A New York fund manager and his firm, Activated Capital LLC, has been charged by the SEC with a "Ponzi-like" securities fraud in connection with opportunity zone investments, according to an agency civil lawsuit.
The SEC is seeks a jury trial followed by a permanent ban for Joshua Burrell, 38, of New York City and Activated, disgorgement of gains with pre-judgment interest, and civil monetary penalties to be determined later, the filing stated. Burrell did not return a call for comment by press time.
The SEC noted in its complaint that Burrell asserted his Fifth Amendment privilege against self-incrimination during the investigation that preceded the filing of charges.
Burrell, who was a registered representative at a registered broker-dealer from 2016 to 2017, founded Activated in January 2019 and immediately set out to raise money from outside investors in his private investment funds, according to the SEC. By February of this year, Activated raised about $6.3 million for two funds from 14 investors, at least $100,000 of which Burrell diverted to his personal bank account, the filing said.
In the funds’ operating documents, Activated purported that money raised would be used to make investments in opportunity zones, which are economically distressed communities for which new investments are eligible for preferential tax treatment under the Tax Cuts and Jobs Act of 2017, the SEC said.
“Through this program, investors who have capital gains through the sale of an asset like stock or real estate can receive tax benefits if that gain is rolled into an opportunity zone within a certain time,” the filing stated. “The offering materials represented that the properties would be purchased in the name of the funds in which investors had invested and that distributions to investors would come from income from the real estate.”
Instead, Burrell and Activated used investor money to buy properties in the name of other Activated entities, the filing said. From January to March 2020, for example, one of the funds spent $1.7 million of investor money to buy 13 properties in Chester County, Pa., for Activated Fund Holdings LLC.
“After misappropriating investor assets to purchase the properties, Burrell then used the properties as collateral to obtain bank loans,” the SEC said, adding that in December 2020, Burrell took out a loan of more than $1 million on behalf of Activated Fund Holdings and used $218,000 of that money to pay investors “distributions,” and another $108,000 to cover a redemption.
In what the SEC described as “Ponzi-like conduct,” the distributed returns were described by Activated as distributions based on income generated from the investments in the real estate properties. Between October 2019 and February 2021, about $472,000 was distributed by Activated under this guise, and yet the properties had made only $210,000, according to the filing. The shortfall was made up by using other investors’ money and the bank loans, the filing stated.
In addition, the SEC also charged Burrell with creating offering and marketing materials that said that the fund would have an outside custodian and that the Activated principals had made significant investments into the fund, neither of which was true. Burrell also misappropriated about $100,000 of investor funds, including $56,000 which he falsely characterized first as “expense reimbursements” and then as "property improvement" expenses when asked for more detail by Activated’s accountant, according to the filing.