Concrete Equities fraud rallies investors

Viewers of the early seasons of CBC’s Dragons’ Den will remember the oft-repeated ad wherein an improbably young, somewhat swarthy company president touted the safe, superior returns of an investment company called Concrete Equities. Between static promo shots of office buildings, Vincenzo De Palma extolled the security of investing in income-producing real assets in lazy diction, as if an up-and-comer like him lacked the time to pronounce every consonant. But Concrete Equities was the entrepreneurial reality show’s lead sponsor, and that lent it a sheen of respectability.

Had the producers at the CBC put the company’s management in front of the Dragons, they likely would have discovered De Palma and Co. were neither licensed nor qualified to market and manage a portfolio of real estate investments. Following a two-year investigation, he and three other principals in Calgary-based Concrete Equities were disciplined in January by the Alberta Securities Commission—including the largest fine ever imposed on an individual in the province—for having sold investments without being registered, and lying to investors. But their comeuppance didn’t occur before they had raised $118 million from 3,700 people and come close to losing it all.

“The Concrete Group operation as a whole seems from the evidence in its entirety to have been an accident waiting to happen,” the ASC concluded in a decision released in September. In January, it suspended the four principals from investment dealing and fined them a total of $5.6 million, little of which is likely to be collected. [More: Corporate fraudsters: Middle-aged and mostly male]

Usually, investors taken in this sort of scam count their losses and walk away, often to a diminished standard of living from what they had planned. Concrete’s investors, though, decided on a different course of action. Putting in countless hours and dollars, they wrested control of five of the seven properties Concrete had acquired, saw them through receivership and appointed new management to run them. If everything goes as planned, they’ll be receiving dividend cheques again later this year.

“Do you think we’re going to lose it?” Terry Town recalls a 76-year-old retiree asking him over the phone from Lloydminster, Alta., one day in the spring of 2009. All his savings, the man said, were tied up in Concrete Equities’ buildings.

“Not if I have anything to do with it,” Town found himself responding. For Town, it was a turning point. The owner of a company that sells business filing and storage systems in Calgary, he wasn’t looking for more work, or to be a hero. He had only just learned something was awry when, as an investor in three of Concrete’s buildings, he had received proxy forms asking him to sign over his stakes to a company called Strategic Group in return for unsecured debentures, a kind of IOU not backed by real collateral, promising to pay him 6% a year.

“Why would I take an unsecured debenture when I actually own a chunk of a building?” he asked himself. Other investors, it turned out, were asking the same question and began talking to others they knew who had put in money. After connecting with a handful of them by phone, Town agreed to serve as a liaison for fellow investors in one of the properties, the SNC-Lavalin office building in Calgary. He badgered Concrete to obtain a list of investors’ names, minus any contact information. The more people he talked to, the angrier he got.

Many were seniors who relied on the investment for their income every month. Some were sick and unable to defend their interests. Town subsequently joined an ad hoc steering committee of a dozen like-minded investors determined to take back what was theirs. “We said we’re going to fight. We’re not going to roll over and let you steal it,” he says. [More: Risk management]

Concrete Equities was set up by Dave Jones and Dave Humeniuk in 2005. Jones had sold investments through a firm called Wealthstreet Inc. since 1992. He was widely known for his market commentaries on Calgary radio stations and speeches at investing forums. His partner Humeniuk was a mortgage broker until being handed a lifetime ban by the Real Estate Council of Alberta in 2005 related to undisclosed infractions dating back to the period from 1998 to 2000.

A 22-year-old Varun (Vinny) Aurora, the son of a wealthy associate of Jones, joined the firm late in 2005 and was named a director alongside Jones and Humeniuk. In May of 2006, De Palma, who worked previously as a lumber trader in Prince George, B.C., was brought on as a commissioned consultant, and later replaced Humeniuk as a director. The four variously called themselves general manager, vice-president, president and CEO, changing titles frequently and sometimes fighting in public like a dysfunctional family, but from what the ASC was able to divine, Humeniuk was the instigator and Jones, the ultimate boss.

(In a gruesome side note, reality show contestant Ryan Jenkins, who killed himself after being charged with the 2009 murder of Jasmine Fiore, a California swimsuit model he married in Las Vegas, listed “investment sales associate” with the firm as his last job on a resumé posted online.)

