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Purported Massive Investment Fraud had Hallmark Signs of a Ponzi Scheme

woodbridge mortgage fundsAs we recently discussed in detail in a previous blog post, on December 21, 2017, the Securities and Exchange Commission (“SEC”) formally announced charges, as well as an asset freeze, against the Woodbridge Group of Companies (“Woodbridge”) of Sherman Oaks, CA, as well as Woodbridge’s related unregistered investment funds, and the firm’s owner and former CEO, Robert Shapiro.  Among other things, the SEC has alleged in its Complaint – filed in Florida federal court – that “[D]efendant Robert H. Shapiro used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

According to the SEC’s Complaint, Woodbridge utilized a large and coordinated sales force to sell its Woodbridge Notes, sometimes referred to as First Position Commercial Mortgages (“FPCMs”).  As further alleged by the SEC, “Woodbridge employed a sales team of approximately 30 in-house employees that operated within Woodbridge’s offices.”  Moreover, the SEC’s Complaint alleges that “Woodbridge also utilized a network of hundreds of external sales agents to solicit investments from the general public by way of television, radio, and newspaper advertisements, cold calling campaigns, social media, websites, seminars and in-person presentations.”

As detailed in the SEC’s Complaint, the Woodbridge business model relied upon borrowing money from investors in exchange for promissory notes, typically maturing in 12 – 18 months.  These notes carried an annual interest rate of 5 – 8%, payable monthly.  The investors’ money was supposed to be issued to lenders in the form of securitized mortgages.  However, according to the SEC, this rarely occurred.

As recently reported and covered in several of our prior blog posts, Woodbridge declared Chapter 11 bankruptcy in Delaware in early December.  The timing of the filing came on the heels of Woodbridge discontinuing its interest payments to investors.  In its bankruptcy filings, Woodbridge cited “increased operating and development costs” that “were exacerbated by the unforeseen costs associated with ongoing litigation and regulatory compliance.”

At this stage, it appears that while Woodbridge was marketed nationwide to a number of investors, South Florida was a particular hotbed of activity.  This makes sense, given the large number of retirees and pensioners residing in Florida who seek stable fixed income investments.  In fact, as recently reported, one insurance salesman and former broker supposedly sent invitations to potential Woodbridge investors, encouraging potential attendees to “learn how to earn 6% fixed interest” a year, while also highlighting “monthly income checks” and “no market risk.”

It appears that many investors in Woodbridge succumbed to the promise of earning above-market yields on safe, conservative, “risk-free” or “secured” investments in mortgages.  Of course, such representations often prove to be a red flag, or indicator of some wrongdoing.  When an advisor or promoter makes the claim that an investment product has no risk or is somehow crash proof, it should serve as an immediate warning or red flag to an investor of potential fraud.

Investors who purchased Woodbridge First Position Commercial Mortgages (“FPCMs”) through a stockbroker or financial advisor may have viable FINRA arbitration claims if the brokerage firm or Registered Investment Advisor (“RIA”) did not perform adequate due diligence before recommending the Woodbridge investment.

Some of the issuers of Woodbridge securities include the following entities:

  • WMF Management, LLC (“WMF”);
  • Woodbridge Group of Companies, LLC (d/b/a Woodbridge Wealth);
  • Woodbridge Mortgage Investment Fund 1, LLC;
  • Woodbridge Mortgage Investment Fund 2, LLC;
  • Woodbridge Mortgage Investment Fund 3, LLC;
  • Woodbridge Mortgage Investment Fund 3A, LLC;
  • Woodbridge Mortgage Investment Fund 4, LLC;
  • Woodbridge Commercial Bridge Loan Fund 1, LLC;
  • Woodbridge Commercial Bridge Loan Fund 2, LLC.

As members and associated persons of FINRA, brokerage firms and their financial advisors must ensure that adequate due diligence is performed on any investment that is recommended to investors – including private placements under Regulation D.  Further, firms and their brokers must ensure that investors are informed of the risks associated with an investment, and must conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and risk profile.  Either an unsuitable recommendation to purchase an investment or a misrepresentation concerning the nature and characteristics of the investment may give rise to a claim against a stockbroker or financial advisor.

If you have invested in any of the Woodbridge Funds, or otherwise purchased a First Position Commercial Mortgage through investing in a Woodbridge promissory note, from a registered representative of a broker-dealer, you may be able to recover investment losses in FINRA arbitration.  Investors may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.

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