SEC accuses New Mexico real estate executive of $80M Ponzi scheme that bilked 600 investors

By Sue Major Holmes, AP
Wednesday, March 24, 2010

New Mexico real estate exec accused of $80M scheme

ALBUQUERQUE, N.M. — A prominent Albuquerque real estate executive used his reputation to defraud about 600 investors in New Mexico and elsewhere out of an estimated $80 million in a Ponzi scheme, the Securities and Exchange Commission alleged in a federal lawsuit.

In the complaint, filed Tuesday, the SEC accused Douglas F. Vaughan of fraud and selling unregistered securities. The SEC obtained a temporary restraining order to stop the scam and freeze Vaughan’s assets and those of two companies he founded.

Vaughan and his Vaughan Company Realtors filed for Chapter 11 bankruptcy protection last month.

The SEC seeks unspecified financial penalties and a court order that Vaughan give up gains from the alleged scheme.

Vaughan’s attorney, Robert Gorence, said Wednesday he and his client were still reviewing the complaint and the restraining order.

“We have no comments to make other than we look forward, ultimately, to our day in court,” Gorence said.

The state Regulation and Licensing Department’s Securities Division also has been investigating Vaughan. Superintendent Kelly O’Donnell said last month that investors had contacted the division, concerned over Vaughan offerings.

The SEC lawsuit said Vaughan issued promissory notes through The Vaughan Company Realtors, claiming they would generate returns of 10 percent to 25 percent over one to three years. He began offering notes in 1993 and continued at least through January.

The complaint said Vaughan used another entity, Vaughan Capital LLC, formed in 2008, to solicit investors for real estate investments such as buying homes at distressed prices. The minimum investment in “membership units” was $125,000 and Vaughan sold $6.2 million in memberships to 22 investors through January, the lawsuit said.

But, the SEC alleged, both offerings were part of a Ponzi scheme in which new investor money paid off earlier investors. The scheme began collapsing last year when cash obligations to investors outstripped the ability of Vaughan and his companies to raise money from new investors, the lawsuit states.

The bankruptcy filings show the “supposed ’security’ for the promissory notes pales in comparison to the amounts owed the notes,” according to the complaint.

The commission alleges Vaughan transferred nearly all the money he raised from Vaughan Capital investors to Vaughan Company’s operating account, then used those funds to cover Vaughan Company’s business expenses and obligations to promissory note holders.

“When the scheme unraveled, Vaughan hid behind the economic downturn and blamed the poor real estate market,” said Donald Hoerl, director of the SEC’s Denver regional office.

The SEC also alleges Vaughan’s net worth, which was supposed to protect investors, has a negative value.

Vaughan paid himself $877,000 from Vaughan Company in 2008 and 2009, although the company’s accumulated losses totaled $61.3 million through last year, the lawsuit said. In the past two years, interest payments and routine business costs exceeded what its real estate business brought in by more than $25 million, the SEC said.

And, it said, the aggregate principal on the promissory notes has grown to about $80 million, meaning the company owes investors about $14 million annually in interest alone.

The principal is more than 20 times the equity claimed in properties that supposedly secure the notes, the lawsuit said.

“To fund Vaughan Company’s ever-increasing obligations to note holders, defendants have relied entirely on new money raised from investors, both in the note program and in the Vaughan Capital offering,” the complaint said.

The investigation is continuing. Hoerl said Wednesday he could not comment on whether that might mean more charges.

He also said the bankruptcy filings’ effect on the SEC complaint will have to be worked out.

The lawsuit said neither Vaughan nor his companies are registered to offer securities under federal laws. It charges Vaughan and The Vaughan Company with acting as an unregistered broker-dealer and charges Vaughan and both companies of fraud in offering the sale of securities, fraud in the purchase or sale of securities and unregistered sale of securities.

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