Schemers Defraud Two Groups of Investors With Same Assets

Offering frauds are typically one of the largest groups of actions filed each year by the Commission. The fraudulent schemes come in all shapes and sizes. What they involve, and the manner of their execution, is limited only by the imagination of the fraudsters. The Commission’s latest variation of these cases does involve a twist, however. In the first part of the scheme the fraudsters swindle a group of investors on a hotel deal. In the second phase of the scheme the swindlers used the hotels from the first part of the scheme to swindle another group of investors. SEC v. Woods, Civil Action No. 2:24-cv-663 (C.D. Ca. Filed August 6, 2024).

Named as defendants are: Taylor Woods and Howard Wu. Messrs. Defendants were co-founders and co-owners of Urban Commons LLC, U.S. Hospitality Investments LLC and Sky Holdings LLC and the co-managing members of Urban Commons LLC, players in the schemes.

Each facet of the fraud involved U.S. based hotels; investors would collectively have a loss of over $70 million. In the first facet of the scheme Defendants induced investors to consent to the sale of their investment interests in the hotels. Those interests, which involved about thirteen U.S. based hotels, were valued at about $160 million. Defendants represented to the hotel owners that they had a buyer for all thirteen properties, that owners should execute consent solicitation statements to facilitate the deal, that investors would receive a pro rata share of the net proceeds from the deal and that investors would retain a security interest in the properties.

Defendants ultimately exploited the consents to consolidate the properties for placement into a REIT and assign themselves a 15.2% interest in the properties. The REIT had a public listing in Singapore. Delays in closing were attributed to the claimed buyer. In reality, there was no buyer.

Once the REIT filed for bankruptcy the second facet of the scheme launched. In this part of the transaction Defendants raised at least $1.775 million from a new group of investors. The purpose was to place a bid to buy the hotels that had been placed in the REIT out of bankruptcy to operate them. Despite representations to the investors that their funds would only be used for the deal, in fact much of the investor money was used for personal and unrelated business purposes. Defendants failed to return most of the investor money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 26068 (August 7, 2024).