Tuesday, February 24, 2009

M&M Fraud Watch: RICO Edition

From Examiner.com

According to a civil lawsuit filed on February 9, commercial titan Marcus & Millichap, its own agents, two of their associates and several subsidiaries of Marcus & Millichap and the associates perpetrated a massive real estate fraud scam against more than a dozen victims beginning in 2004 and continuing until 2008, when the scheme collapsed. Collectively, they are accused
of causing losses that exceed $50 million involving 22 properties.

The associate-defendants are Paul A. Morabito and Jack Waelti. Their “alter ego” shell companies are too numerous to list, but include Eureka Petroleum Inc.; Tibarom LLC; Tibarom NY LLC; Tibarom PA LLC (Morbito’s firms) and QSR Group LLC; QSR Group One LLC; and QSR Group II LLC, aka QSR Group Two LLC.

In a nutshell, attorneys for the victims-plaintiffs claim that the various defendants set up a sophisticated “real estate scam” that began with contacting the owners of Jiffy Lube and Church’s Chicken franchises around the country and offering to purchase both the franchises and the properties. The sold properties were put in the name of shell companies controlled by Morabito or Waelti, which were then “flipped” into Marcus & Millichap subsidiaries such as Sovereign Scranton. Dummy sale/leaseback agreements were then written that inflated both the value of the properties at sale, as well as the leasebacks.

Attorneys for the plaintiffs are accusing the defendants of violating the Racketeer Influenced and Corrupt Organizations Act (“RICO”), negligent misrepresentation, fraudulent concealment, unjust enrichment and imposition of a constructive trust, money had and received, and violation of two sections of California’s Business and Professions Code.

What is more troubling are the consequences of others who were not in on the deal but third party companies indirectly involved in the scam. Here is the follow up article on the role appraisers played in perpetuating the fraud.

Appraisal fraud is just not given the attention it is due. In fact, without an appraiser willing to violate the code of ethics to which licensed appraisers must adhere, a large percentage of real estate fraud crimes would not have been possible.

This highlights the importance of doing your due dilligence and not blindly accepting what the person selling you the asset is promoting.

I work with many appraisers who are always seeking information on rental comps, sales prices etc. We are in the same business of information.

Before you buy commercial real estate you would be wise to hire your own appraiser, especially when prices are changing as drastically as they are.

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