WASHINGTON (Reuters) - U.S. regulators charged Sunwest Management and its former chief executive with securities fraud on Monday, alleging the retirement home operator lied to investors and eventually operated the business as a kind of Ponzi scheme.
The Securities and Exchange Commission accused Oregon-based Sunwest, which operates more than 200 U.S. retirement homes, and former CEO Jon Harder of concealing the risks of investments and exposing investors to “massive losses.”
Between 2006 and 2008, Sunwest raised at least $300 million from investors and used the funds for down payments on approximately 100 retirement homes with the balance financed by institutional lenders and banks, the SEC’s lawsuit said.
Investors were told they were buying an ownership interest in a specific retirement home that would generate enough profit to pay a 10 percent annual return, and that Sunwest had a history of never missing a payment, the suit said.
However, at least half of the properties lost money. Sunwest concealed the losses by commingling retirement home assets and paying investors from this pool of cash, the SEC said.
Calls to lawyers for Sunwest and Harder were not immediately returned.
Sunwest paid investors steady returns on their investments from cash generated from other facilities, refinancings, loans from Harder and Harder’s friends, and from funds raised through offerings to new investors, the SEC said.
According to the SEC’s complaint, Sunwest failed to disclose it was being run as a single enterprise with its fortunes tied to the success of hundreds of properties and contingent on future financing ability.
As credit markets tightened, “the house of cards Harder had built came crashing down on unsuspecting investors,” the SEC lawsuit said.
“By June 2008, they operated Sunwest virtually as a Ponzi scheme,” the lawsuit said, adding that money raised in the final offerings was used to pay old investors their 10 percent return.
By January 2009, more than 100 Sunwest retirement homes were placed in foreclosure, receivership or bankruptcy, the SEC said.
The SEC’s lawsuit was posted at http:/www.sec.gov/litigation/complaints/2009/comp20920.pdf .
The case is SEC v. Sunwest Management Inc, U.S. District Court, District of Oregon, No. 09-06056.
Reporting by Karey Wutkowski and Rachelle Younglai; Editing by Andre Grenon and Tim Dobbyn
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