Ostensibly, Concrete existed to buy and manage real estate, mostly strip malls and office buildings, on behalf of investors. It would set up eight limited partnerships, each corresponding to a property it had arranged to purchase. Partnership units, costing $10,000 to $25,000 apiece, would pay a certain cash flow stated in the offering memoranda. Combined with a “highly conservative” capital appreciation of 4% a year, Concrete Equities Place, for one, would return 18.8% a year over five years, its marketing materials projected. Seven of the partnerships ended up owning buildings in Calgary. For the eighth, Concrete raised $45 million to buy a piece of oceanfront in Mexico, but only got as far as acquiring options on property that subsequently expired.

Commercial real estate in Calgary was at the top of its market cycle between 2005 and 2008, but even then Concrete routinely raised more money than the buildings actually cost and failed to return the difference to investors. And once it owned the properties, there was little management going on. The structures fell into disrepair. Leases expired and vacancy rose as tenants moved out and were not replaced. [More: Nothing for money]

Investors, meanwhile, were in the dark. “We never had an annual meeting. We never got a financial statement,” Town says. As long as the dividends kept coming—Concrete paid out just under $5 million to investors between 2005 and 2008—nobody fussed. Inside the company, though, things were worse than investors could have imagined. “They were basically running everything out of just one bank account.…They figured they’d just keep raising money and paying back the ones with the money they’d been using,” Steven Butt, president of brokerage and property management firm Avenue Commercial, which sold a building to Concrete and continued to manage it under contract. The only difference between this and a Ponzi scheme was Concrete Equities had some assets. But perhaps not for long.

Over the autumn of 2008, the dividend payments to investors stopped. That was at least plausible. Stock markets were crashing, credit was tight, and vacancies in Calgary were on the rise. But then on March 12, 2009, Concrete issued a notice of its plan to restructure the partnerships. It asked investors to endorse a resolution to sell five buildings to Strategic Group in return for unsecured debentures. Concrete had apparently gone to Strategic, a privately held landlord and developer with more than $1 billion worth of assets, months earlier for a loan to purchase two buildings, the partnership units for which they’d only partially sold. “The Concrete guys were taking a huge commission cheque on the front end for closing those projects,” Town theorizes. Rather than return the money to investors when they failed to raise enough money to buy the buildings, they approached Strategic for bridge financing and bought them anyway. The interest charges were steep. By 2009, Strategic had effectively foreclosed on the two properties (which it still owns); now Concrete was proposing to pool the remaining assets into a single entity and sell that to Strategic, which might have allowed Concrete’s directors to walk away without taking responsibility for the consequences.

What they evidently didn’t count on was that the limited partners would organize, even those close to them. Mike Hansen was a salesman working for Wealthstreet who both owned and sold Concrete investments. When clients started calling to ask what to do regarding the resolution, “that’s when the lights completely went on,” he says. Defying Jones’s instructions to sell the proposal, Hansen helped corral investors even before he quit Wealthstreet to pursue the recovery effort full-time. “It was a 24/7 job trying to contact all the investors,” he says, describing days and nights spent combing telephone directories with names pulled from lists of investors in the LPs. “We ended up rallying pretty much everybody.” The resolution was defeated. [More: Investing in sin stocks]

Town, Hansen and the other members of the steering committee knew their work was far from done, though. Concrete was still the general partner and manager of the properties. The committee members would soon learn, though, that the mortgage on the SNC-Lavalin building had expired six months earlier and the property was headed for foreclosure. They hired a lawyer and asked investors to chip in to pay for legal fees. They approached Butt to ask if Avenue Commercial would run all the buildings as general partner. Butt had his own reason for helping the investors; he still had a personal guarantee for $9 million on the mortgage to one building, something the bank had insisted on when he sold it to Concrete. But he also felt outrage at how investors had been treated. “It took me out of my business for well over a year just to work on this,” Butt says. Town estimates, all told, 150 people worked to save the buildings.

Combing through what documents they had—Concrete was stonewalling—they found in an offering memorandum a clause whereby, with the consent of 69% of shareholders, they could appoint new management. At a raucous meeting of shareholders at Calgary’s Southside Victory church in May, they got that consent, appointed Avenue Commercial as the new general partner and sent Concrete a letter of dismissal.

