I have represented a number of doctors and dentists over the years in disputes with their stockbrokers and in Ponzi schemes and investment fraud cases.
My medical professional clients are typically intelligent and savvy with respect to managing their money, but because they are often too busy to dig into the details they can often be taken advantage of by unscrupulous investment advisors, and in some cases, they fall victim to fraud.
Below are a couple of war stories. Of course, most investment professionals are good and well-qualified – but not all of them. A keen intellect cannot substitute for taking the time to read the documents carefully. The devil may really be in the details
The Falls Event Centers
Utah-based entrepreneur Steve Down had been pitching investments in The Falls Event Centers since 2011. He raised approximately $120 million from more than 300 investors – the majority of whom are dentists throughout the United States.
On May 11, 2018 Down and his event centers were sued by the Securities and Exchange Commission for defrauding investors.
So why did so many dentists fall for this scheme? How did he do it?
Steve Down is a gregarious 61-year-old promoter who billed himself as an “an innovative entrepreneur and successful business owner, is passionate about creating companies and providing jobs.”
One of Mr. Down’s companies was called CE Select, a continuing education provider for dentists. According to the detailed complaint filed by the SEC, dentists attending CE Select seminars were pitched an investment in The Falls during their lunch break.
I honestly cannot figure out how he managed to make a pitch for a wedding reception center investment seem like a normal part of a dental continuing education seminar. But I digress.
The investment was basically a hard-money loan to fund the purchase and construction of more event centers and was supposed to pay returns of 10 to 14% per year to investors.
Down’s investment pitch remained essentially the same for years. The SEC alleged that Down made the following representations to his captive audience of unsuspecting dentists:
- The Falls had 8 profitable locations and was growing at a rapid pace,
- The Falls would have 200 event centers by 2022
- After The Falls had 12 centers, it would be able to obtain institutional loans to replace the hard money loans,
- Many of the event centers were profitable even before they opened, because they were accepting event bookings before they opened, and continued to be profitable after they opened,
- Each event center would earn gross revenues of $1 million per year and cover expenses of approximately $650,000, leaving a profit of approximately $350,000, or 35% of revenue, per year.
- The 200 projected centers would bring in net income of $70 million per year.
- The Falls would be worth $2.8 billion by the time it had 200 centers in 2022.
The problem, according to the SEC, is that many of these representations were false, and Down allegedly knew it.
The Falls’ own accounting records showed that the event centers had never been profitable. Down also allegedly knew that his business model was unsustainable because of crippling debts owed to investors and mortgage holders. But he nevertheless kept on pitching this “profitable” investment to dentists and other investors until the SEC finally shut him down.
Down did not admit or deny the allegations in the SEC’s complaint, but he and The Falls did consent to the entry of a final judgment permanently enjoining them from future violations of securities laws and Down paid a civil penalty of $150,000. A final judgment was entered against Down and The Falls on May 11, 2018, by United States District Court Judge Jill Parrish.
Despite all this, according to an article in the local paper, Down planned to continue building his wedding center empire, and “The Falls will continue to conduct business as usual.”
But that won’t happen – The Falls filed for bankruptcy soon thereafter.
What do you think? Have you been a victim of investment fraud? Why do you think doctors often fall prey to fraudulent investments? Comment below!