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Couple sues firm for alleged Ponzi scheme

Investment-management firm used new investors’ money to cover losses of earlier investors, Newport Beach couple claims.

August 06, 2008|By Joseph Serna

Newport Beach-based MKA Capital Group Advisors LLC has been running a Ponzi scheme on its investors, according to a Newport Beach couple suing the company.

According to the lawsuit, filed in Orange County Superior Court July 28, MKA Capital Group, a real estate investment-management firm worth between $400 million and $500 million, has been using new investors’ money to cover losses suffered by the group’s “Opportunity Fund” investors. The Opportunity Fund is a fund created to make loans to real estate developers in hopes of turning a profit.

When Newport Beach couple John and Cynthia Gates invested $3 million into the Opportunity Fund in July 2007 they say they were promised a 12% annual profit on that investment and that there was virtually no risk of losing money, their attorney Gary Steinberg said. Instead, for whatever reason, their money was used to cover losses earlier investors had suffered, the lawsuit claims.

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“No one in their right mind would make such a guarantee,” said Dan White, general counsel for MKA Capital Group.

The Opportunity Fund is broken up into first, second, third and fourth trust deed investments, Steinberg said. For example, if a construction company needs a $30-million loan to develop a property, a group of investors from the Opportunity Fund will loan that money. Those investors are first trust deed investors. If the construction company needs more money, second investors are tapped, then third, and so forth. If and when the property turns a profit, the money is reimbursed in the order it was invested, so first, then second, etc.

When a company defaults on its loans, as the Gates family claims in the lawsuit though it was guaranteed it wouldn’t, any salvageable money is reimbursed to the first investors with any leftovers going to the second, then third, and so forth.

What MKA Capital Group did, the lawsuit claims, is take the Gateses’ second and third deed loan money and gave it to the first investors to cover that group’s losses. That way the fund stayed open. When you take money from Peter to pay Paul, it’s commonly called a Ponzi scheme. There is no record of criminal charges being filed against MKA Capital Group.

Steinberg said he doesn’t think MKA Capital Group intended to do a so-called Ponzi scheme when the company accepted the Gateses’ money. Rather, the group was trying to recover from bad investments, Steinberg said.

“I don’t think this is any kind of plan or scheme to do everything different,” Steinberg said. “But, it appears that certain representations were made at the front end of these investments that may not have been true and were materially false and caused a person to make these investments.”

The lawsuit also alleges the firm would not turn over documents the Gateses’ are legally entitled to view, and that a second company, Westmoore Securities Inc., violated its contract with the Gateses by recommending they invest with MKA Capital Group even though they were not looking for a high-risk, high-yield fund. MKA Capital Group will likely submit a reply to the lawsuit in the coming weeks, White said.


JOSEPH SERNA may be reached at (714) 966-4619 or at joseph.serna@latimes.com.

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