Real Estate Fund Manager Fined $12 million for Fraud
SEC Litigation Released March 15, 2022
GowerCrowd- In the long-awaited conclusion of a year-long real estate fraud case, the Securities and Exchange Commission announced the entry of final consent judgments against real estate fund manager Eric C. Malley, alongside his company, MG Capital Management L.P. The March 14, 2022 judgments order Malley, alongside two related entities under his control, to pay $12 million to resolve charges brought by the SEC against them, including charges related to defrauding investors via real estate funds under the control of MG Capital.
The initial complaint was filed on January 12, 2021, in federal court in the Southern District of New York. In the complaint, the SEC alleges that starting in 2014, Malley and MG Capital solicited investments for two real estate funds, MG Capital Management Residential Funds III and IV, and raised $58 million despite the fact that Malley, a licensed real estate broker, had no investment management experience. The SEC contends that he was able to raise these funds due to the false investment track record fabricated by Malley.
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They go on to allege that while Marketing Fund III and Fund IV, MG Capital and Malley claimed that the pair had previously been involved in the management of two flourishing real estate funds- a claim that investors later learned turned out to be false. Malley claimed that the funds he managed had a combined value of $1.18 billion and had substantially outperformed the S&P 500 Index over the past decade- it turned out that the funds never actually existed.
These were not the only misrepresentations made by Malley and MG Capital. In offering documents and marketing materials, the pair made claims that investor capital was guaranteed against loss, as well as secured by a $250 million balance sheet, which again, did not exist. Additionally, these materials made claims that the firm had long-term, pre-signed lease agreements for prospective tenants as well as partnerships with other financial firms.
While pulling the wool over investors’ eyes, Malley and MG Capital misappropriated millions of dollars in investor assets and used fake financial reports to hide enormous losses that eventually forced the funds to close up shop. The SEC also alleged that a portion of the misappropriated assets were paid to MG Capital Realty Management LLC and MG GP III LP, entities controlled by Malley, both of which were named as Relief Defendants in the complaint.
Eric Malley and MG Capital eventually consented to the entry of final judgments against them, which permanently enjoins them from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. After giving their consent, Malley was ordered to pay $11,348,226 in disgorgement and $816,423.41 in prejudgment interest which are to be paid on a joint and several basis with MG Capital as well as the Relief Defendants.
The aforementioned payments were deemed to be satisfied by Malley’s guilt plea in a related criminal charge, in which he was sentenced to 60 months in prison as well as ordered to pay restitution totaling $33,249,822.12 to victims. He will also have to forfeit $5,625,747.45 in ill-gotten gains under the terms of the agreement.
The investigation into Malley and MG Capital was undertaken by Derek M. Schoenmann, Ibrahim Sajalieu Bah, Celeste A. Chase, Neil B. Hendelman, and Todd D. Brody, all members of the New York office of the SEC. The litigation itself was taken on by Mr. Bah, Mr. Brody, and Mr. Schoenmann, with Lara Shalov Mehraban supervising the case.
Read the full SEC release here.
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