"Lies, Damnable Lies" and Marketing: MG Capital tells a marketing whopper on Real Crowd
Updated: 3 days ago
The impossible claim that investor capital is "fully protected from loss" has not yet been removed by the sponsor or the platform.
Original article was posted in late 2017. Fraud confirmation by the SEC and state of New York were added in 2022. The news about the shut-down of the RealCrowd portal was added in 2023.
(Usual disclaimer: I'm just an investor expressing my personal opinion and am not an attorney, accountant nor your financial advisor. Consult your own financial professionals before making any financial decisions. Code of Ethics: To remove conflicts of interest that are rife on other sites, I/we do not accept ANY money from outside sponsors or platforms for ANYTHING. This includes but is not limited to: no money for postings, nor reviews, nor advertising, nor affiliate leads etc. Nor do I/we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members. Info may contains errors so use at your own risk. See Code of Ethics for more info.) This recent investment from MG capital, claims something remarkable. In it's first key point, it proclaims that "investor's net capital is fully protected from loss".
When I saw this, I thought: "Really?" As far as I know, the entire world of finance hasn't been able to pull off an investment where "capital is fully protected from loss". (And that goes for both modern and ancient times). The safest investment in existence today, the U.S. Treasury bond (backed by the most powerful government and the strongest economy on the planet) isn't "fully protected from loss". But this is?
I looked further. Trillions of dollars have poured into the U.S. Treasury bond because of the safety it provides. If MG's investment is really "fully protected from loss" it must have even more than that rolling in. I found it interesting that they apparently have been unsuccessful in raising even a mere $25 million in over 2 weeks.
I kept looking. The U.S. Treasury bond yields a skimpy 0.96% return because investors are willing to accept a brutally low yield for the safety it provides. (That's actually a negative -1.04 return after 2% inflation...that's how valuable a close to risk-free investment is). So surely this completely risk-free "fully protected from loss" investment would have to yield even less. Would it be 0.5%? A negative nominal return? I found it even more interesting that it is projected to return 20% IRR.
In my experience, there's no such thing on the planet as an investment "fully protected from loss". And in my opinion, any 20% IRR real-estate investment claiming to do so (in the often overpriced and fading markets of Manhattan, no less) is ludicrous, irresponsible and blatantly fraudulent.
What do the Fed's say?
The U.S. Securities and Exchange Commission (or SEC which is the regulatory agency that oversees investments) agrees. Under it's "Watch Out for Ponzi Schemes" investor alert, it says:
Guaranteed High Investment Returns. Promises of high investment returns – often accompanied by a guarantee of little or no risk – is a classic sign of a Ponzi scheme. Every investment has risk, and the potential for high returns usually comes with high risk. If it sounds too good to be true, it probably is.
And here's what it has to say about one of the typical patterns of financial fraud:
"Investors purchase...enticed by the promise of a high ... return – up to fifteen or twenty percent – with a very low level of risk....seller may falsely claim that they're "guaranteed" or insured. And few investors ask tough questions about these investments."
The Lights Come On But No One Scatters
When I first saw this claim a few weeks ago, I brought it to the attention of RealCrowd. RealCrowd has a very informative podcast, and in it they've claimed that they do rigorous due diligence on sponsors. And investors have had good experiences with them. So I assumed that MG's claim was a due diligence oversight, and thought for sure RealCrowd would just apologize and immediately remove it.
I was both surprised and disappointed when they didn't. Instead several emails were exchanged back and forth. Eventually, I was told that the wording was going to be changed. I followed up today and found it was changed from "100% protected from loss" to "fully protected from loss". In my opinion, there's little to no meaningful difference, it's still a blatantly fraudulent claim.
RealCrowd has so many incredible features including good volume and diversity of investments. And yet, in this case I believe they have done investors a huge disservice, by choosing to look the other way. If this claim isn't enough to fail platform due diligence, then what is? As a result of the questions this raises, their ranking is being downgraded from #2 to 5.
What happens next?
I reached out again to RealCrowd and asked them to again take this down. If they do so, or wish to respond, I will update this article.
UPDATE #1: Real Crowd refuses to fully remove the claim of the guaranteed return
September 27, 2017: RealCrowd has responded and said, " The language has been removed from the offering page but will remain in the FAQ's and offering materials as written." In my opinion, this is very disappointing.
UPDATE #2: SEC says investors were defrauded millions by this fund and manger has been jailed
March 15, 2022: This SEC says investors were defrauded millions of dollars from this fund and the manager has been jailed.
