The FBI appears to have launched an investigation into a Bellevue-based real estate investment firm, the first indication that the company’s former executives could face criminal charges connected to allegations they ran a Ponzi scheme.
For at least the last decade, iCap raised money from investors in Washington state and elsewhere, promising to invest in Seattle-area real estate projects. But last spring, investors grew concerned as the company stopped making monthly interest payments. By the fall, iCap filed for bankruptcy and a third-party restructuring firm, Paladin, took over.
Paladin said last month it believed iCap was a Ponzi scheme, using investor funds to repay other investors while doing little of the real estate redevelopment it promised. According to bankruptcy filings, the company owes 1,800 investors and other entities a total of $250 million.
As part of the bankruptcy case, attorneys for former CEO Chris Christensen wrote in court filings last week that the U.S. Securities and Exchange Commission and FBI “recently opened a criminal investigation into iCap.”
“It is too soon to know whether the investigation will lead to any indictments or who the targets are,” Christensen’s attorneys wrote, urging the court to hold off on determining whether the company was a Ponzi scheme “until the parties have a clearer understanding of the criminal investigation.”
Christensen has denied that the operation was a Ponzi scheme.
The restructuring company last month urged a bankruptcy judge to find that iCap operated a Ponzi scheme, alleging that most of iCap’s income came from investors, not from real estate projects, and that iCap used most of its cash to make payments to investors, not for real estate projects. A Ponzi finding could allow the company to tap into more financing to fund the ongoing bankruptcy, according to court filings.
The dispute appears to have attracted the attention of federal regulators in recent months.
The SEC notified Christensen in February it was investigating iCap, and the “federal government confirmed its investigation of the same” this month, Christensen’s attorneys wrote.
Both agencies declined to comment. It’s unclear how the investigations are related. The SEC does not conduct criminal investigations.
While investigations are in their “nascent stages,” Christensen and others have received subpoenas from the SEC and the Washington State Department of Financial Institutions, the attorneys wrote.
Christensen’s attorneys did not respond to a request for comment Monday, but have denied in court filings that he operated a Ponzi scheme.
Attorneys representing iCap investors, who are still waiting to find out if they will ever recoup their investments, welcomed a federal probe. Investors “should feel encouraged knowing that federal investigations are underway,” John Bender, an attorney representing the committee of investors in the bankruptcy proceedings, said in a statement. “We will support federal investigators however we can.”
Christensen, the former CEO, “vehemently disputes” the Ponzi scheme allegations, his attorneys wrote.
ICap “bought, developed and sold or otherwise exited out of approximately 60-70 real estate projects in Vancouver, Seattle, Tacoma, Bellevue and Renton, generating hundreds of millions of dollars in proceeds,” they wrote this month. That work included securing permits and paying for construction work, “a large business operation that completed a large number of complicated real property projects.”
That activity “stands in stark contrast to the typical Ponzi scheme,” they argued, adding later, “Even an unprofitable business is not synonymous with a Ponzi scheme.”
Christensen also disputed the conclusion from a consultant Paladin hired that iCap was a Ponzi scheme, claiming the consultant lacked expertise in real estate and based his findings on incomplete records.
Christensen, the restructuring company and other parties in the bankruptcy continue to argue about whether iCap operated a Ponzi scheme and whether a bankruptcy judge should decide on that question any time soon.
Christensen’s attorneys contend the criminal investigation could interfere with Christensen’s Fifth Amendment right against self-incrimination and that the government could use the bankruptcy process to get “premature access” to evidence relevant to the criminal case.
Bankruptcy Judge Whitman Holt appeared sympathetic to that argument during a recent hearing, saying he found “this dynamic very troubling” and was “concerned about rushing forward in a way that steps on other people’s toes or creates problems.”
Investor attorney Jay Kornfeld noted that a year has passed since iCap stopped making interest payments to investors. “For investors and individuals [who] have lost in many cases their life savings, that is a long time, and we would urge the court to keep this process going,” he said.
The next hearing in the case is set for Wednesday.
