Real estate investor bankruptcy hearing raises allegation of a Ponzi scheme

More questions than answers arose Tuesday during the U.S. Trustee’s proceedings examining the financial activities of Ken Casey, who died in May leading to investor inquiries and a U.S Securities and Exchange Commission investigation.

Some investor questions zeroed in on why company officials continued to be paid even after the financial structure of the company began to unravel.

Attorneys, accountants and debtors are sorting through scores of binders of financial data and now testimony relative to filings in U.S. Bankruptcy Court in San Francisco. The Chapter 11 filings were announced July 27.

The legal and accounting firms were brought into the process when Casey’s estate was under review, which involved his enterprises — Professional Financial Investors and Professional Investors Security Fund. The firms occupied eight of nine suites at an office building located at the 350 Ignacio Blvd.

Before succumbing to a heart attack, the Marin County man oversaw an operation that grossed $12.6 million in revenue last year and involved 600,000 square feet of commercial space and almost 900 apartment units. The properties have been valued at $555 million.

Details revealed in the data led to an ongoing investigation by the U.S. Securities Exchange Commission and an accounting probe focused on practices, which have collectively been referred to as a “significant, massive fraud,” Sheppard, Mullin, Richter & Hampton attorney Ori Katz, the debtors’ counsel, said on the conference call. “This case has many of the hallmarks of a Ponzi scheme.”

A June 28 letter to investors from the law firm handling the matter warned interest payments could not be funded without new investment. Still, securing new investment would have provided new grounds of “misconduct.” Ponzi schemes follow a “rob-Peter-to-pay-Paul” process that often leads to a collapse that resembles a house of cards, as new investors must be gotten to keep payments going to other investors the letter concluded.

Officials from the trustee’s office grilled Katz and Michael Hogan, a San Ramon accountant with Armanino LLP, who was brought on board to assist Eric Sternberger, an attorney with Ragghianti Freitas of San Rafael. The two men are working with a newly appointed PFI director, Michael Goldberg, on deciphering through the companies’ legal obligations in respect to Casey’s holdings. He replaces Casey’s widow, Charlene Albanese, who as executive director made $11,000 every two weeks, despite some involved with the proceedings not knowing what she was doing for that salary, Hogan indicated.

The boards have dissolved, and company executives in the upper echelons of management have left — including broker and Chief Financial Officer Manuel Romero and real estate investor Lewis Wallach as president. With his wife Cynthia Harrison Wallach, Wallach bought the late entertainer Judy Garland’s landmark Malibu beach house for $3.54 million in 2018, the Los Angeles Times reported.

In addition, more questions arose over how much money in accounts receivable was deemed overdue rent by tenants. It was determined that $92,000 of the $138,000 due would be “uncollectible and doubtful” since the “tenants were no longer on the property,” noted Hogan, who now represents the sole chief restructuring officer as of June 13.

Assets and liabilities were laid out in general during the course of the call, declaring vehicles, paintings, office furniture and 54 annuity insurance policies have been assessed.

According to Dun & Bradstreet, PFI started in 1998 and grew over time with a slate of real estate brokers and 41 employees.

With one investor asking about the timeline of any resolution, the hearing’s testimony showed the proceedings and full scope of the questionable practices are far from over.

Katz noted that much of the timeline for a resolution depends on the extent of claims pouring in by creditors, who represent a person or entity holding a claim against a debtor — a person or institution that owes a sum of money.

“Many (of these claims) can be pursued in bankruptcy court in the interest of the debtors,” Katz said, adding the culpability of other company and bank officers remains to be determined.