SEC Obtains Final Judgment Against Real Estate Fund Manager and Its Founder Who Fabricated Track Record and Misappropriated Millions from Investors The Securities and Exchange Commission announced today the entry of final consent judgments on March 14, 2022 against fund manager Eric C. Malley and his company, MG Capital Management L.P., who, along with two related entities Malley controlled, have agreed to pay over $12 million to resolve charges related to defrauding investors in two real estate funds managed by MG Capital. The SEC's complaint, filed on January 12, 2021 in the Southern District of New York, alleged that beginning in 2014, Malley - a licensed real estate broker with no investment management experience - and MG Capital solicited investments in two real estate funds, MG Capital Management Residential Funds III and IV, respectively, raising a total of $58 million primarily on the strength of a fabricated investment track record. The complaint alleged that, in marketing Funds III and IV, Malley and MG Capital falsely claimed that they had previously managed two highly-successful real estate funds with a combined portfolio value of $1.18 billion that had significantly outperformed the S&P 500 Index over a ten-year period when, in fact, those prior funds never existed. As alleged, Malley and MG Capital made numerous other misrepresentations in their marketing materials and offering documents, including claiming that investors' capital was "100% protected from loss" and secured by a non-existent $250 million balance sheet and that they had partnerships with hundreds of prospective tenants with pre-signed, multi-year lease agreements. Further, the complaint alleged that Malley and MG Capital misappropriated millions in investor assets while using falsified financial reports to conceal huge losses that ultimately forced the two funds into wind-down. Finally, as alleged in the complaint, some of the misappropriated assets were paid to two related entities controlled by Malley, MG Capital Realty Management LLC and MG GP III LP, both of which were named as Relief Defendants. Malley and MG Capital consented to the entry of final judgments permanently enjoining them from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering Malley to pay a total of $11,348,226 in disgorgement and $816,423.41 in prejudgment interest, portions of which were to be paid on a joint and several basis with MG Capital and/or the Relief Defendants. Those payments are deemed satisfied by Malley's guilty plea in a related criminal matter, pursuant to which Malley was sentenced to 60 months imprisonment and ordered to pay $33,249,822.12 of restitution to the victims of the fraud and to forfeit an additional $5,625,747.45 in ill-gotten gains. The SEC's investigation was conducted by Celeste A. Chase, Derek M. Schoenmann, Ibrahim Sajalieu Bah, Todd D. Brody, and Neil B. Hendelman of the SEC's New York office. The SEC's litigation was conducted by Mr. Brody, Mr. Schoenmann, and Mr. Bah, and the case was supervised by Lara Shalov Mehraban
Criminal case: Damian Williams, the United States Attorney for the Southern District of New York, announced that ERIC MALLEY, the founder and former chief executive officer of real estate private equity investment firm MG Capital Management L.P., was sentenced today by United States District Judge Edgardo Ramos to 60 months in prison in connection with a securities fraud scheme in which he fraudulently induced hundreds of individuals to invest a total of approximately $58 million in two real estate investment funds. MALLEY pled guilty before Judge Ramos on May 20, 2021. U.S. Attorney Damian Williams said: “For years, Eric Malley swindled investors through false promises about himself, his credentials, his track record, and the state of his real estate investment funds. Today’s sentence sends an important message that there are grave consequences to such deception.” According to the allegations contained in the Complaint, the Information to which Malley pled guilty, other court documents, and statements made in public court proceedings: MALLEY founded MG Capital Management L.P. (“MG Capital”) in approximately January 2013, and served as its chief executive officer and chief investment officer from that time until approximately December 2019. During that time, MALLEY formed two real estate investment funds (collectively, “the Funds”) – MG Capital Management Residential Fund III (“Fund III”), in approximately February 2014, and MG Capital Management Residential Fund IV (“Fund IV”), in approximately September 2017. MALLEY promised, when soliciting investors and throughout the life of the Funds, that the Funds represented an opportunity to own an equity interest in hundreds of luxury income-producing properties across Manhattan, following a debt-free investment strategy purportedly informed by sophisticated proprietary analytics that MALLEY had developed over the course of his career in real estate. MALLEY touted two purportedly extremely successful prior funds he had formed, Fund I and Fund II; assured investors that the Funds would be and were debt-free; and represented that the properties held by the Funds would be and were leased primarily to corporate tenants, including, among others, well known technology companies and a prominent university based in New York City with which Malley had pre-existing agreements. But MALLEY’s representations were false. Funds I and II did not exist. The Funds were not debt-free, but instead held mortgaged properties. The properties that made up the Funds were almost entirely leased to individual, not corporate, tenants. Malley did not have the corporate relationships or pre-existing agreements he touted. The Funds held far fewer properties than MALLEY had represented. And although Malley promised the investments were fully protected from loss, they were not. MALLEY induced approximately 335 investors to invest a total of approximately $58 million in the Funds through these and other fraudulent misrepresentations. The Funds together incurred millions of dollars in losses and are currently being liquidated.
UPDATE #3:The RealCrowd platform is no more
August 24, 2023: RealCrowd has announced it's no more and will be acquired by another firm. Here's more info.