Simon 0:05

Welcome back to Fraud Files. My name is Simon, and I'm the interviewer on this podcast, which brings you real life case files and forensic insights into a number of white collar frauds, financial crimes and misdemeanours that your host Edward has personally encountered, and in some cases brought to light, during his financial, corporate and business career. He shines the spotlight on both the frauds and the perpetrators. So Edward, the million dollar question. Why Batman!

0:37

I've always, for as long as I can remember, had a passion for fighting crime and injustice. I don't know whether or not it's, goes back to when I was a young kid and my parents bought me a a Batman. Outfits and Cape and in that make believe world I was sorting out and seeking to be a symbol of justice and protector of the innocent. So maybe it goes back to that, but certainly I knew at a young age that I wanted to be an accountant. And more particularly, I wanted to be an auditor. So I wanted to understand how companies operated and how to make sure that as an auditor when obviously is trying to ensure that things are accurate and that there is no financial fraud or other wrongdoings being perpetrated.

Simon 1:36

They say darkness conceals crime, but for white collar villains and investment scammers you certainly do shine the spotlight!

1:43

Certainly throughout my career, including my time as an auditor I've come across numerous financial frauds and scams not just in business, but also investment scams. And I suppose I've always felt compelled if you like to get to the bottom of those financial irregularities and to put things right. So maybe again, that's where this idea comes from of of, I'm Batman.

Simon 2:19

And in this episode, you've got another real estate fraud that you came accross that you are going to tell us about.

2:25

Yes, Simon. That's right. In this episode I'm going to be giving an account of a true story of of fraud and recovery as the title suggests. And in this particular case, a number of years ago when I was at a family gathering, I was talking to a close relative of mine. And she started telling me about how her and her husband had wanted to and had started to make an investment in a real estate project that was taking place in Orlando Florida, in the United States. My close relative let's call her Sue for the purpose of this podcast on her husband Peter, were getting a little bit worried because they had paid the developer in the United States significant deposits on what they believed were two condos that they would then own in a development in Orlando. Sue told me how they had come across this development company, let's call it American Resorts, for the purpose of this podcast, and it was a friend of theirs, that had recommended this particular real estate project. And in fact, the developer, American Resorts had flown them to Florida to look at the site, which at that stage was just a Greenfield site and to discuss the mechanics of the investment opportunity. As would be typical of any of these type of overseas development opportunities. Sue and Peter were shown plans and maps and brochures, et cetera, et cetera, and they were able to identify two particular condominiums that they felt would be a good investment opportunity. Out of a total development of more than 900 units at a vacation resort that was being planned and it looked very attractive to them. And, obviously Nando is a destination for for lots of things, like Disneyland, et cetera, and so they felt it would be something that they wanted to do and they were then enticed to put down deposits as soon as they got back to their home country to secure their investments. Whilst they were in Florida the paperwork was given to them to sign and which they were talked through. And Sue told me that they had as part of the form filling exercise, there was a box that they were asked to tick, which box said that the the deposit monies. Would not be held in an escrow account. So in a separate account, ring-fenced towards the future purchase price of the properties. But actually the developer, by ticking this box they were basically granting a right to the developer to utilize those the deposits that they collected. As part of the development costs. So this is something that they were told would facilitate the development and move things along nicely. And, of course they would only have to put down the balance then of the funds for the purchase.

