Just When You Thought it was Safe to go into the Water

This is not a follow-up story about hurricane Katrina.

One out every three home owners today in America is drowning.  According to Mark Fleming, chief economist for First American CoreLogic, more than 15.2 million U.S. mortgages, or 32.2% of all mortgaged properties, were in a negative-equity position on June 30, edging down from 32.5% at the end of March, according to the real-estate information company, which tracks data on about 90% of mortgage loans nationwide.

The combined total property value for loans in 2008 in a negative-equity position was $3.4 trillion, according to the report.  Negative equity can occur because of a decline in property value, an increase in mortgage debt or a combination of both. Equity levels are important to people who can’t make their mortgage payment since it affects their ability to sell or refinance.

“The slight drop from 2008 to the figures of 2009’s first 2 quarters in the portion of under-water loans reflects the recent flattening of home price changes, which is “great news” for the housing market as negative equity has been increasing for a number of periods,” Fleming said.

Still, he stressed that this decrease is a quarterly comparison and not the yearly comparison typically used in house prices.

Negative equity is a strong driver of foreclosures, Fleming said, and the stunted growth rate in the second quarter is a positive sign that foreclosures may moderate in the future. First American CoreLogic made “very crude” estimates that the foreclosure rate will peak a bit higher than 4% in early 2010, he said.

Is there Regional competition to be in Second Place?

According to business columnists in Arizona and Florida, they both report that their state has the number two spot sewn up for the most homes under water with negative-equity mortgages.

According to Jan Bucholz of the Phoenix Business Journal, her headline read:

“Arizona second in underwater loans”

On the other coast of the United States, the South Florida Business Journal with a statistical quote from CoreLogic posts the following headline:

“Florida No. 2 in mortgages under water”

For the sake of preventing another Civil War, let’s call it a tie.  We’ll look at the raw figures in a moment.  For right now, here is a look at what everyone agrees on:

The number one state leading the country in under water (negative-equity) mortgages is Nevada where 65 percent of homeowners have negative equity in their homes. (I still am quoting data from First American CoreLogic, based in Santa Ana, Calif.)

The percentage difference between the two states “coveting” the number two position, Arizona and Florida, is a fraction between 49% and 48% respectively.

Fourth on the list of under water mortgages is Michigan with California rounding out the top five.

Can anyone say:  Tsunami?

Nationwide, we have one-third of all mortgages in an “under water” position with a total property value for loans at $3.4 trillion. California led states with $969 billion, followed by Florida with $432 billion, New Jersey and Illinois each with $146 billion and Arizona with $140 billion.

Looked at by city, Los Angeles topped the list with more than $310 billion of total property value under water, followed by New York with $183 billion, Miami with $152 billion, Washington with $149 billion and Chicago with $134 billion, according to CoreLogic.

A magician’s greatest tool is the ability to convince his audiences that what they are looking at is something other than what’s in front of their eyes. 

BBC Equities

This magical definition is what I’ll use to describe what happened to 440 investors of a Southfield company called BBC Equities.  In July of this year, BBC Equities was shut down and its two principal officers, John Bravata and Richard Trabulsy, were charged with five counts of securities fraud by the U.S. Securities and Exchange Commission.

The SEC’s complaint charges John Bravata, Trabulsy, and Bravata Financial with violating Sections 5 and 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint charges BBC Equities with violating Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. The complaint also charges Antonio Bravata with violating Section 5 of the Securities Act and Section 15(a) of the Exchange Act. The SEC’s complaint seeks permanent injunctive relief and disgorgement from all of the Defendants, and civil penalties from John Bravata, Trabulsy, and Antonio Bravata. The SEC’s complaint further seeks disgorgement of all investor funds or assets acquired with investor funds from Relief Defendant Shari Bravata.

The two defendants characterized BBC Equities to prospective investors as a real estate investment fund and a safe investment with annual returns of 8% to 12%.  However, BBC Equities was far from a safe investment.  The defendants are alleged to have deceived prospective investors about the use of investor funds; the risks associated with the investment; the purported compensation, commission, and finder’s fees paid to defendants and the true financial condition of BBC Equities.

