The U.S. Securities and Exchange Commission has sued Walter Ng of Lafayette and his business partners over a multimillion-dollar fraud, saying they failed to inform investors of the erosion of their real estate funds in 2007 and 2008.
The suit, filed Thursday in U.S. District Court, bolsters a class action suit against Ng and co-defendants, alleging one of the largest frauds in California history.
Walter Ng and co-defendants Kelly W. Ng, 56, of Orinda (Walter's son) and Bruce A. Horwitz, 75, an Orinda pediatrician, exercised their Fifth Amendment protection against self-incrimination. The SEC says the defendants refused to answer SEC questions about the management of R.E. Loans and MF08 (Mortgage Fund '08).
The suit by SEC lawyer Erin E. Schneider (see PDF attached to this file) seeks to enjoin the defendants from future violations of securities laws. "It also seeks an order requiring all defendants to disgorge ill-gotten gains with prejudgment interest and to pay civil monetary penalties," the complaint states.
Ed Swanson, an attorney for Ng, had no comment on the lawsuit, Bloomberg News reported.
"In 2002, Walter Ng and Horwitz formed R.E. Loans. Its business was to make initial, high interest rate loans to real estate projects and developers who would repay them when more traditional lenders refinanced the projects," the SEC complaint states. The loans were touted as being liquid — R.E. Loans "told investors they could get back money whenever they wanted."
From 2002 through 2006, the Ngs and Horwitz raised hundreds of millions of dollars from thousands of investors.
A 2011 class action lawsuit filed in connection with that case alleged that Walter Ng, his sons Barney and Kelly Ng, and Dr. Bruce Horwitz committed a massive fraud -- purported to be among the biggest if not the biggest in state history -- while managing R.E. Loans, B-4 Partners, Mortgage Fund ’08 and Bar-K, Inc. from a less-than-impressive office on Lafayette Circle in Lafayette.
The SEC complaint gives credence to the class action complaint allegations, said Richard Brown, an Alamo lawyer for the plaintiffs in the class action. "We understand the FBI and Justice Department still have their own active investigation which has been ongoing over the last year," said Brown.
Other narrative from the SEC complaint:
"In 2007, however, R.E. Loans began to experience significant cash flow problems and the Ngs and Horwitz for the first time were unable to make distributions to their investors. Rather than tell investors about R.E. Loans' precarious financial condition, Walter Ng and Kelly Ng in late 2007 decided to form a new real estate fund, Mortgage Fund '08 (MF'08), LLC, to raise investor money to prop up R.E. Loans."
They pitched it as a "new, conservative investment vehicle … In reality it was a vehicle to prop up R.E. Loans and make it appear profitable." The defendants did not disclose to MF08 investors tens of millions in dollars of unsecured loans to RE. Loans.
In 2008, both R.E. Loans and MF08 "experienced dramatic and significant loan delinquencies" without informing investors, who "continued to pour money into MF08 well into 2009." Ultimately both R.E. Loans and MF08 filed for bankruptcy.
The percentage of R.E. Loans' loans that were either delinquent or in default increased from 19 percent in January 2008 to 48 percent in August 2008, the SEC stated. Despite "disintegrating loan portfolios," the Ngs and Horwitz continued to solicit investors with assurances that funds were performing well, saying "MF08 was ideal for people who wanted retirement income and high earnings."