SEC, DOJ Charge New Jersey Man With Operating $50 Million Ponzi Scheme

The Securities and Exchange Commission ("SEC") and Department of Justice ("DOJ") filed charges against a New Jersey man, charging that he operated a Ponzi scheme that raised over $50 million from investors who believed they were investing in rental apartment buildings in New Jersey and Pennsylvania.  The SEC charged Connolly with multiple violations of federal securities laws, while the DOJ brought a 16-count indictment consisting of one count of securities fraud, five counts of mail fraud, three counts of wire fraud, and seven counts of money laundering. 

Beginning in 1996, Connolly formed at least twenty-five separate investment vehicles, each of which was used for a separate offering of securities to investors and purported to use the proceeds to acquire and manager one or more rental apartment buildings in Pennsylvania or New Jersey.  For each offering, Connolly draft an offering prospectus given to investors that detailed the "shares" each would receive in return for their investment.  In total, Connolly raised more than $50 million from over 200 investors until the scheme unraveled in 2009.

According to authorities, the operation turned criminal sometime in 2006, when Connolly fraudulently induced investors to purchase interests in certain investment vehicles by making material misrepresentations concerning the use and segregation of investor funds.  For example, while Connolly represented that the proceeds of an offering would be used solely to purchase the specific properties identified in the offering prospectus, this was inaccurate.  Instead, on numerous occasions Connolly used funds from one offering to purchase properties that were the subject of a different offering.  Additionally, Connolly used investor funds to make purported cash flow dividends from the performance of the properties tied to each offering, a classic hallmark of a Ponzi scheme.  Investor funds were also used to make improper payments totaling $2 million to Connolly, as well as refinance properties and other unauthorized uses.  When the scheme unraveled in 2009, the properties owned by the investment vehicles were forced into foreclosure, thus eliminating all investor interests.

The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains, and financial penalties.   Each of the criminal charges except money laundering carries a maximum sentence of twenty years in prison, while Connolly faces a maximum potential sentence of ten years for the money laundering charge.  

A copy of the SEC lawsuit is here.