Saturday, December 16, 2017
Business

Federal regulators file complaint over Cay Club 'Ponzi scheme'

CLEARWATER — Federal regulators have filed suit against a group of Florida real estate executives they say oversaw a $300 million scam, part of it based in Clearwater, that drew in 1,400 unwitting investors from across the nation.

The Securities and Exchange Commission filed the complaint Wednesday in U.S. District Court for the Southern District of Florida, alleging the executives defrauded investors.

The scheme, which ran from 2004 to 2008, promised profits from luxury resorts that were to be developed in 17 locations in the United States, including Clearwater, the SEC asserts.

In reality, federal regulators say, the development projects — called Cay Club resorts — were a Ponzi scheme. Investors' millions were not used as promised — to renovate condo units — but funneled into exorbitant salaries for executives and private business ventures such as gold mines and a rum distillery, investigators say.

The executives also "diverted tens of millions of investor funds to unrelated projects and to finance their lavish lifestyles, including the purchase of homes, vehicles, planes, watercrafts and club memberships," according to the SEC complaint.

The defendants named in the complaint are Fred Clark, 54, of Grand Cayman in the Cayman Islands; David Schwarz, 56, of Orlando; Cristal Coleman, 39, Clark's wife, also of Grand Cayman; Barry Graham, 57, of Marathon; and Ricky Stokes, 53, of Fort Myers. None could be reached for comment Thursday, and no lawyers have yet produced responses on their behalf in federal court.

Allegations of fraud in the Cay Club projects have already led to lawsuits by investors, as the Tampa Bay Times reported in 2011. One of those investors, Laurie McNulty of Charleston, S.C., said she was gratified to see the federal government finally moving against those who orchestrated the projects.

"I'm still a little bit in disbelief," she said. "We've been waiting so long for something like this to happen. I'm thrilled, just thrilled."

McNulty's case is emblematic of how SEC officials say the Cay Club executives made their money. A pharmacist, she bought a $700,000 condo off U.S. 19 in Clearwater through Cay Club in 2005. From afar, the deal looked sweet: McNulty qualified for a mortgage from a bank officer recommended by Cay Club, and she immediately received a $100,000 check from the company in a "lease-back" arrangement.

That condo was eventually foreclosed and resold for $175,000.

The SEC alleges that bogus sales prices were justified to investors by phony comparison sales of nearby condos whose prices the executives manipulated through "a scheme to artificially inflate the values of the units by selling them back and forth to each other."

In an example cited in the complaint, a company controlled by three of the executives bought a Clearwater unit for $490,000 in November 2004, then sold it to Coleman a month later for $859,900. Coleman then sold the unit to an investor for $1.2 million, making a $38,000 commission.

Eric Bustillo, director of the SEC's Miami office, said the agency hopes to recover as much of investors' money from the defendants as it can, and will work to go after substantial amounts of cash that agents believe has already been moved to offshore bank accounts.

"One of our goals, always, in these cases, is to recover as much as possible," Bustillo said.

Bruce Barnes, a Safety Harbor lawyer who represented more than 20 investors in prior lawsuits against Cay Club, praised federal regulators for sifting through a complex real estate scheme to press what he considers a solid case.

"I think that the SEC did a commendable job of distilling the scam to its essence," he said. "You could write a novel about how they pulled this off."

News researcher Caryn Baird contributed to this report. Peter Jamison can be reached at [email protected] or (727) 445-4157.

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