Inside Finance THE DEBT AND EQUITY MARKETS
Avoiding Hard Money Loan Scams
If someone claiming to be a Nigerian prince asked you to wire
him $80,000 to $100,000 in return for an enormous sum of
money to be deposited into your bank account, you’d likely
laugh it off as a blatant scam. Yet some investors and develop-
ers, seeking hard money loans, are falling into the same kind
of trap.
To be sure, not all hard money lenders “It sounded shady to me; they all
are crooks. But a Google search for wanted money up front,” said Investor
hard money lenders and commercial X, who took it upon himself to have
real estate yields 215,000 results a half-dozen of them investigated.
and even the sleekest-looking Web Typically, these fraudulent lenders get
sites can’t prove who’s legitimate and borrowers to wire funds to them so
who’s not. The fact that conventional that they can perform due diligence
loans can be difficult to come by for on a project. But once the funds are
those who face imminent refinanc- sent, it becomes virtually impossible
ing or other time pressures has made to reach them. As Investor X pointed
otherwise-sophisticated owners more out, “these guys do something to Olivia Robinson
vulnerable to fraud. justify their cause so that it’s difficult
to sue and win. You have to use their
Here is one cautionary tale: appraisers, and then they tell you that Some findings: the client did get two
you don’t qualify for a loan. Very few references from one lender, the first
The development started out with
deals actually go through.” from someone posing as a borrower
great promise, located along a
but who was actually an employee;
riverfront in the Southeast. Between Bottom line: the partners in this and the second from someone who
the city and county, the development development did not use any of the had gotten out of jail and was on pa-
would be granted $4 million in tax “lenders” they found and are still role. One company had been charged
credits over a five-year period. The looking for financing. Why would with securities fraud by the SEC. One
mixed-use development (which had they have considered this route at was in bankruptcy and claimed no
initially been planned as condomini- all? Investor X said, “If you look at assets. One was a disbarred attorney
ums) had been started in 2007; by ’08 and ’09, so many people were using three Social Security numbers.
2008, half of the condominiums were far enough along [with their develop- One company’s Web site showed
sold and then the market “went to ments] and banks were not lending. pictures of properties whose owners,
pieces,” according to Investor X. Be- You might have to file for bankruptcy contacted during the investigation,
tween the summer of 2009 and the unless you could finance the project. reported that they had never heard of
present, the managing partners found It makes you desperate. Why not in- that lender.
a legitimate lender but the terms were vest $100,000? The lure of the hard
so restrictive that they started looking money is that it’s non-recourse.” Neither Investor X nor the other inves-
at hard money lenders and found a tors and managing partners reported
number of possibilities through an Olivia Robinson, principal of Back- the investigation’s results to any
online search. ground Intelligence, Inc., a private regulatory authorities. “Most of them
investigation firm specializing in fraud could say they provided a service for
and white collar crime, who conduct- the upfront fee,” he said. “We didn’t
ed this investigation, recalled that think it was worthwhile.”
“one of the common themes was that
they were all frauds. They wouldn’t di- Robinson observed that “when people
vulge where their money comes from get scammed they’re embarrassed
and they don’t give references.” and don’t want to diminish the value
of their business.” n
16 DEVELOPMENT FALL | 2010
www.naiop.org
Do Your Due Diligence
Dan Purdom, national practice group leader, white collar
crime group, at the law firm Hinshaw & Culbertson, LLP,
remarked that the best way to avoid hard money scams is
to not give money to strangers. “Do your due diligence,” he
said. “Fraud knows no limits; it happens in good times and
bad times.” In short, the old adage “if it’s too good to be Daniel Purdom
true, it probably is” applies.
(If a lender purports to be a broker- billion. The letter proved bogus, the account was a fiction
dealer, you can search for the firm and the person who would have received the funds had
at www.FINRA.org/investors/Tools- spent 32 months in prison for forgery and other misdeeds.
