A Minneapolis lawyer and three investment fund executives were charged Tuesday by federal regulators with defrauding several hundred investors in a real estate lending fund by concealing the fact that the fund had no significant income and was using new investors' money to pay existing investors.
The U.S. Securities and Exchange Commission filed a federal lawsuit in St. Paul seeking to freeze any remaining assets of the Capital Solutions Monthly Income Fund and related parties so the money can be returned to investors.
Charged in the civil complaint are Prior Lake resident Todd A. Duckson, 44, a former partner in the national law firm Hinshaw and Culbertson, and fund executives Michael A. Bozora, 60, of Belvedere, Calif.; Timothy R. Redpath, 53, of Mill Valley, Calif.; and Owen Mark Williams, 53, of Saratoga Calif.
Duckson's attorney, Scott R. Carlson of Minneapolis, said the SEC's claims "are completely unfounded and unsupported, and we will vigorously contest them. We look forward to correcting the SEC's allegations and resolving this matter."
Phillip Stern, a Chicago attorney representing Bozora and Redpath, also denied the allegations. "We believe we ultimately will prevail in the litigation," he said.
And Brent Baker, a Salt Lake City attorney representing Williams, said his client is "looking forward to having all the facts come out as soon as possible and putting this matter behind him."
Duckson was described in an SEC filing last year as a business attorney, certified public accountant and finance entrepreneur who founded "four community banks, a venture capital firm, a financial and tax firm and numerous other financial ventures."
A default in 2008
According to the SEC, the Capital Solutions fund, created in 2004, raised $74 million from about 450 investors nationwide, including in Minnesota. The fund made mezzanine real estate loans to a single Minnesota lender known as Hennessey Financial, which got into severe financial trouble in 2007, according to the SEC's complaint.
Mezzanine loans are similar to second mortgages and are often used by developers to secure more funding. After Hennessey's default to the fund in May 2008, Capital Solutions foreclosed on its real estate holdings, the complaint says.
"Instead of disclosing this fact, Bozora, Redpath and Duckson falsely claimed that the fund was positioned to profit from the U.S. real estate downturn," Robert Burson, senior associate director of the SEC's regional office in Chicago, said in a prepared statement.
The SEC's complaint says Duckson, Bozora and Redpath raised $21.6 million for the fund after Hennessey Financial's default and foreclosure.
Also charged in the complaint are True North Finance Corp., formerly known as CS Financing Corp.; Capital Solutions Monthly Income Fund, formerly known as Hennessey Financial Monthly Income Fund; Capital Solutions Distributors; Capital Solutions Management; and Transactional Finance Fund Management.
Duckson owned and managed Transactional Finance, which acted as adviser to the fund; Bozora and Redpath owned and operated the Capital Solutions distributor and adviser firms, which also worked with the fund.
True North is headquartered in Minneapolis. The complaint says Duckson, who had been its outside counsel, became CEO in June 2009. Redpath, its former CEO, is now vice chairman. Bozora served as president of the firm from November 2006 through June 2009, and Williams has been its chief financial officer since about 2005.
The SEC alleges that Bozora, Redpath and Duckson failed to disclose Hennessey Financial's default and foreclosure to the investment fund's investors for several months. When they did make a disclosure, the SEC says, they minimized the events and misled investors about the fund's ability to make new loans. In fact, the SEC says, the fund used most of its money to maintain the foreclosed real estate and to pay existing investors.
The SEC's 30-page complaint charges Williams with accounting fraud, alleging that he caused True North to overstate its revenues in 2008 and 2009 by as much as 99 percent.
Dan Browning • 612-673-4493