Securities Law Blog

The SEC charged Sunwest Management Inc. yesterday with securities fraud. The SEC alleges that Sunwest, which operates hundreds of retirement homes across the United States, lied to investors about its operations and concealed the risks of the investments, exposing investors to massive losses when the economic downturn triggered Sunwest's collapse. According to the SEC's complaint, Sunwest raised at least $300 million from more than 1,300 investors nationwide by promising a steady income stream and touting its success in running the properties. It is expected that lawyers representing defrauded investors will file FINRA arbitrations against the broker-dealers and registered representatives who recommended TIC interests in Sunwest properties.

The complete text of the SEC press release regarding the Sunwest filings follows:

SEC Charges Operators of Multi-Billion Dollar Real Estate Enterprise With Fraud

FOR IMMEDIATE RELEASE
2009-38

Washington, D.C., March 2, 2009 — The Securities and Exchange Commission today charged Oregon-based Sunwest Management Inc. with securities fraud and is seeking an emergency court order freezing its assets. The SEC alleges that Sunwest, which operates hundreds of retirement homes across the United States, lied to investors about its operations and concealed the risks of the investments, exposing investors to massive losses when the economic downturn triggered Sunwest's collapse.

According to the SEC's complaint, Sunwest raised at least $300 million from more than 1,300 investors nationwide by promising a steady income stream and touting its success in running the properties.

"Investors are entitled to accurate information about the securities they are buying and the risks involved," said Marc J. Fagel, Regional Director of the SEC's San Francisco Regional Office. "This is a tragic example of investors being defrauded out of millions of dollars because they were far more exposed to a downturn in the real estate market than they had been led to believe."

The SEC's complaint, filed today in federal district court in Eugene, Ore., charges Sunwest, its former President and CEO Jon M. Harder of Salem, Ore., and several related entities with securities fraud. According to the complaint, Sunwest, which operates more than 200 retirement homes at one point valued at $2 billion, told investors that they would be investing in a particular property. Investors were told that the property would generate sufficient profits to pay annual returns of around 10 percent, and that Sunwest had a track record of never missing a payment. Between 2006 and 2008, Sunwest raised more than $300 million from investors, which was used for the down payments on approximately 100 retirement homes, with the balance financed by institutional lenders and banks.

The SEC alleges that at least half of the properties had lost money, and Sunwest concealed this information from investors by commingling all of its finances and making investor payments from this pot of cash. The SEC further alleges that investor returns came not just from these commingled assets, but from mortgage refinancings as well as loans from Harder. According to the SEC's complaint, Sunwest concealed its precarious financial position and the risks it posed to investors by failing to disclose that Sunwest was being run as a single massive enterprise with its fortunes tied to the success of hundreds of properties and contingent on future financing ability. When the recent credit crisis derailed Sunwest's ability to continue to refinance the properties, payments to investors ceased and many of them stood to lose their entire investments.

The SEC further alleges that, even after Sunwest encountered difficulties refinancing properties and lenders began foreclosing, the defendants continued raising money from investors. Sunwest obtained millions more in investments up through June 2008, continuing to misrepresent that the money was designated for a specific property when, according to the SEC, it was being used to prop up the failing business.

The SEC's complaint alleges that Harder, Sunwest, and related entities Canyon Creek Development Inc. and Canyon Creek Financial LLC, violated the antifraud provisions of the federal securities laws, and seeks relief including disgorgement and civil monetary penalties. The SEC's complaint also seeks disgorgement from several relief defendants, including Sunwest Chief Operating Officer Darryl E. Fisher, General Counsel J. Wallace Gutzler, and Chief Restructuring Officer Hamstreet & Associates and its principal Clyde Hamstreet, as well as Harder's wife and several entities he controls.