Calculators/BrokerCheck. You can
also search for fraudulent firms at Investigating the lender started with a look at the letter of
www.ripoffreport.com.) support. It was from a familiar-sounding financial institu-
tion but “it wasn’t quite right,” she said. There was no
Marie Colmey of Hinshaw & Culbert- listing with the Secretary of State where the company was
son noted that if you are an officer allegedly based or with any regulatory agencies. Robinson
of a corporation, you have fiduciary continued on page 18
duties, which means that if a deal
falls apart, you can face exposure.
Marie Colmey “It doesn’t mean you won’t get sued
if you’ve done something with good
intentions. Everyone’s going to sue
everyone when the deal goes down.”
The prospect of being sued isn’t your
only concern. In one case that Olivia
Robinson investigated, the client had
already sent three years of tax returns
as well as personal and corporate
credit information to the “lender.”
Although he did not wire funds, he
was worried that his information
would be misused. He contacted
existing lenders to alert them to
possible identity theft and forwarded
Robinson’s report to the FBI.
In this case, Robinson literally had
one day to conduct an investigation
before the client was to wire funds;
at the client’s attorney’s request,
she had to verify the authenticity of
the “lender.” She investigated two
corporations: the one that would be
receiving funds and the New York bro-
kerage house that had written a letter
substantiating that the company had
an account balance in excess of $1
FALL | 2010 DEVELOPMENT 17
Inside Finance
continued from page 17
also did a reverse directory search, like-sounding names and examined home, with $306,000 in loans out-
Googled the company, called the SEC complaints. There weren’t any standing. There were no filings with
building manager and tenants at the because the bank didn’t exist. the Better Business Bureau within
address shown on the letterhead and the “lender’s” local jurisdiction.
there was no one there by that name. The “lender” had filed a bankruptcy
She also contacted the investor rela- proceeding and had felony convic- It’s difficult to assess exactly how
tions departments of institutions with tions for forgery and grand theft, as prevalent hard money fraud is. For
well as a notice of default on his example, Jason Boone, research as-
sistant at the National White Collar
Crime Center, could not find reliable
numbers regarding hard money loan
scams, because once discovered,
the scam will be prosecuted under
a variety of different crimes (such
as wire or mail fraud). However,
you can report scams to the Internet
Crime Complaint Center, run by the
FBI and the National White Collar
Crime Center. Go to www.IC3.gov
or call the FBI at 1-800-CALLFBI,
CIVIL ENGINEERING • PROJECT MANAGEMENT • SURVEYING
or https://tips.fbi.gov. To find the
ENVIRONMENTAL CONSULTING • LANDSCAPE ARCHITECTURE local field office of the FBI, go to
www.fbi.gov. If securities fraud is
involved, you can file a complaint
with the SEC at www.sec.gov.
Our business relationships are built on TRUST
Dan Purdom advised that if you’ve
lost money due to fraud, the best
Our reputation is built on QUALITY thing to do is to try to get the money
back. Do the “lenders” have insur-
ance? Do they have property to go
after? He pointed out that “the reality
is that mail and wire fraud is incred-
ibly amorphous. You have to prove
they schemed to defraud, knowingly.”
He said that the FBI has the longest
track record for investigating these
BohlerEngineering.com crimes, but are often deferring to
states because of pressing Homeland
Security issues. He also remarked
WARREN NJ 908.668.8300 that “you lose control if you turn it
over to an investigative agency.” n
SOUTHBOROUGH MA 508.480.9900 | ALBANY NY 518.438.9900
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Background Intelligence:
CHALFONT PA 215.996.9100 | PHILADELPHIA PA 267.402.3400 www.backgroundintelligence.com
TOWSON MD 410.821.7900 | BOWIE MD 301.809.4500 Hinshaw & Culbertson, LLP:
www.hinshawlaw.com
STERLING VA 703.709.9500 | WARRENTON VA 540.349.4500
FORT LAUDERDALE FL 954.202.7000 | TAMPA FL 813.379.4100 By Ellen Rand, contributing
editor, Development.
18 DEVELOPMENT FALL | 2010