Reported in the Sacramento Bee by Nathaniel Miller is the issuance of criminal complaints against five people related to Diversified Management Consultants, Inc. for running a Ponzi scheme (Ponzi is capitalized because it is named after the first such schemer). This author, as I am sure other regional attorneys and victims, have been expecting this result.
First off, a Ponzi scheme is when you promise Mr. A huge returns on an investment. You then find Miss B, promise a huge return, and when Ms. B makes an investment, you use her cash to pay the interest or profit to Mr. A. It requires continually recruiting new money to keep paying off new investors in the Ponzi scheme.
In this case I know of two techniques these defendants made to clients- paying high rates of interest for loans supposedly secured by real estate, and shares of stock in corporations with supposed interests in real estate. These claims where made in a time of high real estate appreciation and speculation.
Here is one way they made the promise. In exchange for the loan they would give a promissory note which claims :
“This note is secured by the following described Security Agreement and Schedule A attached. This Security Agreement, which is signed by [ABC limited partnership or other entity], gives a security interest in all corporate assets, currently owned or to be owned of XYZ Capital Group, Inc.”
But, when you look at the Security Agreement, in reality there is no security. It states that it grants a security interest:
“in all assets of ABC limited partnership (as described in Schedule A attached) It is understood that the real assets of ABC LP are in a continuous state of flux in that they are being acquired and liquidated as the market provides opportunities.”
Schedule A was a list of property addresses, to give the victim/lender the confidence that they had an interest in real estate.
Huh? This security interest is essentially unenforceable. Here is where an experienced Sacramento real estate lawyer could have helped. To perfect a security interest in real property, you need a notarized recordable document (a mortgage or deed of trust) which describes the property. You would then have the ability to foreclose; obtain title to the property subject to any liens recorded before your deed of trust was recorded. Here, there is nothing the lender can do other then watch the money disappear.