WASHINGTON – The Securities and Exchange Commission has filed fraud charges and obtained an emergency asset freeze against a South Carolina businessman who allegedly siphoned funds raised from municipal bond investors that were meant to purchase or renovate nursing homes.
The SEC is alleging that Dwayne Edwards improperly commingled funds from nine different conduit municipal bond offerings totaling nearly $62 million as well as the revenues of the facilities financed by the offerings. The bond proceeds were supposed to be used to finance assisted living or memory care facilities in Georgia and Alabama.
The charges have a connection to a prior SEC case against Christopher Brogdon, who also commingled investor funds in senior living projects and used the money for personal expenses and other business ventures. He is in the process of repaying $86 million to investors.
Eight of the offerings in the case against Edwards, who has more than 35 years of experience in operating nursing facilities, involved purchases of facilities from Brogdon, according to the SEC. The commission said that Edwards did not have a prior relationship with Brogdon but sought out Brogdon to purchase some of his facilities and considered him a "big-time operator" in the industry. Four of the purchases from Brogdon used "substantially the same financing team that Brogdon himself had used for many years," according to the SEC. Edwards had also referred to Brogdon as "brilliant" while working with him, according to the SEC.
The SEC filed its complaint against Edwards in a federal district court in Newark, N.J. on Jan. 20. The complaint also charges Edwards' former business partner Todd Barker, who agreed to a bifurcated settlement with monetary sanctions to be determined at a later date. The SEC said Edwards handled the bond financings and signed the offering documents while Barker was primarily responsible for operating the facilities.
The complaint also lists a number of "borrower defendants" -- the companies Edwards and Barker set up to manage the projects – as well as "relief defendants," including companies that were said to be offering management support services and had the bank accounts that were used to commingle the funds, according to the SEC. Individuals such as Edwards' wife also were connected to the scheme.
In addition to the asset freeze, the court is seeking a final judgment ordering the defendants to disgorge their ill-gotten gains along with prejudgment interest as well as pay civil penalties. The SEC is also, among other things, seeking: an injunction against Edwards and the management companies from future securities law violations; the appointment of a receiver; and an injunction against the filing of bankruptcy, foreclosure, or receivership actions by or against any of the entities subject to receivership.
"As alleged in our complaint, investors thought they were investing in a single senior house project while their money was actually being used to fund an ever-expanding web of affiliated facilities and the personal expenses of Edwards and his friends and family," said Andrew Calamari, director of the SEC's New York regional office.
The SEC said a consolidated receivership for the facilities will maximize payments for defrauded investors and ensure proper management of the facilities.
The SEC listed lawyers representing Edwards and Barker. Barker's lawyer said her client has no further comment outside of the SEC proceedings and the lawyer listed as representing Edwards said his firm is not representing the defendant and that he cannot go into more details. Edwards could not otherwise be reached for comment.
The SEC found that, between July 2014 and September 2015, Edwards along with Barker and the companies they set up to serve as the borrowers, raised their money through the conduit offerings. The documents for each of the offerings said that the bond proceeds would be used to purchase and renovate a particular facility and that the revenues the facility generated would be used to make the interest and principal payments to the investors.
The documents also said that the offering proceeds would be used for things like working capital for the facility and a debt service reserve fund (DSRF) that would be used only if the facility couldn't otherwise make interest payments. The funds would only be used for the specific facility, according to the documents.
In addition, Edwards, Baker, and the companies managing the facilities were barred from taking management fees if the facility was not making enough money to pay for expenses, including interest payments to bondholders, the documents said.
The SEC found that despite those statements in the offering documents, Edwards began commingling funds just days after the second offering closed in August 2014. He used the commingled funds to pay for the costs of purchasing new facilities and took thousands of dollars for his personal use even after some of the facilities had been forced to draw down on their DSRFs, the SEC said.
Baker aided and abetted the violations, according to the SEC, because he owned half of the management companies and served as the co-guarantor on eight of the nine offerings. He also helped Edwards set up the bank account system Edwards used to commingle and facilitated several transfers of commingled funds before leaving the operations at the end of 2015, the SEC said.
The commission said its emergency relief measures were necessary in this case because it found that Edwards was still commingling funds as recently as November 2016. The residents of the assisted living and memory care facilities that the original offerings were designed to finance are also at risk, according to the SEC, because the facilities are in disrepair and Edwards has not paid vendor invoices.