Simon 6:00

So what started to go wrong with this investment opportunity? So they're back in their home country. And the deposits that they were asked to send across was the equivalent of $50,000 for each of the condos. So that's a hundred thousand dollars in total of the deposit monies, which represented 20%, of the purchase price of the condos. So the total investments that they would have made would have amounted to say $500,000. Sue indicated that there was credit facilities that would be extended, that would be provided through the developer for the balance of the funds. But anyway, they paid across their a hundred thousand dollars and were waiting then to see things, come to fruition according to a according to the timeframe. But after a number of months. There seemed to be a little bit of stalling on the part of the developer, and things didn't seem to be going according to plan and the the planning permissions and the development seemed to be certainly falling behind schedule. So Sue and Peter started to have some real concerns? Yes, you can imagine. A hundred thousand deposit, that's a lot of money. And I could see there was a lot of concern on their behalf. So I dunno, I just felt maybe I could try and help them out. I didn't wanna see them lose that money or at that stage they, they weren't sure they would lose that money it seemed like. Things had gone sour with the development. They felt it was likely, they didn't want that to happen. They didn't know where to go, what to do. They didn't have any other, they hadn't any of their independent legal advice or independent real estate advice. And so they were tied in with the developer and the sales, the marketing department of the developer. And they were just waiting for more news. And yes, they were getting a little bit worried about their deposit and, so I, I said to them I'll investigate it a little bit more for them if they'd like. And see what I could turn up. What research and digging did you do? Obviously I had the paperwork, copies of the paperwork that they had signed. And I knew the name of the developer. I knew, the development company, let's say. And I also knew the name of the, principal developer himself a UK citizen obviously now working in Florida. Let's call him Michael Grant, for the purpose of this podcast. So I set about gathering information on the development company. I was able to obtain financial information. The company was quoted on the, over the counter market in the in the us. Basically that's like a public company. And then has to provide various financial information and operational information according to certain criteria from time to time to the board on which it's listed. And I could see that the. The development of more than 900 units at this resort park definitely was running into some problems. And there were red flags that I could see developing. There were certainly delays in getting the planning permission, and the company was making announcements regarding some of those delays in the various filings that I was able to, to get hold of. I could see that the development company had purchased a site at a cost in the region of $14 million, and that was largely funded by a term loan from a bank. And that loan was due for repayment in a couple of years time. And clearly they were going to have to sort out some some funding for the actual development finance itself that loan was secured on the land. So if there was a default on that loan, the, the bank who was lending that money could take possession of the resort project. So we have a development that's consisting of a mixture of town homes and condominiums. But there was announcements that the funding had run into some issues and in those announcements on the filings that they made the development company said that and I quote, in addition to partially fund our development costs at the resort. We have used cash from buyers', deposits on the pre-sold town homes and condominiums, for which the buyers have waived the requirement to main the funds in escrow. The deposits on the town homes and condominiums range from 10 to 20% of the purchase price, and approximately 90% of the buyers. For the resort development have waived the escrow requirements and these funds have been expended for our project related costs, provided the purchaser has waived the escrow. And in another filing, the company and I quote again, says the company will need to find alternative financing for the construction of phase one of the resort of which there can be no assurance. However, even if we are able to secure a sufficient financing for the construction of phase one, moving forward, our growth and continued operations may be impaired by limitations on our access to the capital markets in the event that our current anticipated costs of developing the resort. Are more than we anticipate and we may not have sufficient funds to complete the construction projects as we may be forced to reduce our annual construction goals and scale back our operations, which would have a material adverse impact on our ability to pursue our business plans if there was no assurance of capital from outside sources being available. And the filing goes on to say if we cannot obtain the appropriate finance, we may have to delay the commencement of the construction of phase one and or phase two until such time as we have adequate funding available. And we may never have sufficient capital to begin or complete the development of phase one or phase two of the resort. And the construction of the resort may be subject to delays and cost overruns, which would cause the estimated cost of the resort to increase and which would cause us to cocktail or abandon the construction of the resort. And I could see that while the development company had begun some earth moving and clearing process of the land for the resort, there was no evidence to suggest that the vertical construction that was to be carried out in phase one of the development had ever commenced. Furthermore, I could see in an announcement by the development company a couple of months. After my relatives had invested there was showing that the company had an accumulated deficit of over $11.5 million generated by operating losses since its inception. They went on to say we owe a significant amount of money to the bank in connection with the land loan, which money we do not currently have, and which loans are secured by the resort. If we are not able to repay it will have a material adverse effect on our financial condition. Wow. So what happened next? A number of weeks later, after I'd done all my research, I