Financial Fraud Alert - August 2012

Author:Mr Timothy O'Driscoll and Stephen C. Baker
Profession:Drinker Biddle & Reath LLP

Who: Plaintiff: Securities and Exchange Commission

Defendants: The Companies, LLC, Kristoffer A. Krohn, Stephen R. Earl, and Michael Krohn

What: This action stems from the alleged fraudulent offer and sale of unregistered securities for the purchase of distressed real estate for investment. Allegedly, "[Defendant] The Companies or its subsidiary... initiated four unregistered offerings of securities from January 2009 to June 2011." According to the complaint, "the four offerings raised a total of approximately $11.9 million from approximately 169 investors." The complaint states that the Defendants established a long-term strategy of purchasing real estate owned properties or "REOs". The complaint describes an REO as a "portfolio[] of homes that have been foreclosed upon and packaged together to be re-sold by a bank or lending institution." Allegedly, the Defendants planned to purchase REOs and "then donat[e] or sell[] off the homes that were in complete disrepair, repairing those homes that were worth repairing, renting the repaired homes for a steady cash flow, and later selling the homes at a profit when the homes appreciated in market value."

According to the complaint, the Defendants obtained valuations of the individual properties in Defendant Kristoffer Krohn's REO, by hiring a third party real estate evaluation company, which used broker price opinions or BPOs. The BPOs evaluated all of the properties in the REO at approximately $2.9 million. Purportedly, the Defendants also used an online software program, RealQuest, to evaluate the REO properties. The complaint states that the RealQuest software valuations did not account for the fact that many of the REO properties "had significant liens or other encumbrances that exceeded the value of the properties, thereby giving...

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