Schemer's Unauthorized Real Estate Investment May Pay Off For Victims
Victims of one of the largest Ponzi schemes uncovered in Long Island may soon recoup a significant chunk of their losses from the sale of a luxury Montauk resort that the scheme perpetrator purchased using misappropriated investor funds. Brian Callahan and Adam Manson, who each currently await sentencing after pleading guilty for their role in duping investors out of close to $100 million, used tens of millions of dollars in investor funds to purchase the Panoramic View in Montauk, New York, early in the scheme. While the scheme collapsed in 2013, the property has appreciated considerably in value as as beneficiary of the rise in real estate values over the past half-decade. While the property remains on the market, it appears that a sale could result in the payment of close to 50% of approved investors losses - a welcome development and well above the pennies on the dollar that most victims typically receive in the aftermath of such schemes.
Authorities indicted Callahan and his brother-in-law, Manson, in August 2013. According to the indictment, Callahan managed multiple offshore investment funds organized in Nevis and the British Virgin Islands, told most investors that their funds would be invested in various New York hedge funds, and required a $5 million minimum investment. Other investors were told they would receive above-average returns by investing in a fund that traded high-dividend stocks, bonds, and certificates of deposit. Investors were provided with regular account statements purportedly showing consistent account growth. In total, the funds raised nearly $120 million from at least 40 investors, including the Montauk, N.Y. volunteer fire department and a Maryland investor that alone lost $11 million.
However, rather than using investor funds as promised, the men ran a classic Ponzi scheme where they used new investor funds to pay purported returns to existing investors. In addition, the men diverted tens of millions of dollars in investor funds for other unauthorized purposes, including credit card bills, golfing club dues, down payments on multiple houses, and payments for luxury automobiles including a Range Rover and BMW.
Through their company, Distinctive Ventures, Callahan and Manson also diverted at least $30 million of investor funds to acquire Panoramic View in 2007. The resort, a stunning ten-acre parcel of property in Montauk consisting of private residences and a hotel, was refurbished with the goal of selling the residences and focusing on operating the hotel. However, the purchase came on the eve of the well-known collapse in the real estate market, and the market for such an exclusive property soon dried up.
After the Securities and Exchange Commission brought an action against the men in 2012, the federal government filed a criminal forfeiture action that same year and has been responsible for the property ever since. Notably, a New York federal judge denied the government's attempt to sell the property for $54 million in 2013, finding that the sale was not commercially reasonable given that a valuation had priced the property as high as $88 million and that the amount would only leave approximately $36 million for investors after paying off higher-priority outstanding liens. The government has been accepting new bids for the sale, with all interested parties having until Wednesday, August 12, 2015 to submit any indication of interest to USANYE-Panoramic@usdoj.gov.
For investors, the proceeds from the sale of the Property likely represent their only hope to recoup more than pennies on the dollar of their losses - losses that the court-appointed receiver collectively pegs as nearly $100 million. The receiver has amassed nearly $7 million for distribution to investors to date, meaning that investors could realistically expect to recoup close to half of their losses should the Property sell for an amount above $60 million.
The Court's previous order denying the motion to sell the Property is below: