Elderly Lafayette businessman Walter Ng, his son Kelly Ng of Orinda and a business partner, former pediatrician Bruce Horwitz, also of Orinda, were sued recently by the U.S. Securities and Exchange Commission over securities fraud and embezzlement.
The complaint, filed on Feb. 28 in U.S. District Court, alleges that the assets from a second real estate fund, Mortgage Fund '08 (MF08) were used to prop up an earlier, rapidly-imploding fund called R.E. Loans. The suit claims that the trio lured unwitting investors to MF08 with assurances of success and exceptional performance. "In reality R.E.Loans could no longer make payouts to its investors, so the Ngs funneled millions of dollars from MF08 to R.E.Loans," according to the SEC. In total $85 million was raised over a period of a year and a half for MF08, with an astonishing $700 million raised for R.E.Loans. Many prominent Lamorinda residents were unfortunately duped into investing with the Ngs and Horwitz.
"As fund managers, the Ngs had a fiduciary obligation to put MF08's interests ahead of their own," said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division's Asset Management Unit. "Instead, the Ngs cannibalized one fund in a futile effort to keep another fund afloat while giving investors the illusion that both funds were profitable." This was at the same time as the real estate market was collapsing; by June of 2008, 74 percent of the MF08 was either delinquent or in default, alleges the complaint.
"Sadly, this is another case where the collapse of the real estate market was compounded by unscrupulous fund managers," said Marc Fagel, director of the SEC's regional office in San Francisco. "Rather than come clean with investors, these individuals continued to raise millions of dollars and conceal the failing performance of their real estate holdings."
When the original fund was established in 2002, R.E.Loans was successful, enabling investors to get cash out as needed - however in 2007 the fund had "cash flow difficulties" that slowed distributions, according to the suit. "MF08's Offering Materials told investors it would invest in commercial loans secured by deeds of trust. Beginning in December 2007, MF08 investors received promissory notes with five or six year terms that guaranteed at least 8% interest per year payable on a quarterly basis," explain attorneys for the SEC in the complaint.
At this point both R.E.Loans and MF08 have filed for bankruptcy - it is unlikely investors can recoup their losses. Now 83, Walter Ng filed for personal bankruptcy protection in 2011; when questioned by the SEC he used his Fifth Amendment right to not self-incriminate.
Kelly Ng, 56,worked as a managing member of the Mortgage Fund, which was the investment advisor to MF08. He also used his Fifth Amendment right when questioned by the SEC. Same for Bruce Horwitz, who had served as a managing member of B-4 Partners, which managed R.E. Loans.
An initial class action lawsuit was filed on Aug. 31, 2011 by victims of the alleged fraud, followed by a second class action, Mendes v. B-4 Partners, LLC, and a third, related class action, Nolan v. Wells Fargo Capital Finance, Inc. In March of 2012, all three matters were consolidated for pre-trial purposes, the lawsuit is now called "Second Consolidated and Amended Complaint." It is pending in California Superior Court in Alameda County and seeks recovery on behalf of over 1,400 people who invested in R.E. Loans and over 600 who invest in MF08.
Ed Swanson, attorney for Walter Ng, did not respond when asked to comment on any of the issues surrounding Ng's former businesses that were headquartered on Lafayette Circle.
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Lamorinda Weekly, Moraga CA