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The Verde Independent | Cottonwood, Arizona

home : latest news : state September 24, 2016

8/2/2013 12:17:00 PM
No escape from financial verdict for Radical Bunny

Howard Fischer
Capitol Media Services

PHOENIX -- A federal appeals court has rebuffed a bid by the four managers of a bankrupt Arizona firm to escape paying a $3.7 million verdict for securities fraud.

In an unsigned opinion, the 9th U.S. Circuit Court of Appeals said there was nothing in the evidence to back up the contention by the managers of Radical Bunny LLC that what they were selling to investors were not securities. And the judges rejected arguments by the attorneys for the officers that they did not know they were violating securities laws.

"The undisputed facts show that Radical Bunny was on notice that it was potentially violating securities law, and that it did not disclose that fact to investors,' the appellate court concluded in the lawsuit brought against them by the Securities and Exchange Commission.

In fact, the judges noted that the officers admitted that, at worst, they were told only that they might be selling a security without a license, in violation of federal laws. That, the managers argued, made them innocent of intentionally violating the law.

"This point is irrelevant, because even knowing that they might be violating securities law was material information they should have told their investors,' the court concluded.

The judges also called it "undisputed' that all four knew they were committing fraud by lying to investors about the nature of what they were getting.

The appellate ruling is the latest to go against the firm which funneled close to $190 million to Mortgages Ltd., another firm that also went belly up. The Arizona Corporation Commission earlier this year ordered Tom Hirsch, Harish Shah, and Howard and Berta "Bunny' Walder, along with an affiliated entity, to pay $189.8 million in restitution and more than $4.6 million in administrative penalties for defrauding investors.

In April, however, the former managers filed suit in Maricopa County Superior Court asking a judge there to overturn the commission's ruling.

The heart of both the federal and state cases is the charge that investors were told that Radical Bunny would use their cash to purchase interest in promissory notes secured by real estate deeds of trust. More to the point, regulators said the investors were told the investments were secure because they would be named as beneficiaries in those deeds of trust.

Instead, the cash was used over about a four-year period to make unsecured loans to Mortgages Ltd., a Phoenix-based originator of high-interest, short-term loans to real estate developers, mostly for commercial projects.

In 2008 that company eventually was forced into bankruptcy, taking with it the investors' funds. And Scott Coles, who was Mortgages Ltd. chairman, committed suicide that year.

In upholding the $3.7 million judgment against the managers, the appellate court said there was really no legal question but that what was being sold to investors were securities. That meant it was illegal for the four managers, who were not licensed securities dealers, to offer the investments.

"Appellants promised the investors a profit of 11 percent interest annually on their investment,' the judges wrote.

That return, they noted, was not measured by or paid for by the amount of profit made by Mortgages Ltd. Instead, the court said, it was to be paid to the investors by Radical Bunny.

"The offering was widely disseminated, leading to 900 separate accounts in 20 states,' the judges said. "A reasonable investor would have viewed the offering as involving an initial investment of money with the expectation of profit.'

The court also noted that it was Radical Bunny, and not the investors, who had the authority to manage the funds.

And the judges said there was clear evidence that the managers knew they were committing fraud because they told investors that the loans they made to Radical Bunny would be secured by deeds of trust.

"The undisputed facts in this case demonstrate that each appellant either knew or was reckless in not knowing that these securities were not backed by the collateral they had promised the investors,' the appellate court concluded.

In appealing the Arizona Corporation Commission ruling, the attorneys for the managers paint an entirely different picture of what was going on. They contend that "participants' in Radical Bunny simply acquired an interest in a commercial note issued by Mortgages Ltd.

"Radical Bunny did not determine the success or failure of that note,' the lawyers said.

"Radical Bunny simply divided up the participants' funds and kept track of what percentage they owned,' their legal appeal reads. "When Mortgages Ltd. fulfilled its obligations to pay, Radical Bunny, like any other entity with escrow duties, divided up the money and sent it to the participants, retaining a disclosed fee for its work.'

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