Investors sue Cedar Funding.
Friday, April 25, 2008
Cedar Funding investors filed a scathing lawsuit Thursday, April 24, accusing the Monterey-based hard money broker of running a Ponzi scheme and demanding a receiver to take over the troubled mortgage fund. The lawsuit was filed on behalf of six members of Cedar Mortgage Fund, LLC against the fund, Cedar Funding, Inc., owner David Nilsen and Accustom Development, LLC. The six investors are Michael and Joanne LePage, Harvey and Melanie Billig, Ritta Brumm, and Arno Heckrodt. Monterey law firm Duffy & Guenther LLP is representing the plaintiffs. The pooled construction and real estate loan fund has an estimated 1,150 investors, most of them local. “Many of the investors have invested their retirement accounts and their savings in the Fund, and depend upon income from the Fund for their retirement and other necessities of life,” the lawsuit says. “Some investors have borrowed against their houses to make investments in the Fund and risk losing their houses if they lose their income from the Fund.” Cedar Funding has two types of investors, those who paid into the mortgage fund and those who invested in specific properties through first and second deeds of trust. The lawsuit alleges Cedar Funding used new investor money to pay off old investors. The lawsuit claims that when loans became due and the borrower couldn’t pay it off, Cedar Funding would extend the loan rather than declare it in default. “As a consequence, in order to treat the loan as a ‘performing loan,’ Cedar Funding, Inc. was in the practice of obtaining more money from new investors, which would then be used to fund impounded interest for the period of the extended loan,” the lawsuit says. “The impounded interest would then be paid out to the Fund and on to the existing investors as their monthly distributors.” The lawsuit was filed a day after Cedar Funding and Nilsen held a meeting with investors at the Golden State Theatre in Monterey. According to the lawsuit, Nilsen said, at the meeting, “he was not in a position to make further distributions to the existing investors, as no new investors were investing in the Fund. The unspoken predicament for this statement was that Cedar Funding, Inc. needed new investors’ money to make distributions to present investors—a Ponzi scheme.” Nilsen, reached by e-mail, declined to comment on the lawsuit. Nilsen previously told the Weekly that he was not running a Ponzi scheme and that no investor has lost his principal. The controversy unfolded at the beginning of April when Cedar Funding reduced its rate of return for fund investors from 10.75 percent to 6.37 percent. Many investors with claims on specific deeds of trust received no interest payments. This has created a frenzy of angry investors who have demanded their money back. According to the lawsuit more than 230 investors have attempted to withdraw more than $15 million. Nilsen has said Cedar Funding is suffering fallout from the sub-prime mortgage crisis and housing downturn. Cedar hasn’t been making many new loans, and borrowers have been unable to refinance because of tightened mortgage regulations, Nilsen told the Weekly in an earlier interview. This he said has depleted the interest reserves on some construction loans, and led to a lack of cash flow to pay investor interest payments. Nilsen said Cedar Funding would now collect on borrowers for monthly interest payments Plaintiffs, however, allege that “Nilsen has used assets of Cedar Funding Inc. for his own personal use, including making millions of dollars of insider loans” to himself and Accustom Development, which Nilsen also owns. Plaintiffs also accuse Nilsen of commingling funds from other investors with the funds money. “Cedar Funding has basically commingled all this money that they brought in with individual deeds of trusts with deeds that are supposed to be assigned to the fund,” says Michael LePage, a Carmel resident. LePage and his wife Joanne joined the fund in late 2006. In addition to running a pyramiding scheme, the lawsuit alleges that the defendants breached several provisions of the fund’s offering circular, a legal document filed with the state securities division that outlines investment terms. The lawsuit alleges that Cedar Funding made at least $21 million in prohibited insider loans, “which are loans made to itself or to entities in which it has interest.” This is a violation of the funds’ offering circular, which bars loans to fund manager. The loans represent one third of the Fund’s investment capital, according to the complaint. Referencing a 2006 audit, the lawsuit says Cedar Funding made at least $8.5 million in loans without recorded trust deeds. This means investors’ dollars were not properly secured by real estate. The California Department of Real Estate made similar claims against Cedar Funding in 2006. Also in violation of the offering circular, the lawsuit says, Cedar Funding placed title to most—if not all—of the fund loans in its own name, not in the name of the fund. “As a consequence there is not a clear record of the investments made by the Fund, and the Fund does not have title to any of its investments.” In addition, the lawsuit alleges that Cedar Funding failed to obtain title and fire insurance for its investments. With construction loans, the lawsuit says Cedar Funding failed to fully fund the loans, “without using an independent escrow for draw disbursements, without preparing a draw schedule, and without obtaining an independent qualified third person to monitor and verify draw requests.” LePage demanded to see the fund’s books and records but has been denied access. “Cedar Funding, Inc. has failed to provide the most basic information about its loan portfolio,” the lawsuit says, “including an identification of loans which are not performing.” The lawsuit requests that the courts appoint a receiver to take charge of the fund. In addition to appointing a receiver, the lawsuit demands that the courts impose a trust and a lien on all properties owned by Nilsen, Accustom Development and Cedar Funding, which were financed by investors money. LePage hopes a receiver can take over and get investors’ money back. “My concern is or all of the people invested in this,” he says. “The focus of my complaint is that the manager of Cedar Funding has committed fraud, they got a Ponzi scheme going and they mismanaged this money.”