discussed this with with Sue my relative. And she obviously was liaising with her husband Peter, and, they'd asked the developer could they pull out of the development? And the developer had said, no, that's not going to be possible. There was just some delays, but I could see the writing was on the wall and I knew that, i'd have to act quickly because there was a lot of units, there was a lot of deposits that had been paid. They were not being held in escrow. They'd been absorbed into the development costs. There was probably a lot of people starting to get very worried, and I knew time was of essence to see what could be done, if anything. And of course, the money was over in America. My relatives were in the uk. And the communication was breaking down with the developers, so things didn't look great, to be honest with you. Sue and Peter just said, look, do what you can. So I set about trying to come up with a strategy to see what could be done. So what happened next? What did you do? It came to me, came to my mind at some point that what we needed was somebody local who could help us. 'cause we were far away the other side of the world from Orlando really. And I felt we needed local legal. Representation particularly 'cause I was concerned at that stage about the monies, the escrow monies being signed away, which was, most unusual really to have your deposit monies actually going into the the costs of the of construction and other costs. And at that time financial information was available from the accounts. Accounts had to be filed I could see from those accounts the costs, the type of costs that were being built up. And I could see a lot of salaries and bonuses being paid and director's remuneration being paid. And obviously all the, the early development costs being incurred. So a lot of costs were racking up. And I could see that in the SEC filings, that's the security exchange commission filings, which the, the company had to file. I could see that from the deposits that were put down on the presales for this particular resort development. The developer had raised around $37 million. So we are talking about it, significant development, significant deposits. That's going to be a lot of people. This was heavily promoted this scheme to UK and Ireland investors, and no doubt other investors in other parts of the world. And I felt we needed local representation. I. Somehow came across the name of a legal firm based in Florida, in that offices in Miami. And something just drew me through in those days, obviously we still had the internet, so you can make access, but. Something drew me. There was a number of companies that I looked at. Something drew me to one particular legal firm. I dunno what it was to be honest with you. But I contacted directly, one particular legal firm picked up the phone one day, called them, and I was put through to to a very lovely lady. Who, whose name was Michelle. For the purpose of this podcast, and I started to explain to Michelle about the predicament of my relatives in this scheme. And, I told her that I was based in Ireland as I was at that time and that my relatives were based in the uk. And she said to me that she understood the seriousness of the situation, first of all. And then she said to me that as we were chatting, she said she had just come back from her summer vacations, which she had spent with her family her husband and her children in Ireland. She'd had a marvelous time. And, it was quite incredible. I, I just happened to pick this this lady who was the Irish hospitality, the Cade meal of Cher, was still in her, in, in her mind. So I'd called, I was calling in the autumn, and she was back a number of weeks from Ireland, but she was so enthralled with it and obviously able to look into her Irish ancestry as many Americans have, and so on and so forth. And bizarrely she said to me, you know what, edward, I'm going to take this case on and I'm not gonna charge your relatives a fee for this. I thought. That, was incredible. Of course, I knew that it was gonna be difficult to get anything, any outcome, any successful outcome for my relatives. But to have a a very professional, clearly very professional lawyer, working on my relatives behalf in Florida was as much as I could have asked for, like that. With and with no costs being incurred. This is getting interesting. Tell us what happened next. Michelle started to contact the company, wrote letters to the company identifying her client as my relatives asking about the deposits asking about the state of the development. And generally raising some concerns about the situation. I, on the other side of it felt that I could continue to, something was driving me to continue to investigate further on my own as well. And and I started to focus in particularly on the, the promoter himself Michael Grant and I started to do a little bit of research on him, and I came to discover that he was a, British chartered accountant through, the information that I obtained and that he had promoted some earlier schemes in Orlando and that there had been some litigation from investors regarding those schemes. Now I'll come back later to clearly, none of this was known to my relatives one has to do one's research when you're investing and understand the background to the promoters. You need to do this in advance of making the investment, not as here we were doing subsequent to the investment. Good you'll come back to red flags in investing generally later, but for now we are all dying to hear what happened next. So Michelle was making her inquiries, I was making my inquiries, and I thought I'd go a step further. I managed to get the the details of the location of the developer and the and the development company. And so I in a moment of I dunno what you wanna call it, but in a moment of some inspiration perhaps or wearing my. Batman cloak wanting to fight this financial crime. I decided to pick up the phone and call the company. And I I then had a number of calls with the company and I was speaking to their chief financial officer. About my relative situation and obviously tying that in with and coordinating that with the legal letters that were coming from Michelle, the lawyer in Miami and initially obviously didn't look good. There was being excuses being made and, I was being told a lot of stories and the information really wasn't flowing back nicely and comprehensively to answer Michelle's queries as well. But I thought I'd up the ante a little bit and I said to the CFO that 'cause who clearly had contact with with Michael Grant. And I said that if there wasn't some solution