The Anatomy of a Fraud

For those of you that follow the postings on our website because you are a victim of the Real Estate Fraud Scheme committed of Mr. Ken Plein, the headline, “EARN 9% RETURN ON REAL ESTATE SECURED INVESTMENT,” brings back many unpleasant memories. My purpose for posting this title was not to remind those that we represent of how they were defrauded, but rather to warn our other clients/readers that there are many Ken Pleins still out there offering returns on investments that seem plausible, but may in fact be “Ponzi Schemes” in the making.

In the past few months, I have become aware of several other real estate secured “investments” that are being offered to friends or clients. They may be legitimate investments, but then again, they may be the type of financial crime that bilks Americans out of billions of dollars of their savings every year. Sometimes these schemes are outright frauds where unsupportable rates of return (such as the 9% offered in the title) are promised to investors that may be making 2% or less in their bank savings account. Initially, a small investment is made, and once the investor’s confidence is obtained, the investor places much larger amounts into the fund. He soon is telling his friends and relatives how well he is doing and they become the next victims. The crook does nothing more than pay the high rate of return for a period of time while raking in more and more investment dollars. In some cases, some investment is made to create the appearance of legitimacy. In a pure “Ponzi Scheme” there never is an underlying “asset”, and the only money generated is from the constant flow of new dollars. At some point the perpetrator has siphoned off 80-90% of the principal, often spending it on a luxurious lifestyle, and leaves the investors with no assets while he flees town or files Bankruptcy.

Other “schemes” may start off as legitimate investments, but when economic conditions turn negative, they can no longer sustain promised returns. In the Plein case, the original investors were promised better than average returns secured by first liens on real estate. Mr. Plein, knowledgeable of the local real estate market, would look for undervalued properties, those that needed “cosmetic” repairs that could be fixed up and “flipped” for a nice profit. With real estate annual appreciation hitting 20% a year, paying 9% was easy and profitable for both Mr. Plein and the investor. And with the rate banks were paying on savings and money market accounts dropping to historic lows, Mr. Plein was receiving more investment dollars than he had properties to invest in. Although he was still telling investors that their investments were secured by “First Deeds of Trust”, i.e., mortgages, he no longer was recording those liens, and for those that were recorded, there were often several recorded liens against the same property. He began to “ascribe” specific loans to specific properties, telling investors that the funds they deposited with him were going to be secured by a certain property. Many of the investors assumed they were the only investor in that property, or that they at least were in first position. In one case, he listed at least seventeen different investments, all allegedly secured by the same property. In his records he overvalued properties by 100% or more, giving the appearance that all the investor money was secured by the value of the real estate.

In 2006, when real estate valuations took a sudden turn for the worse, Mr. Plein should have stopped paying unsustainable rates of interest and certainly should not have accepted new investment money for which he continued to promise 9% annual interest. By that time he had established himself as a “trusted” investment manager, and the money flowed to him, even if he didn’t ask for it (although he often did). When Bernie Maddof, America’s most notrious Ponzi scheme thief was in his heyday, millionaires used to beg him to please take and invest their money! Like a mini-Maddof, Plein now found a river of money flowing toward him. The problem was, with real estate prices having reversed course and suddenly dropping, he no longer had the ability to pay the promised returns to the existing investors. So now he sought more and more funds, bragging how lower real estate prices meant better buying opportunities for him and his investors to make even more money! Eventually he knew the walls would come crashing down, and rather than being honest with his investors, many of whom considered him a family friend by now, he took what was left and bought homes for himself and family members and grabbed whatever money he could to keep his scheme alive, even though not a dime of the money in the end was ever “invested” in any property. He may not have started out as a fraud, but he certainly ended up that way!

The lesson for those readers that have not lived this nightmare, is be very careful with your investment dollars. The old saying risk equals return may be true, but when you risk your investment with a con artist, your return will ultimately be zero! There are many “investment funds” operating in the Valley now that offer real estate investments that are buying distressed properties at foreclosure sales or from banks, fixing the properties up, and selling them, just like Mr. Plein started out over a decade ago. If you choose to invest in a fund that is making such investments, ask for a list of the properties that they have purchased and a financial statement showing their assets and liabilities. Consider driving by the properties if they are within your area. Find out the names of the principals involved in the fund, and “google” their names (if you don’t know how to do this ask your grandchild to do it) to see if there are any negative stories about them on the internet. If they tell you that the information is confidential, be careful. If the investment appears legitimate, have an exit plan as to when you plan to cash-out your investment. The promised or expected return on many of these funds is likely unsustainable in the long term, and your investment may be tied to present value, which means when you cash out you may be doing so for pennies on a dollar. What are the profits being made by the principals compared to the investors. Many of these funds are like a timeshare, where the profits are taken off the top by those selling the investment, and after all the shares are sold, the property begins to deteriorate rapidly in value. If after conducting all of your research you still feel this is the type of investment you wish to make, call me first, because I have a friend that has a great deal on Oceanfront Property in Arizona! (apologies to George Strait).


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