SEC v. The Estate of Kenneth J. Casey is a case filed by the SEC in the United States District Court for the Northern District of California on June 2, 2021, claiming that Kenneth Casey (“Casey”), the founder of Professional Financial Investors, Inc. (“PFI”), a real estate investment and management company, personally misappropriated over $10 million from investors as part of a scheme where Casey falsely told investors that their money would be used to invest in multi-unit residential and commercial real estate. Specifically, the complaint alleges that Casey violated 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5, and Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
According to the complaint, Casey’s fraudulent scheme began to unravel shortly after his death, when questions arose about the solvency of PFI and one of Casey’s other companies, PISF. The SEC had previously filed an action against the president of PFI for his role in a fraudulent scheme to misappropriate funds from investors.
The SEC alleged that Casey’s companies solicited and sold investments in: (1) promissory notes secured by interests in PISF; (2) promissory notes secured by fractionalized interests in junior deeds of trust owned by Casey’s companies; and (3) equity memberships in LLC’s that purchased real properties. Casey allegedly told investors that interest and equity distributions were to come from PFI’s management of under lying rental property, including collecting rent from tenants. PFI raised millions of dollars from more than 1,300 investors, including many elderly investors.
Beginning in 2015, PFI and PISF did not generate sufficient cash flows through rents and realized property appreciation to service bank loans and the securities issued to investors. Instead of paying investors from profits, the SEC alleged that, over a four-year period, over $150 million of the approximately $330 million raised during that time was used to pay back investors.
The SEC alleged that Casey authorized investor funds to be commingled between entities, authorized the use of new investor funds to make interest and principal payments to previous investors, and knew that such action was contrary to representations he personally made to investors.
In addition to his role in operating this Ponzi-like scheme, the SEC alleged that Casey treated both PFI and PISF bank accounts as his personal funds by misappropriating: (1) over $1.3 million in cash from investors without depositing that cash into a PFI or PISF account; (2) more than $1.4 million from investors to pay for labor at his personal residents; (3) over $2.6 million to pay his personal state and federal tax obligations; (4) more than $2.5 to renovate one of his personal residences; and (5) over $2.3 million for other personal purposes, including the use of investor funds to make payments on Casey’s personal credit card.
Based on the allegations in the Complaint, the SEC seeks disgorgement of all ill-gotten gains from Casey’s estate.