Two New York-based real estate investment funds for German investors serving as absentee landlords have filed a civil racketeering lawsuit against two South Florida companies and three people.
U.S. District Judge Robin Rosenbaum in Fort Lauderdale granted a temporary restraining order Aug. 23 freezing the assets of seven companies in Miami-Dade and Broward and six people, saying the funds “are substantially likely to prevail” on counts brought under the Racketeer Influenced and Corrupt Organizations Act.
It soon became apparent to the court, however, that the lawsuit may have overreached. At the conclusion of a Sept. 3 hearing, Rosenbaum released three companies and Gabriel De Los Reyes from the injunction. He said it appeared the lawsuit was filed to throw up a smokescreen to protect the funds’ managing directors, Andre Hoffman and Michael Pirgmann.
Other defendants insist the allegations are based on false and misleading information.
The funds claim Dale Wood, a Fort Lauderdale-based property manager, and his company, The Whydah Group Inc., have been selling off properties without authorization.
Wood and Whydah allegedly schemed to fraudulently transfer the commercial real estate assets of HPC US FUND 1 LP and HPC US Fund 2 LP. Wood is still under the injunction and has not responded in court.
Wood, Whydah, Wellesley Asset Secured Portfolio Inc. of Fort Lauderdale and its principals, Peter Burgess and Roland Breton, are named as racketeering co-conspirators.
De Los Reyes and his companies are being sued as parties to a constructive trust fraud to deprive property from the rightful owner.
Two HPC funds are in real estate and three in the U.S. secondary life insurance market. Founded in 2002, HPC is based in Hamburg and set up funds in a New York branch office.
HPC’s real estate funds represent the pooled resources of 1,872 German nationals and were supposed to be worth $56.5 million. The funds have not estimated their losses.
In 2002 and 2003, the funds purchased income-producing properties, such as apartment complexes and small shopping centers, said Paul Lopez, a director at the Fort Lauderdale firm of Tripp Scott, which represents the funds.
When the real estate market crashed in 2008, the funds hired Wood to maintain the properties. His role was limited to servicing mortgages and making sure utilities and routine maintenance were kept up, Lopez said.
“Unbeknownst to the trusts, Wood was selling and transferring properties to third parties, many of whom we think were insiders,” Lopez said.
The alleged fraud came to light through Michael Pirgmann of Hamburg, Germany, who had a controlling interest in Blackport Investment Group LLC. Blackport, which Wood also had an interest in, managed the properties.
Pirgmann is a principal in Blackport and an HPC funds managing director. Wood answered to him.
On Aug. 1, Pirgmann questioned a $500,000 payment earmarked for a potential real estate purchases, according to the HPC complaint filed Aug. 22.
When Wood did not repay the money on time, Pirgmann started an investigation and discovered status reports and annual statements provided by Wood were false, the complaint said.
“Wood fraudulently concealed that he had sold certain assets for less than reasonably equivalent value to other defendants and sold other assets to third parties without authorization,” the complaint states.
Wood and his company were not available for comment by deadline and are not represented in the court case.
Properties were sold for a third to half off their market value, Lopez claimed. The investors questioned the fate of 13 of the 40 properties they own in 18 states and suspect others may be in jeopardy.
Several Florida properties are listed. These include Commodore Plaza at 3162 Commodore Plaza in Miami; Jaramillo Apartments II at 946 SW Fourth St. in Miami; an undisclosed 29-unit townhouse community in Fort Lauderdale; and an 11.4-acre undeveloped tract in Kissimmee.
The complaint alleges all defendants knew or should have known their transactions with Wood were improper.
During April and May, Wood prepared a deed on a mobile home park in Anchorage, Alaska, to sell the property to Wellesley for $51,000, a price the complaint states “is far below the approximate actual value.”
Two weeks after Wood signed an unauthorized “corrective special warranty deed,” Wellesley turned around and sold the property to another company.
“According to a wire transfer document from the title company involved, Wellesley received approximately $850,460 in return for the property,” the complaint alleges.
Thomas Sclafani, an attorney for Wellesley, Burgess and Breton, told the court the accusations are “premised on utterly false and misleading information.” He insisted the Wellesley parties were innocent purchasers and, as far as they knew, sales took place with the approval of the investors.
On the Anchorage property, Sclafani of Sclafani & Associates in Fort Lauderdale said Wood came to Wellesley for the $51,000 to pay delinquent property taxes because the property was about to be sold by the state. A warranty deed was executed as a temporary measure to collateralize the loan.
“Shortly thereafter, Wood agreed to sell a 90 percent interest in the mobile home park to Wellesley in exchange for the forgiveness of about $780,000 in debt” that the HPC funds’ property management company, Blackport, owed Wellesley, Sclafani added.
De Los Reyes’ company is De Los Reyes Properties LLC. Because of his transactions with HPC, he created Atlantic City Properties LLC and Tribeca 56 Walker LLC, which were named as co-defendants. De Los Reyes is represented by solo practitioner William J. Brown of Miami, who said the judge released De Los Reyes and his companies from the injunction after a seven-hour hearing.
De Los Reyes testified and submitted an affidavit from Volker Land, a German attorney with White & Case in Hamburg.
Land said De Los Reyes hired White & Case to conduct due diligence on the acquisition of HPC Capital GmgH, which was comprised of two real estate funds and three insurance funds.
“It became apparent that it made little or no sense for our clients to acquire HPC or that we could reach agreeable terms to do so,” Land stated.
De Los Reyes said he looked into the purchase after he was approached by HPC, and he was interested because the management fees were substantial. But after spending $300,000 on due diligence, De Los Reyes said White & Case advised not to go forward for several reasons.
Two of the funds had collapsed, investors had sued in other litigation, and De Los Reyes could not find an underwriter. Finally, De Los Reyes was concerned that most of the properties were in trouble.
“They owed back taxes, insurance, attorneys’ fees, they had liens, all sorts of things,” De Los Reyes said.
Negotiations were reduced to consideration of individual properties. The HPC lawsuit alleged wrongdoing by De Los Reyes on the purchase of a few properties. But HPC parties were hardly unsophisticated investors, he said.
HPC alleges De Los Reyes acquired four lots in Atlantic City with Wood’s help and without their knowledge. De Los Reyes said he wired $475,000 to HPC to acquire the properties because HPC was about to lose them.
MB Financial Bank then advised Brown that his client, De Los Reyes, was being sued because the bank never got the money.
“Fortunately, I had proof that I wired the money to HPC special acquisitions account,” De Los Reyes said. “In my opinion, I think the Germans are trying to put up a smokescreen, so they can blame somebody because those funds are coming to an end.”
Although Rosenbaum lifted the injunction on De Los Reyes, Lopez said he expects him to remain in the lawsuit.
The injunction remains in place against “the core RICO defendant, Wellesley, which was very significant to us,” Lopez said.
The remaining defendants include Rite Timing Services Corp. in Miami, the Pan American Fund LLC in Broward and Tim Suazo and Thomas Mayer, both of Miami. They are not yet represented by counsel.