The Securities and Exchange Commission today charged a New Jersey man with operating a Ponzi-like scheme that duped clients into investing more than $2 million in a series of phony real estate investment vehicles.
The SEC alleges that David M. Connolly, 50, of Watchung, N.J., induced investors to buy shares in fake real estate properties he created through his firm Connolly Properties Inc. He promised investors monthly dividends based on cash-flow profits from rental income at the apartment buildings, as well as the growth of their principal from appreciation of the property.
Originally, Connolly did hold real estate investments in New Jersey and Pennsylvania. But these did not produce the projected dividends. He was forced to make Ponzi-like dividend payments to early investors using money secured from new ones. Connolly meanwhile siphoned off at least $2 million in investor funds for his personal use, the complaint says.
"David Connolly presented himself to investors as a successful real estate investment manager with a track record of paying consistent, high returns," said George S. Canellos, the director of the SEC's New York regional office. "In truth, Connolly's operation was essentially a shell game intended to raise additional funds from new or existing investors in order to perpetuate his fraudulent scheme."
The SEC's complaint, filed in federal court in New Jersey, claims that none of Connolly's security offerings in the investment vehicles were registered with the commission as required under the federal securities laws.
The U.S. Attorney's Office for the District of New Jersey, which conducted a parallel investigation, today indicted Connolly on one count of securities fraud, among other criminal charges.
Connolly, who began offering investments in 1996, raised in excess of $50 million from more than 200 investors in more than 25 investment vehicles.
Though he told investors that their funds would be used exclusively for properties related to each particular vehicle, instead Connolly mixed the funds in bank accounts that he controlled and used for a variety of purposes undisclosed to investors, including $2 million in payments he made to himself.
Between 2007 and 2010, Connolly wrote checks to cash in excess of $2.5 million. Even after he stopped making dividend payments to investors in April 2009, he continued to pay himself dividends as well as a $250,000 "salary" out of investor funds.
The SEC alleges that Connolly lacked sufficient revenues from rental income at the apartment buildings he'd purchased originally, so he raised millions of dollars for new investment vehicles. He used the funds to pay purported monthly cash-flow dividends in excess of 10% to investors in older investment vehicles.
Connolly then refinanced properties and used the cash to continue the scheme. It ultimately collapsed in 2009 when new investor funds dried up and the rental income was insufficient to support payments on the mortgages. The properties owned by the investment vehicles were forced into foreclosure, wiping out the equity of the investors.
The SEC is seeking permanent injunctive relief, disgorgement of any ill-gotten gains with prejudgment interest and unspecified financial penalties.