Real Estate Fund Managers Charged with Operating Ponzi Scheme

Allison Tussey —  October 13, 2013 — Leave a comment

Walter Ng, his son Kelly Ng, and Bruce Horwitz, three real estate fund managers, have been charged with fraud for secretly using the assets of a new real estate fund to rescue an older, rapidly collapsing fund.

The defendants allegedly lured investors into their real estate fund called Mortgage Fund ’08 LLC (MF08) by claiming it was safe and secure and would replicate the success of their earlier real estate fund, R.E. Loans LLC. In reality, R.E. Loans could no longer make payouts to its investors, so the Ngs funneled millions of dollars from MF08 to prop up R.E. Loans. The Ngs and Horwitz falsely touted both funds’ performance in their effort to continue raising money. They raised more than $85 million during an 18-month period from investors primarily living in the San Francisco, California, area.

According to the complaint filed in federal court in Oakland, California, the Ngs and Horwitz promoted the MF08 fund in the midst of the 2008 financial crisis as a new opportunity to invest in conservatively underwritten commercial real estate loans secured by deeds of trust. But the Ngs and their advisory firm, The Mortgage Fund LLC, immediately began transferring money raised by MF08 to R.E. Loans so that they could afford distributions to investors in that fund. From December 2007 to March 2008, the Ngs transferred almost $39 million from MF08 to R.E. Loans. They later attempted to justify the transfers by claiming MF08 had purchased three loans from R.E. Loans that totaled around $39 million.

The complaint further alleges that both the Ngs and Horwitz lured investors into MF08 by making false claims about its performance and the R.E. Loans fund’s performance. What investors did not know was that both R.E. Loans and MF08 began to experience significant and dramatic borrower defaults in 2008. For example, the percentage of the R.E. Loans portfolio that was either delinquent or in default increased from 19 percent in January 2008 to 48 percent in August 2008. The percentage of the MF08 portfolio that was delinquent increased from 16 percent in March 2008 to 74 percent in mid-June 2008.

Despite the funds’ rapidly disintegrating portfolios, the Ngs and Horwitz repeatedly assured investors that R.E. Loans and MF08 were performing well and the underlying loans were safe and secure. For example, both Walter Ng and Horwitz touted the funds’ purportedly positive performance at a June 2008 investor dinner in Oakland’s Chinatown. Additionally, Walter Ng and Kelly Ng in July 2008 characterized MF08 as a “fantastic success” even though more than 70 percent of its loan portfolio was delinquent by that time.

The SEC’s complaint charges Walter Ng and Kelly Ng with violating Section 17(a) of the Securities Act of 1933 (“Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Investment Advisers Act of 1940 (“Advisers Act”); Bruce Horwitz with violating Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder; and The Mortgage Fund with violating Sections 206(1) and (2) of the Advisers Act. The Complaint seeks injunctive relief, disgorgement of wrongful profits, and financial penalties against all four defendants.

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Allison Tussey

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