Some investors irked on handling of Marin County Ponzi claims

A $436.5 million portfolio sale of North Bay real estate involved in a Novato investment company’s sizable Ponzi scheme is expected to wrap around the end of this year.

San Francisco-based real estate investment company Hamilton Zanze & Associates in early November was confirmed as the buyer of five dozen multifamily and commercial properties in Marin and Sonoma counties that were part of the late Ken Casey’s Professional Financial Investors, or PFI, and Professional Investors Security Fund.

A virtual court hearing before Judge Hannah Blumenstiel is set for Thursday to hash out fees for professionals involved in the process so far, work through how investor claims will be handled and review proposed additional sales of individual real estate properties.

Casey’s death in May 2020 led to private and Securities & Exchange Commission audits that found about $330 million had been skimmed from around 1,300 investors going back as far as the beginning of 2007. The businesses were forced in Chapter 11 reorganization in mid-2020.

Of the investors, 566 were deemed “net winners” of the Ponzi scheme under court rules, with aggregate net “winnings” of $41.2 million, according to an analysis by FTI Consulting, a restructuring and forensics firm hired to analyze claims and handle the selling off of assets.

“In many cases, these investments provided Investors with a stream of income purporting to be interest payments but which in reality were payments from subsequent principal investments made by other victims of the Debtors’ fraud in furtherance of the Ponzi scheme and therefore potentially avoidable as ‘actual’ fraudulent transfers,” wrote attorneys representing PFI and the unsecured creditors committee in the mid-August filing that mentioned the FTI findings.

One part of the bankruptcy court process involves possible recouping of a portion of the money paid out from the insolvent entity through determination called a “clawback.”

Some of the investors involved told the Business Journal they are frustrated with how the process of unwinding PFI and its dealings to pay creditors, including investors, has been handled.

Lani Jacobson said she expected to have a netted claim of about 50% of the $800,000 she put into three PFI limited-liability companies for as many properties starting in 2009.

“I was in private money lending so 6% wasn’t exorbitant,” she said about the return she was promised. After buying in with a first lien, she went in for another two years after the original one had been paying out consistently.

She later found out that PFI had structured such liens in such a way to set up the organization up as trustees, and because the liens weren’t properly perfected, Jacobson joined the pool of unsecured creditors.

Jacobson said she was advised to push the creditors for receivership rather than Chapter 11, because of the professional fees for the latter process could be reach into the millions of dollars.

Fees the court has approved so far to be paid out when the PFI estate is finally settled totals $22.4 million as of the latest monthly report, with half that from FTI, filed Dec. 6. The creditors have been told that fees at the end might be nearly double that.

The SEC has lodged several objections with the court to the level of fees, starting in September 2020 and the most recent filed Dec. 2. Agency attorney David Baddley asserted that what’s being charged in this case is different from similar actions.

“In other fraud cases, where this is a substantial public service interest because of the number and nature of the victims involved, it is common for fiduciaries and other estate professionals to substantially discount their standard rates, often by more than 30% or 40%,” wrote agency attorney David Baddley, who is based in Atlanta. “The discounts are given in recognition of the fact that every dollar saved in the cost of the professional fees adds one more dollar to the victims’ recovery.”

The first agreement to bring fees in line with court direction was reached in October 2020. The agency declined to answer questions from the Business Journal about the level of fees and other actions the regulators may take, citing a policy of not commenting on cases beyond court filings.

Those working with the investor-creditors have offered monthly virtual meetings, but some investors want more transparency and think that their questions have been squelched.

“It is more about managing complaints than controlling the costs,” Jacobson said.

Debra Grassgreen, an attorney with San Francisco, Pachulski Stang Ziehl & Jones, which represents the Official Committee of Unsecured Creditors, commonly referred to as UCC, declined to comment, saying that updates would be provided in court Thursday.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.