oakland, San Francisco Bay Area Rapid Transit District, Alameda County Health Care Services Agency, Metropolitan Transportation Commission/ABAG, and the Oakland Redevelopment Agency.
Wall Street Interests Involved In WOSP And The Oakland Army Base Gentrification Scheme
The AMB Company which is presently called Prologis Inc., and the California Capital Investment Group founded by millionaire Phillip Tagami, is spearheading the corporate attack to gentrify the Oakland Army Base and West Oakland. They plan to enhance their already massive fortunes by redeveloping the old Oakland Army Base, and redeveloping what are being called Opportunity Sites in West Oakland, once WOSP becomes the law of the land.
In 2011, ProLogis and AMB Company merged to become what is now called Prologis Inc., the largest industrial real estate company in the world with $51 billion in assets under it's management during the first quarter of 2014. Prologis Inc., has 1,400 employees, is headquartered in San Francisco, and was co-founded by wealthy industrialists Hamid Moghadam, Douglas D. Abbey and T. Robert Burke.
According to Forbes, Hamid Moghadam, age 58, the chief executive officer for Prologis Inc., was payed a total of $15,190,029 in compensation during 2013, and SEC filings revealed that he owned 2,359,762 shares of AMB Company common stock in 2000. The stock for Prologis Inc., was going for $41.46 per share on July 15, 2014. He is also a Trustee of Stanford University, and is on the executive committee of the Board of Urban Land Institute.
During 2013, Douglas D. Abbey of Bridge Housing, age 64, received $160,000 in total compensation from the Macerich Co., and he owned 6,461 shares of their stock as of July 15, 2014. The stock is worth $67.73 per share, a total worth of $437,603 in stock ownership currently. Additionally, he was payed $203,442 from Apollo Commercial Real Estate Finance Inc., and he owns 19,988 shares of stock from Apollo Commercial Real Estate Finance Inc., valued at $16.61 per share for a total worth of $320,000 in stock ownership. As of March 2000, according to SEC filing statements Abbey owned 1,460,561 shares of common stock (AMB Company/Prologis Inc.). The stock for Prologis Inc., was going for $41.46 per share on July 15, 2014.
In March of 2000, T. Robert Burke, age 71, owned 1,099,789 shares of common stock of AMB Company/Prologis Inc., according to SEC filings. According to Prologis Inc, during 2011, Burke received $147,495 in total compensation and owned 218,463 shares of stock. Prologis Inc., stock traded at $46.41 per share on July 15, 2014. Burke is also a co-founder of Metropolitan Real Estate Equity Management, LLC., which operates as a subsidiary of the notorious Carlyle Group LP., after it's acquisition during 2013.
Headquartered in Washington, D.C., the Carlyle Group has become notorious for making billions on the so-called war on terror, which included some notorious investors in the corporation including ex-president George W. Bush, and members of the family of Osama Bin Laden which were involved in the fascist pro-war corporation.
The other major player wanting to gentrify the Oakland Army Base and West Oakland with the WOSP gentrification scheme is the California Capital Investment Group founded by millionaire Phillip Tagami, who became notorious when he pulled out a shotgun and threatened to use it against members of the Occupy movement during a November of 2011 protest in Oakland. The California Capital Investment Group has made over a billion dollars in business deals in Oakland including the East Bay since it's inception over 20 years ago, and has merged with Tribune Commercial, according to their website.
Mayor Jean Quan's 10 K Plan
In addition to WOSP, on Wednesday March 5, 2014, Mayor Jean Quan announced that she wants to bring in 10,000 new renters into the City of Oakland and wants to build 7,500 new housing units at 15 projects all across the city, as a way to capitalize on Oakland's hot rental market. She wants to turn Oakland into a playground for the rich and powerful.
In comparison, Jerry Browns 10 K plan resulted in displacing thousands of low-income renters from their housing, and resulted in rent increases for tens of thousands of renters all across the city.
Jerry Brown was the Mayor of Oakland from 1999 through 2007. Rent increases in Oakland rose 8% from 1996 through 1997, and more than 30 percent from 1998 through 1999 after Jerry Brown became Mayor of Oakland. The landlords followed Jerry Browns lead to gentrify Oakland with their total war on the renters by instituting the "eviction for profit system," which displaced thousands of low-income renters in the process during their search for higher income renters.
From September 1998 through December 1999, "30 Day" no-cause evictions rose by 300 percent, with 56 percent of evictions being families with children, and 75 percent of the evictees were people of color. At that point most renters being evicted earned less than $25,000 per year and payed between $600.00 to $700.00 in rent per month, for one bedroom apartments in Oakland.
By 2004, the average minimum cost to rent a studio apartment in Oakland was around $625.00 per month compared to around $850.00 per month to rent a studio condominium. At the same time, minimum costs for a one bedroom apartment were around $650.00 per month, compared to around $850.00 per month minimum to rent a one bedroom condominium.
Rents kept increasing through the years in Oakland and by the summer of 2012, according to the East Bay Express one bedroom apartments around Lake Merritt went for around $900 to $1,000 per month but, by the end of 2012 the rents rapidly increased to around $1,000 and $1,200 per month. And in some neighborhoods one bedroom aprtments near Adams Point would go for around $3,000 per month, and one bedroom units in the Jack London area were going for $1,800, and more per month.
Rents continued to rise since 2012 and according to Axiometrics, Oakland's rents increased by a whopping 10% during 2013. The average rental price cost around $1,868 per month in Oakland, compared to $2,295 in San Jose, and $2,631 in San Francisco, during 2014.
Once Mayor Jean Quan's plan to bring in 10,000 new renters kicks in, in addition to WOSP, the rents are expected to skyrocket even further in Oakland.
Lynda Carson may be reached at tenantsrule [at] yahoo.com