Marin scammers’ scheme fuels $437m property sale

ByDonald L. Leech

Jan 23, 2022

The fallout from a massive fraud scheme by Marin’s investment managers resulted in the sale of $436.5 million worth of North Bay properties.

The sale involved 60 sites formerly controlled by Professional Financial Investors Inc. and its associated fund, Professional Investors Security Fund Inc. Director, Ken Casey of Novato, died in 2020.

The properties, over 1.4 million square feet, were sold last month in federal bankruptcy court. Their properties range from 3,500 square feet to 85,000 square feet, including 935 residences and approximately 680,000 square feet of commercial space.

“This is one of the largest portfolio sales in our county’s history,” said Haden Ongaro, executive vice president of real estate firm Newmark Knight Frank.

At the height of the scam, Casey and his partner Lewis Wallach had amassed 80 large properties: 29 in Novato, 10 in Sonoma, and the rest scattered throughout Marin.

Wallach pleaded guilty to federal fraud charges in 2020. He admitted to being aware that the businesses had ceased to be profitable, but continued to secure properties and assure investors of their financial stability. Companies recruited new investors whose payments were used to pay interest to existing investors.

The 60 properties sold into bankruptcy went to two Bay Area-based affiliated national real estate companies, Hamilton Zanze and Graham Street Realty, and a New York-based investment firm, Davidson Kempner Capital Management.

“We look forward to investing over $50 million in capital in these properties, which are located in our own communities,” said Ashlee Cabeal, chief financial officer of Hamilton Zanze.

More than half of the $50 million is expected to be invested in residential properties in the portfolio.

The bankruptcy sale disappointed some of the 1,300 investors in the Ponzi scheme, most of whom are Marin residents.

“There were a lot of questions that were asked and unanswered about the marketing of the real estate portfolio,” said Betsy Alberty, who lived in Marin before retiring to Port Angeles, Washington, in 2018.

Alberty said that as of July 2020, the remaining assets were estimated at $555 million.

“That’s over $100 million vaporized in one year,” she said.

Prospective buyers of the property were selected to submit a so-called “stalking-horse offer”. In bankruptcy sales, an entity is usually chosen from a group of bidders to make the first bid on the remaining assets. This stalking-horse bid is used as a minimum valuation with the expectation that subsequent bids will be higher. In this case, however, there were no higher bids.

Some investors have also questioned the wisdom of consolidating commercial and residential properties into one package, especially since commercial property values ​​have suffered so much due to the COVID-19 pandemic.

Alberty, who invested $250,000 in Casey’s scheme, said she was one of the smaller investors.

“A lot of the investors are older people who can’t work anymore, who’ve lost a lot of their retirement savings,” Alberty said.

Alberty said investors were also surprised by how the professional fees associated with the bankruptcy have accrued.

“We were told at the start that the fee was going to be $10 million to $15 million,” Alberty said. “At the end of the process, we are looking at a professional fee of $30 (million) to $40 million.”

Alberty said some investors, including herself, also believed people other than Casey and Wallach were complicit in the plot.

“We have unindicted co-conspirators who are still living on the pig,” Alberty said. “They live in houses that have been purchased by the company.”

“Basically they didn’t have to give up their way of life,” she said, “as many of the 1,300 investors lost their homes. They went on food stamps. There are people who have died from the trauma of this Ponzi scheme. »

Andrew Hinkelman, senior managing director of FTI Consulting based in Troy, Mich., who was director of restructuring in the bankruptcy proceedings, declined to comment.

But a legal statement from Gregory Gotthardt, also a senior managing director at FTI, detailed the portfolio sale process and marketing efforts.

Gotthardt wrote that “FTI logged over 70 hours of direct telephone contact with over 80 potential buyers”.

“Many investment groups dismissed the portfolio as ‘non-institutional,’ meaning the properties were insufficient in size and quality to meet their investment criteria,” he wrote.

Gotthardt said other investment groups have lost interest due to adverse conditions such as low occupancy due to COVID-19, deferred maintenance and flooding issues.

“FTI’s analysis indicated that the portfolio’s likely market price was significantly lower than indicated by a slew of pre-bankruptcy broker price opinions that had been obtained by the former director of restructuring,” which pegged the value of the portfolio at between $543 million and $567. million, he writes.

“It became apparent that the companies issuing the brokers’ pricing opinions had little or no detailed information about the true operating performance of the properties,” he wrote.