STORY OF ALLEGED DEVELOPEMENT OF FLORIDA AND LAS VEGAS RESORTS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Jan. 30, 2013 — The Securities and Exchange Commission today charged five former real estate executives who defrauded investors into believing they were funding the development of five-star destination resorts in Florida and Las Vegas when they were actually buying into a Ponzi scheme.

The SEC alleges that Cay Clubs Resorts and Marinas raised more than $300 million from nearly 1,400 investors nationwide through a network of hundreds of sales agents, marketing seminars, and podcasts that touted the profitability of purchasing units at Cay Clubs resort locations. Investors were promised immediate income from a guaranteed 15 percent return and a future income stream through a rental program that Cay Clubs managed. But instead of using investor funds to develop resort properties and units, the Cay Clubs executives used new investor deposits to pay leaseback returns to earlier investors. Meanwhile they paid themselves exorbitant salaries and commissions totaling more than $30 million, and investor funds also were misused to buy airplanes and boats. While still advertising itself as a profitable venture, Cay Clubs eventually abandoned its operations. Many investors’ properties went into foreclosure.

"These Cay Clubs executives lined their pockets with millions of dollars that they told investors would be used to develop five-star resort properties," said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. "They continued to defraud investors as Cay Clubs collapsed."

The SEC’s complaint filed in U.S. District Court for the Southern District of Florida charges the following former Cay Clubs executives:
Fred Davis Clark, Jr. – president and CEO
David W. Schwarz – chief accounting officer
Cristal R. Coleman – manager and sales agent
Barry J. Graham – sales director
Ricky Lynn Stokes – sales director
According to the SEC’s complaint, the scheme began in 2004. Clark, Coleman, Graham, and Stokes solicited investors with promises of guaranteed income, instant equity in undervalued properties, historic appreciation, and at least $30,000 in upgrades to the units they purchased at Cay Clubs resort locations in Florida and Las Vegas. The representations about investors’ profitability and instant equity were false because the purported triple-digit returns resulted from undisclosed insider transactions with Cay Clubs by Coleman, Graham, and Stokes. Their actions made it appear that Cay Clubs units had enormous rates of appreciation over a short period of time when in fact the transactions were merely part of an insider flipping scheme. Further, Stokes wrote letters directly to potential investors claiming that the leaseback payments and profits were "guaranteed" and that Cay Clubs was a "very stable financially healthy company worth BILLIONS."

The SEC alleges that Cay Clubs continued to solicit new investors despite the fact that the company’s financial condition had deteriorated so significantly that it did not have sufficient funds to make the "guaranteed" leaseback or rental payments to investors. Clark, Coleman, and Schwarz misappropriated millions of dollars in investor funds using the multitude of bank accounts they controlled. Besides purchasing airplanes and boats, they misused investor money for unrelated business ventures including investments in precious metals and a liquor distillery that produced Pirate’s Choice Rum. After Cay Clubs abandoned its operations in 2008, Clark and Coleman (who are now husband and wife) moved to the Cayman Islands and continued to dissipate assets and funnel at least $2 million to offshore accounts.

The SEC’s complaint seeks financial penalties from Clark, Coleman, and Stokes and the disgorgement of ill-gotten gains plus prejudgment interest by all five executives. The complaint also seeks injunctive relief to enjoin them from future violations of the federal securities laws as well as an accounting and an order to repatriate investor assets.

The SEC’s investigation was conducted in the Miami Regional Office by Senior Counsel Linda S. Schmidt and Senior Regional Accountant Fernando Torres under the supervision of Assistant Regional Director Jason R. Berkowitz. Senior Trial Counsel Amie R. Berlin will lead the SEC’s litigation.

NEW YORK INVESTMENT ADVISER CHARGED WITH FRAUD

The following excerpt is from the SEC website:

Securities and Exchange Commission v. Brian Raymond Callahan, Horizon Global Advisors Ltd. and Horizon Global Advisors, LLC, (United States District Court for the Eastern District of New York, Civil Action No. 12-CV-1065)

SEC CHARGES NEW YORK INVESTMENT ADVISER WITH DEFRAUDING INVESTORS AND SEC OBTAINS EMERGENCY RELIEF

On March 5, 2012, the Securities and Exchange Commission filed charges against a New York investment adviser for defrauding investors in five offshore funds and using some of their money to buy himself a multi-million dollar beach resort property on Long Island.

Brian Raymond Callahan, of Old Westbury, New York, raised more than $74 million from at least two dozen investors since 2005, promising them their money would be invested in liquid assets, the SEC alleged in a complaint filed in federal court in Islip, New York.  Instead, Callahan diverted investors’ money to his brother-in-law’s beach resort and residences project, which was facing foreclosure, and in return received unsecured, illiquid promissory notes, according to the complaint.  Callahan also used investors’ funds to pay other investors and to make a down payment on the $3.35 million unit he purchased at his brother-in-law’s real estate project, the SEC alleged.

Callahan operated the five funds through his investment advisory firms, Horizon Global Advisors Ltd., and Horizon Global Advisors, LLC, and used the promissory notes to hide his misuse of investor funds, the complaint alleged. The promissory notes overstated the amount of money diverted to the real estate project; for instance, in 2011, Callahan received $14.5 million in promissory notes in exchange for only $3.3 million he provided to his brother-in-law. The inflated promissory notes allowed Callahan to overstate the amount of assets he was managing, and inflate his management fees by 800% or more.

Callahan refused to testify in the SEC’s investigation and recently informed investors about the investigation, but gave false assurances that no laws had been broken.  Callahan also misled investors by not disclosing that in 2009, the Financial Regulatory Industry Authority barred him from associating with any FINRA member, the SEC alleged.

The SEC charges Callahan and his advisory firms with violating federal antifraud laws, specifically Sections 17(a)(1), (2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a), (b) and (c) thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.  The SEC is seeking preliminary and permanent injunctions against Callahan and his firms, return of ill-gotten gains, with interest, and civil penalties

At the SEC’s request, and after a court hearing on March 5, 2012, the court granted a temporary restraining order freezing the assets of Callahan and his advisory firms, enjoining them from violating the antifraud provisions and granting other emergency relief. 

The Commission acknowledges the assistance of the British Virgin Islands Financial Services Commission and the Bermuda Monetary Authority.