gavel on money

$58 Million Real Estate Scheme Founder Pleads Guilty

The U.S. Department of Justice recently reported that Eric Malley, founder and former CEO of MG Capital Management L.P., pled guilty to federal securities fraud charges.

False Claims

According to court records, Malley was charged with defrauding tens of millions of dollars from investors looking to invest in luxury properties in Manhattan. Malley’s firm, MG Capital, was founded in 2013 and claimed to use “sophisticated proprietary analytics” that gave Malley’s firm an advantage in achieving higher investment returns. However, Malley purportedly lied about this strategy and overstated his prior experience to attract and entice investors to his firm.

This is a common scheme that we see in a number of securities fraud cases. Great fraudsters are often skilled salespeople: they know how to get people to say ‘yes’ to them. Thus, they are often willing to say whatever they need in order to close the deal.

In this case, the DOJ states that Malley defrauded over 300 investors throughout the past seven years. Malley obtained more than $58 million in total from these investors through his clever sales tactics.

As part of obtaining this money, Malley assured investors that he had a “debt-free investment strategy” for which his properties were leased to large corporations that had plenty of money to spend on rent. However, this claim was apparently fabricated, as the properties were mortgaged (not debt-free) and rented to individuals (not corporations).

Additionally, Malley reportedly boasted about his success on previous funds to investors prior to MG Capital. Malley claimed that he raised nearly $400 million in these funds, but authorities found no proof to support such claims.

Lessons

In dealing with individuals convincing you to invest with them, it is more important than ever to exercise extreme caution. We have seen a record-high number of investment fraud reports in the past year, which causes concern for all investors.

A major part of the investment process involves completing proper third-party due diligence. This gives an inside look into the investment without potential conflicts of interest that may occur from the individual or company that is offering the investment opportunity.

Although public companies disclose general and specific risks of investing in their companies within their SEC documents, it is unlikely that you will see this from fraudsters. Most (if not all) of them will tell you everything you want to hear without telling you about the potential downsides of the investment. This alone is a strong warning that you should strongly consider before deciding to invest your money.

Virtually every investment opportunity comes with risk. Individuals that offer “risk-free” investments into their companies should not be trusted, as there are risks all around us. While certain sectors and industries may be less risky than others, there are all sorts of unforeseen risks that are outside of a company’s control, including market risks, political risks, social risks, and others. Thus, watch out for anyone that claims to offer “risk-free” investments, since all investments are risky in one way or another.

Overall, be sure to exercise extreme caution before investing your hard-earned money. Complete due diligence is helpful, but it does not fully ensure that your money is going to the right place. Continue to watch for red flags that make the investment opportunity “too good to be true.”

Remember, whatever it is, let’s make sure our money is working for us rather than somebody else.

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