To keep their scheme afloat, Bravata and Trabulsy allegedly spent an additional $11.3 million of investor funds to perpetrate a Ponzi scheme. They used new investment proceeds to make quarterly payments to earlier investors, among other payments. They have also spent $14 million of investment proceeds soliciting and raising money from new investors to fuel the scheme.

The defendants’ lavish spending and the cost of propping up their Ponzi scheme left BBC Equities with little to invest. Of the more than $53 million in real estate investment proceeds, no more than $21 million remained for BBC Equities to use in acquiring 52 commercial properties. Worse, those properties were highly leveraged, with mortgages and other liabilities exceeding $128 million.

The two defendants’ malfeasance has rendered BBC Equities financially insolvent. Last month a court-appointed receiver took control of BBC Equities and its parent company Bravata Financial.  The SEC suit also names Bravata’s wife Shari Bravata, his son, Antonio Bravata, John Bravata’s real estate investment company BBC Equities LLC and Bravata Financial Group LLC.

The companies are headquartered in Southfield with an office in the quiet southwestern Michigan town of Portage.

Frozen Assets

In a decision made in late July a Federal Court Judge ordered the assets of John Bravata, his family, Richard Trabulsy and their companies frozen.

The Bravatas and Trabulsy spent $7 million of investors’ money for their own benefit, according to the SEC. Over the course of two years they purchased several sports cars, spent millions in rent and mortgage payments on vacation homes and for new homes in the Detroit area, spent more than $100,000 on jewelry and spent large sums on gambling, such as a transfer of $90,000 to the Wynn Casino in Las Vegas from the corporate account.

Another large expenditure was payment of regular dividends.  When the commercial real estate wasn’t generating enough money to pay investors, money that should have been used to acquire real estate was used to pay investors.  The Bravatas and Trabulsy spent $11.3 million in fund proceeds to pay existing investors as dividend payments came due. The SEC said BBC spent $14 million to solicit and raise money to find new investors.

The stated revenue stream for the BBC Equities’ investment fund was commercial real estate. BBC raised money to purchase 58 commercial real estate properties in metro Detroit, Kalamazoo,  Florida and in northwestern Ohio. Bravata purchased one building at 22840 Woodward Ave. in Ferndale and recruited the Farmington Hills-based film production company Grace & Wild Inc. to lease space there.

The idea was to raise funds by promising investors returns of 8 percent to 12 percent. Bravata planned to use the shareholder money to acquire real estate rather than use money borrowed from a bank, which can cost more than 12 percent in interest and also has been difficult to do under recent economic conditions.

The SEC said BBC took on $128 million in mortgage debt through the $21 million in the purchases of 58 properties, 37 of which were in northwestern Ohio communities of Toledo, Perrysburg, Maumee, Sylvania and Findlay.  The SEC says that of the $53 million invested, only $21 million was spent on real estate, most of it as down payments on properties with existing mortgages. 

Two of my good friends, Dennis and Mary Nazelli of Livonia found themselves as one of the 440 unwilling victims of the Bernie Madoff-esque BBC Ponzi scheme.  “To most people who invest their money in stocks, gold or real estate, $70,000 is a drop in the bucket to them,” said Nazelli.  “To us, it was all we had been able to save over 35 years with typical, middle-class incomes, a five-year strike in the nineties at my newspaper job and a bankruptcy.”

Unlike the majority of the BBC Equities’ victims, the Nazellis shared their BBC story.  Dennis and Mary contacted an attorney at Powers, Chapman in Troy as soon as they were notified by letter from the BBC’s fund custodian, Pensco Trust.  Their attorney only had bad news for them: “The only people who were going to get money from this case would be lawyers.”

It’s a Family Affair

“We were approached by a relative who told us about his new position with a financial planner,” said Dennis.  “We weren’t looking for a ‘killing.’  We assumed that as his client, this would help our relative make a nice commission.  If we received a dividend once a year, we could take a vacation….”  The Nazellis completed the paperwork and signed their life’s savings to the Pensco Trust Company of San Francisco.  “We learned later, that Pensco was the “custodial agent” for BBC Equities.”  Dennis continued, “I was a Trustee for my union’s Pension fund with assets in excess of 120 million.  There were no “red flags” in this process.  Not until the SEC moved in and froze BBC’s assets in July.  That’s when I was informed by my attorney at Powers and Chapman, that our money was being used for the dividends to pay the first wave of investors.”

