Posted on Tue, May. 04, 2004
SEC alleges real estate firm was running investment scheme

GARY GENTILE

Associated Press

LOS ANGELES - A federal court froze the assets of a real estate investment company Tuesday after regulators alleged it was misleading hundreds of clients by promising sky-high returns but paying them off instead with money from newer clients.

The firm, Chicago D&P, attracted clients in California and Nevada and had plans to expand its operations to other states, according to the company's offering materials. It raised as much as $6 million from more than 200 clients during the past six months, according to a complaint filed by the Securities and Exchange Commission in U.S. District Court in Oakland.

The company, with offices in Reno and Emeryville in the San Francisco Bay area, advertised potential returns of more than 30 percent and offered bonuses to clients who brought new people into the fund, the SEC said.

The agency's complaint said company president Patricia Morgen was selling an unregistered security.

"The alleged profit payments to existing investors were funded almost entirely by money received from new investors to the scheme," the complaint said.

Morgen denied wrongdoing, calling her clients "lenders" rather than investors.

"We do borrow funds from individuals, and we pay those funds promptly," she said.
The company's own offering statements, however, refer to a potential client as an "investor/lender."

The offering statement said the company's mission was to borrow money from lenders to fund real estate activities without having to obtain outside loans. Clients would be paid profits from businesses Chicago D&P ran or property it owned, the company said.

"We have a lot of money coming into the company. We have businesses. We sell real estate. We have rentals. Money comes in and money goes out," Morgen said. "We also pay those loans off. Since they are loans, I'm not even sure they under the SEC's jurisdiction."

She added, "We realize we have a challenge with the SEC."

The SEC said the company does own property in California and Nevada but not enough to generate the promised returns.
"The money they are paying to investors is far more than anything they can claim to have generated from their real estate businesses," said Marc Fagel, co-head of enforcement in the SEC's San Francisco office.

Morgen, 57, declined to detail the company's real estate holdings. According to company documents and its own Web site, Chicago D&P operates a day care center in Sparks, Nev., and numerous rental properties. Other properties it claims to own are listed by address only.

The company started in Chicago in 1998 and opened offices in Northern California the following year. Its corporate headquarters were moved to Reno in 2000.

In its offering statements, Chicago D&P asked clients to lend money for six-month periods and promised a profit of 18 percent, which compounded if the client kept the money in the fund. The company did not warn of any potential risk, according to the SEC.

Since January 2001, Chicago D&P has raised at least $10 million from several hundred clients, according to the SEC's complaint. The fund has raised about
$2 million in the last month alone and since October has paid $3.2 million to its clients.

The complaint also alleges Morgen and her son, Shalom Gibson, used some of their clients' money for gambling, health club dues, clothes and to pay Morgen's American Express bill.

The SEC filed the request for a temporary injunction Tuesday after examining documents provided by Barry Minkow, a convicted felon turned anti-fraud investigator for the San Diego-based Fraud Discovery Institute.

The court granted the request, freezing assets in all accounts owned or controlled by Morgen and her son. A hearing to consider a permanent injunction is scheduled for Monday.

Minkow said he started his probe after being approached in March by a prospective client.Morgen said she has not received complaints from any of her clients, who she described as "very happy." The SEC also has not received complaints, but Fagel said that wasn't unusual.

"When you get in there when the scheme is still running, then it's typical that investors are still happy because they are getting their money," he said.