On June 21, 2013, the Securities and Exchange Commission (“SEC”), suspended Michael J. Steward, a California securities attorney, from practicing before the SEC. The sanction stemmed from an SEC enforcement action brought by the agency in May 2012; Stewart agreed to settle.
In it, the SEC charged Stewart, John J. Packard, Randall A. Smith, and Apartments America, LLC with securities fraud in connection with representations and omissions related to their securities offering for Apartments America. The omissions including concealing their dismal track record as real estate whizzes.
According to the SEC, Stewart, Packard, and Smith created Apartments America to coax money from investors for an unregistered stock offering, using a website, solicitation letters, cold calls, and advertising.
The Fraudulent Solicitations
In one solicitation letter from 2010, sent to people who’d requested information in Apartments America’s predecessor company, PPA Real Estate, Smith assured potential investors that “the next 12-30 months could be the greatest apartment buying opportunity in decades!” He presented his partners, Stewart and Packard, as experts who had been involved in “over $500 million of multifamily transactions.”
He failed to disclose that PPA had gone bankrupt only a year earlier. PPA was in the business of selling what it claimed were “secured promissory notes” to investors, and used the proceeds to invest in apartment buildings in Southern California and Arizona. In May 2009 it defaulted on $91.6 million in notes held by 647 investors in 37 investment programs. It had promised annual interest of 24% to 30% on those notes.
The SEC investigation revealed that Apartments America was no more than an encore performance of the PPA scam. While they did make reference to their previous involvement with PPA, they glossed over its problems and informed potential investors only of its few successes, and misled those investors about the value of Apartments America’s purported property portfolio. The SEC sought and won disgorgement and a permanent ban barring the defendants from participating in any offering of unregistered securities.
Potential investors should always be wary of people soliciting money offering terms that seem too good to be true. Extravagant interest rates fall into that category.
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