Article Courtesy of The Orlando
By Richard Burnett
May 26, 2014
Stung by a judge's criticism, federal securities regulators have run aground in their civil fraud case against an Orlando businessman and four South Florida associates who were accused of running a $300 million Ponzi scheme involving condo sales.
A Miami judge tossed the U.S. Securities and Exchange Commission's case against principals of the Cay Clubs Resorts & Marinas last week, ruling that the five-year statute of limitations had expired and the SEC's suit was filed too late. A criminal investigation of Cay Clubs is still underway.
The judge faulted the SEC for missing the deadline despite a seven-year investigation. He did not rule on allegations that Cay Clubs bilked more than 1,400 investors nationwide — many of whom bought condos in an Orlando complex that failed when the real-estate bubble popped seven years ago.
"This is a case in which the SEC — whose principal mission it is to 'protect investors and the markets by investigating potential violations of the federal securities laws' — failed to meet its serious duty to timely bring this enforcement action," U.S. District Court Judge James Lawrence King said in the ruling.
The SEC has 60 days to appeal.
"Obviously, we are reviewing the judge's decision and looking at our options," said Eric Bustillo, head of the SEC's Miami office. "We'll be making a decision soon."
Observers said it was a surprising move in the case against the Cay Clubs' principals, who allegedly used millions of investors' dollars to buy homes, vehicles, planes and other luxuries for themselves.
Amid such serious allegations, the SEC rarely misses its target this badly in court, said Brian Phillips, an Orlando white-collar crime defense lawyer and former federal prosecutor.
"It is uncommon, though certainly not impossible," he said. "At the end of the day, however, any large bureaucracy can make significant mistakes, and when you don't get things done in a timely way, that can be a big one."
Cay Clubs' sales and resales practices inflated the value of the units in an overheated market from 2004 to 2008, the SEC alleged. The group managed 17 condo properties from the Florida Keys to Las Vegas, including the former Orlando Cay Club Resort and Academy in south Orlando near Oak Ridge Road and John Young Parkway. When the market collapsed in 2007, however, many properties went into foreclosure and investors lost much of their life savings, the SEC said.
The former Orlando Cay Club complex is now known as The Greens Condominums and is managed by Longwood-based Sentry Management.
In January 2013, the SEC sued five Cay Clubs principals — including David W. Schwarz of Orlando, its co-founder and chief financial officer — alleging that the group committed securities fraud by using false marketing claims, suspect leaseback deals and bogus guarantees of big investment returns to lure people into the time-share condo scheme.
Schwarz and his associates denied the allegations. In court records, they said the Cay Clubs condos were sold as traditional real-estate deals, with terms clearly disclosed, not as an investment contracts or securities.
According to documents filed in the SEC case, however, a criminal investigation is still underway into the Cay Club organization.
As part of an immunity deal, Orlando lawyer Scott Callahan — who performed sales closings for Cay Clubs — described a pattern of misconduct by the group to hide details of its investment scheme and mislead lenders about the condo sales, according to the U.S. Attorney's office in Miami.
"Callahan did not want to be held accountable for the misconduct at Cay Clubs or the fraud that took place involving the lending institutions," the U.S. Attorney's statement said.