Court documents indicate that at least BBC 20 employees also persuaded many of their relatives to invest.  And, the investment patterns may support employee claims that top executives kept them in the dark about the firm’s schemes until the company collapsed.

“All of my clients trusted me because I was a client myself,” said one former employee. “I brought in members of my family and some friends. I thought this was a good deal, but we were all kept in the dark and assumed the company was doing well.”

In July, the SEC froze the assets of BBC Equities, along with its parent company Bravata Financial, saying the operation became a Ponzi scheme as new investment money was being used to pay the dividends for previous investors. The SEC’s action followed a cease-and-desist order filed by the Michigan Office of Financial and Insurance Regulation based on an investigation into the operation from a complaint by a person recruited as a potential investor.

After raising $50 million to acquire real estate, the firm purchased only $21 million in property. According to the SEC investigation of the Bravata family’s and Trabulsy’s newly-acquired, personal assets during the two-year period from mid-2006 until July 2009, here is the list:

• $90,268 for a Ferrari
• $84,902 for a Maserati
• $52,335 for a Corvette
• $10,000 for a used Ferrari (and then $29,500 on automotive improvements from a sports car restoration company)
• $936,665 in rent and mortgage payments on a $6 million vacation home
• $26,670 in medical treatments at an “anti-aging” facility
• $27,500 on airfare for hunting vacations in Russia and Canada
• $80,000 for trips to Las Vegas and casinos in Detroit
• $90,000 wired to the Wynn Casino in Las Vegas
• $112,000 in jewelry
• $115,000 in artwork

The human-toll of loss and despair includes the lost jobs at the commercial real estate properties in northwestern Ohio.  Those commercial properties are all in foreclosure.  They included shopping strip malls and small businesses.  To me, looking at the above extravagant shopping list, the Bravata’s and Trabulsy didn’t appear to be worried about their responsibilities to investors at all. 

There is something very telling in Bravata’s position and defense.  Particularly from his attorney, Atlanta-based Gregory Bartko, as he was interviewed by a Livingston County newspaper.  Bartko claimed in the interview that, ” Not all of the SEC charges are true.” 

I for one should know full well that a person is presumed innocent until proven guilty.  But, if the jury comes back with a verdict of “Not guilty on ‘most’ of the charges, but guilty on some of the charges!” I, for one, will not be surprised. 

Besides the securities-fraud case brought by the SEC, John Bravata and BBC Equities face a number of other legal matters:

• An Oct. 1 hearing to challenge a cease-and-desist order from the Michigan Office of Financial and Insurance Regulation for allegedly selling unregistered financial products.
• A fraud and breach-of-contract lawsuit in Texas seeking $1.5 million in damages.
• A lawsuit in Oakland County involving a Ferndale property on which John Bravata allegedly owes $2.3 million.
• A lawsuit brought by Huntington National Bank seeking repayment of a $4.1 million loan.

Postscript: Karma? Or just a coincidence?  According to a November 24th story in the Detroit News:                                                                                                                                                                                     

The attorney representing the Brighton businessman accused in an alleged $53 million “Billionaire Boys Club” Ponzi scheme has himself been indicted for a criminal investment fraud scheme.

Gregory Bartko, the Georgia attorney representing John J. Bravata, his wife Shari Bravata, and his son Antonio Bravata on civil fraud charges brought in Detroit by the U.S. Securities and Exchange Commission, is named in a six-count federal indictment (one more than his alleged Ponzi-schemer client) handed down in North Carolina, according to court papers filed today.

Bartko, 56, along with a California man, are accused of running an interstate scheme to profit from the fraudulent sale of investments starting in 2004. He faces charges that include conspiracy, false statements, obstruction, and mail fraud. 

I wonder if attorney Bartko’s plea will be:  “Not guilty on most of these counts!”

More to come.  Stay tuned.