Major Multifamily Landlord Indicted For Fraud, Accused Of Ponzi Scheme
One of the largest multifamily owners in the country has been accused by Securities and Exchange Commission of committing a "Ponzi scheme-like" series of financial crimes.
Robert Morgan, founder of Morgan Management, allegedly directed employees to falsify financial documents to get bigger loans for the acquisition of apartment buildings, according to the SEC civil lawsuit and a criminal indictment leveled against Morgan by the Justice Department, the Wall Street Journal reports.
To pay off the loans, Morgan Management then solicited capital from smaller investors, some using personal retirement accounts, who believed their money was funding new acquisitions, the SEC alleges. Morgan's son, one of his executives and a mortgage broker were also brought up on criminal charges, according to the WSJ.
The civil and criminal cases both followed from the U.S. Attorney's Office for the Western District of New York's investigation that first brought charges against Morgan Management principals Todd and Kevin Morgan, Arthur's son and nephew, respectively. Mortgage brokers Frank Giacobbe and Patrick Ogiony were also charged for assisting in the inflation of real estate values. Three of the four men first charged have since pleaded guilty and have been cooperating with the investigation, the WSJ reports.
Investors in the scheme are owed $63M, the SEC said, while the Justice Department estimates that the fraudulently obtained mortgages are worth at least $500M. Many of those mortgages were then sold to government-backed Fannie Mae and Freddie Mac, which packaged them into commercial mortgage-backed securities to be sold to investors.
The value inflation of real estate debt that is then bought and sold as a safe asset was one of the driving forces behind the collapse of the single-family housing market that caused the Great Recession. The Dodd-Frank Act regulations preventing the flow of such mortgages did not apply to CMBS loans or multifamily buildings.
“The excesses that happened in single-family are now being transferred to multifamily,” Voya Investment Management Director of Real Estate Greg Michaud told the WSJ.
Several of Morgan's lenders have already filed claims to take the properties back as a way of recouping their investments, but the U.S. Attorney's office claims their losses already total at least $25M.
Morgan Management owns the 14th-most apartments of any landlord in the U.S., according to Yardi Matrix.
Two months before charges were formally filed against any of the parties, Morgan Management had changed its name to Grand Atlas Property Management, with a subsidiary named Morgan Communities. In August, Grand Atlas told the WSJ that neither Arthur, Kevin nor Todd Morgan were still affiliated with the company.