But when Avenue tried to get financial records, Concrete was evasive. (“The reason they didn’t share any was because they didn’t have any,” Butt later realized. “They didn’t do any statements. They never did any year-ends.”) Concrete responded May 28 by going to court and asking to have itself and all eight limited partnerships placed into receivership. Hundreds of investors packed a courtroom for the proceedings, but they would be disappointed in their bid to cancel the receivership proceedings and appoint Avenue Commercial as general partner. Seeking clarity on what was already looking like a train wreck, Madam Justice Barbara Romaine nullified the firing of Concrete and appointed Ernst & Young as the receiver. A management committee was set up that included Butt, De Palma and Strategic Group’s Dave Bulloch, along with representatives from Ernst & Young.

Investors resented the fact that Ernst & Young was spending time and money investigating the lost cause of the Mexican investment schemes at their expense. That wasn’t part of the receivership. Adding insult, the receiver kept referring to their representatives as “the ad hoc committee”—“like we don’t know what we’re doing,” Hansen says. [More: Interactive: Our investment picks]

In its final report in December 2009, Ernst & Young said that Concrete did little in the way of accounting and “took many actions that in the Receiver’s view were not for the benefit of the Partnership.” In accordance with the investors’ wishes, it helped the LPs emerge from creditor protection early in 2010. There was still the matter of the bill; the investors would have to raise a further $1.3 million to pay the accounting firm’s fees.

Moreover, not counting mortgages, the five partnerships were still saddled with debts totalling $9 million, including a $3.7-million “grid note” or secured loan bearing 9% interest to Strategic Group—largely comprised of a break fee for the transaction that never happened. (In an e-mail to Canadian Business, a spokesperson for Strategic stated that the grid note “included funds loaned to Concrete to deal with the significant real estate issues in their portfolio” and that the firm agreed to reduce the total by more than $1 million “as a courtesy.”) Hansen says the investors and their lawyer discussed challenging the grid note in court, but that would have required more money. They opted to cut their losses. Nonetheless, it was an achievement of sorts last March, when new general partner Avenue Commercial held the first annual meetings on the properties that the investors had ever witnessed. Of the 1,800 investors in the five buildings, 1,600 showed up in person. Today they can view monthly statements at a password-protected website. All the properties are generating positive cash flow again as vacancy, in one building as high as 37% in 2009, has been brought down to single digits. By summer 2012, he predicts at least some of the buildings will be in a position to resume dividend payments.

“We actually managed to get our properties back, which from what we’ve been able to research is the first time in history,” Hansen says. In other investment scams in Alberta in recent years, investors never saw a cent. That was also the outcome for the 1,900 investors in Concrete’s Mexican partnerships, its Executive Club financial note and the two buildings ceded to Strategic Group. The only Mexican asset recovered was a Puerto Vallarta condo Humeniuk had bought for his own use.

From their first meetings, the investors had three objectives, Town says: to save the five buildings, to get dividends flowing again and to get the Concrete principals charged and jailed. The first goal’s been achieved and the second is approaching, but the last one appears far from fruition. The ASC, which last August separately rendered a decision against Jones and Wealthstreet for unregistered trading and using “scare tactics and falsehoods” to pressure a senior citizen to mortgage her home to invest in doomed investments, has banned all four from dealing in securities—for life, in the case of Humeniuk and Jones—but that’s more a defensive move than a penalty. It has fined Humeniuk $3.3 million, Jones $1.2 million, De Palma $600,000 and Aurora $500,000, but none of that will make its way back to investors, even if it could be collected. Both Humeniuk and Aurora declared personal bankruptcy in 2009 and Wealthstreet went bankrupt in 2010. (The ASC also fined Jones $1.5 million for the Wealthstreet offences.) Only if the RCMP pursues a criminal case is there any hope of justice in the investors’ eyes, and so far there have been no charges. In the meantime, De Palma is running businesses in Calgary and Vancouver, according to his lawyer, Tim Chick of Davis LLP. None of the other three Concrete directors, who represented themselves before the ASC, could be reached for comment. Humeniuk has reportedly moved to Edmonton.

Town, who every now and then gets spotted and thanked by grateful investors in airports, tries to focus on the bright side. “We were going to get nothing if we sat back,” he says. Instead, once the debts are cleared up—and with help from a property market that has already rebounded some 15% since the dark days of 2009—he expects the investors will one day get 5% a year on money invested. Avenue operates a database where investors can try to sell their units if they want out (or to buy from others). Says Town: “I think it’s a long-term hold for me.”