that was. Put forward, by the developer. Regarding my relatives, I would raise this with the Institute of Chartered Accountants in England and Wales and that clearly there was something going on here that was untoward. And that I wasn't going to let it lie, et cetera, et cetera. And I was started to pile on a bit of pressure and that he needed to, the the CFO needed to have a chat with Michael Grant come back to us with a proposition, with a proposal. And so I was just coming in from now at them from different angles on behalf of my relative. Was there a good outcome for your relative from all of this, let's call it hustling? Yes, I have to say from a really desperate situation of of looking like they were going to lose their a hundred thousand dollars. Out of the blue, my relative received from the developer by email. A non-disclosure. Agreement to sign and an undertaking to on foot of that NDA being signed and returned to the development company, that an undertaking, that development company would immediately refund the, deposit of the two deposits, there's 50,000 on each unit. So a hundred thousand US dollars back to the nominated bank account of my relative. And my relative received that directly. And of course they were absolutely thrilled. There was a possibility of them not losing their money. I read the NDA I asked them to sign the NDA. It was sent back and some days later. So we're talking about probably four months after I started this whole investigation and this whole quest for justice, if you like. About four months after the monies were returned to Sue and Peter's bank account in the uk. They must have been thrilled no doubt! Yes as you can imagine, they were absolutely over the moon. They couldn't thank me enough. They were really delighted to have their money back. They had thought they had lost it. And I have to say that I kept an eye on the situation subsequently, and unfortunately I would say the majority of the investors in that project lost their deposits. The particular resort that was being planned by American Resorts never got fully built. They did complete about 90 townhouses, condos out of the over, 900 units that had been planned, but construction halted a completely when there was a housing crash there was funding shortages. There was extra costs apparently that one can see again from some of the filings. That took place. And ultimately the developer filed for chapter 11 bankruptcy. In an Orlando federal court. And it showed that it was owing, $184 million to the banks, investors, and buyers. And they they had hoped to restructure through the chapter 11 bankruptcy, but it was later converted to a liquidation, meaning that the assets were sold off and there was, there was no big revival. And many big deposits had been paid over many deposits of around a hundred thousand dollars for the pre-construction costs. Some people sued the developers, perhaps one or two, got some money back. But certainly the, in the bankruptcy and in the liquidation, the buyers became unsecured creditors no priority. And and so when the project tanked, which it did the deposits weren't returned. And my my relatives friends who had also invested. Didn't get their money back at all. And all the international investors were hit hard deposits weren't fully escrowed they weren't protected the crash of the development wiped them out. And the public records do show that the majority of the investors walked away empty handed. Any further reprecussions for the promoter? As for Michael Grant, the developer, it became apparent that he had held a number of senior management positions in American resorts and which was indicative of a lack of segregation of duties. And that's something that often sets the alarm bells ringing. Michael was not only the chief executive officer and the chairman of the board of directors, he was also classed as a chief financial officer of the holding company, also the principal accounting officer, until he resigned from those posts just prior to the bankruptcy. It can be seen from the filings that and research that, michael Grant filed himself personally for bankruptcy a number of years later. And in those bankruptcy proceedings, the trustee, the US trustee objected to a number of things that were going on. He that was allegations that that Michael Grant had made false oath and that he had intended to hinder or defraud creditors. And because of the pleadings of the US trustee the court. Ruled that the application for Michael Grant's bankruptcy was being denied. And therefore Michael grant remained personally liable for the debts that he had sought to eliminate. Because if he had got a bankruptcy court to to adjudicate that he was indeed bankrupt, that would've allowed him to wipe. The debts you have those debts legally forgiven, and he would then receive a fresh start. And in those proceedings I, from information that I obtained at the time, it, it says that that he was a British national and former chartered account. And he had a background in high level real estate and corporate management, including his time with the development company. And the the court records in the bankruptcy case frequently referenced his history as a sophisticated businessman, which the judge used as a basis to reject his claims. The defendant's claims that the errors that he'd made in his filings were simple mistakes. When in fact they were contrived and intended to defraud. So Batman, the moral of this story is I think the moral of the story is that old adage, caveat, mTOR, buyer beware. Would you know if someone was trying to defraud you? We all would like to think so, but can we really spot a scam a mile off? Fraudsters are ruthless and their methods are getting more sophisticated, and even though there are many types of fraud. With new ones appearing all the time. There are some psychological tactics that fraudsters commonly use, and these tactics have the sole aim of making people act before they have time to stop, think, and check if it's genuine. One of the best weapons against fraud is knowledge. Once you know the tactics that fraudster commonly use and the signs to look out for, you have more chance of avoiding them. So Batman, this crusade was very successful! Yes, wearing my Batman hat or if you'll allow me to say wearing my Batman cloak. It's not about vengeance, it's about justice. A city, Gotham, or a family deserves better in the face of financial deceit. I felt I had to step up because I am the one who uncovers the truth. In this case, for my relatives, the funds were recovered. The wrong was righted. It's a small victory, but it matters