Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, March 2, 2009

SEC Charges Retirement Home Operator with Fraud

The SEC filed a complaint charging Oregon-based Sunwest Management Inc., with securities fraud and is seeking an emergency court order freezing its assets. The SEC alleges that Sunwest, which operates hundreds of retirement homes across the United States, lied to investors about its operations and concealed the risks of the investments, exposing investors to massive losses when the economic downturn triggered Sunwest's collapse.  According to the SEC's complaint, Sunwest raised at least $300 million from more than 1,300 investors nationwide by promising a steady income stream and touting its success in running the properties. The complaint, filed today in federal district court in Eugene, Ore., charges Sunwest, its former President and CEO Jon M. Harder of Salem, Ore., and several related entities with securities fraud. According to the complaint, Sunwest, which operates more than 200 retirement homes at one point valued at $2 billion, told investors that they would be investing in a particular property. Investors were told that the property would generate sufficient profits to pay annual returns of around 10 percent, and that Sunwest had a track record of never missing a payment. Between 2006 and 2008, Sunwest raised more than $300 million from investors, which was used for the down payments on approximately 100 retirement homes, with the balance financed by institutional lenders and banks.

The SEC alleges that at least half of the properties had lost money, and Sunwest concealed this information from investors by commingling all of its finances and making investor payments from this pot of cash. The SEC further alleges that investor returns came not just from these commingled assets, but from mortgage refinancings as well as loans from Harder. According to the SEC's complaint, Sunwest concealed its precarious financial position and the risks it posed to investors by failing to disclose that Sunwest was being run as a single massive enterprise with its fortunes tied to the success of hundreds of properties and contingent on future financing ability. When the recent credit crisis derailed Sunwest's ability to continue to refinance the properties, payments to investors ceased and many of them stood to lose their entire investments.

The SEC further alleges that, even after Sunwest encountered difficulties refinancing properties and lenders began foreclosing, the defendants continued raising money from investors. Sunwest obtained millions more in investments up through June 2008, continuing to misrepresent that the money was designated for a specific property when, according to the SEC, it was being used to prop up the failing business.

The Commission's complaint additionally seeks disgorgement from a number of Relief Defendants who may have received proceeds related to the misconduct of the Defendants. The Commission therefore seeks an order temporarily freezing the assets of Sunwest Chief Operating Officer Darryl E. Fisher, General Counsel J. Wallace Gutzler, and Chief Restructuring Officer Hamstreet & Associates and its principal Clyde Hamstreet, as well as Harder's wife and several entities Harder controls.

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