AMENDED AND CONSOLIDATED COMPLAINT
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CHAVEZ & GERTLER LLP MARK A. CHAVEZ (Bar No. 90858) NANCE F. BECKER (Bar No. 99292) 42 Miller Ave. Mill Valley, CA 94941 Telephone: (415) 381-5599 Facsimile: (415) 381-5572 BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. WILLIAM G. FAIRBOURN (Pro Hac Vice Pending) ANDREW S. FRIEDMAN (Pro Hac Vice Pending) WENDY J. HARRISON ( Bar No. 151090) KATHRYN A. HONECKER (Pro Hac Vice Pending) WILLIAM F. KING (Pro Hac Vice Pending) 2901 N. Central Avenue, Suite 1000 Phoenix, AZ 85012 Telephone: (602) 274-1100 Facsimile: (602) 274-1199 Attorneys for Plaintiffs
IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA
IN AND FOR THE COUNTY OF ALAMEDA
GORDON NOBLE and ARLENE DEA DEELEY, individually, and on behalf of all others similarly situated,
Plaintiffs, vs. GREENBERG TRAURIG, LLP, a New York limited liability partnership; WELLS FARGO CAPITAL FINANCE, INC. f/k/a WELLS FARGO FOOTHILL, LLC, a California corporation; and DOES 1-30,
Defendants.
FREDRIC C. MENDES, NANCY RAPP, PHILLIP CANTOR, and JOHN EMANUELE on behalf of themselves and those similarly situated,
Case No. RG 11-593201 CLASS ACTION
AMENDED AND CONSOLIDATED COMPLAINT
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Plaintiffs,
vs.
GREENBERG TRAURIG, LLP, a New York limited liability partnership; WELLS FARGO CAPITAL FINANCE, INC. f/k/a WELLS FARGO FOOTHILL, LLC, a California corporation; and DOES 1-30,
Defendants.
Case No.: RG11603095 CLASS ACTION FIRST CONSOLIDATED AND AMENDED COMPLAINT FOR BREACH OF FIDUCIARY DUTY, AIDING AND ABETTING BREACH OF FIDUCIARY DUTY, SECURITIES FRAUD IN VIOLATION OF CAL. CORP. CODE § 25401, ET SEQ., SECONDARY LIABILITY FOR SECURITIES FRAUD AND COMMON LAW FRAUD, FRAUD – CONCEALMENT AND SUPPRESSION OF FACT, NEGLIGENT MISREPRESENTATION, AIDING AND ABETTING FRAUD, VIOLATION OF UNFAIR COMPETITION LAW BUSINESS & PROFESSIONS CODE § 17200, ET SEQ., Unlimited Civil Case JURY TRIAL DEMANDED
AMENDED AND CONSOLIDATED COMPLAINT 1
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Plaintiffs Gordon Noble, Arlene Dea Deeley, Fredric C. Mendes, Nancy Rapp,
Phillip Cantor and John Emanuele (collectively, “Plaintiffs”), on behalf of themselves
and all others similarly situated, bring direct claims against Greenberg Traurig, LLP
(“Greenberg” or “Greenberg Traurig”) and Wells Fargo Capital Finance, Inc. f/k/a Wells
Fargo Foothill, LLC (“Wells Fargo”) (collectively, “Defendants”) for actions that
stripped Plaintiffs of their rights as equity shareholders in RE Loans and decimated their
investments. Plaintiffs Deeley and Emanuele also invested in MF08, which the
managers operated in a Ponzi scheme to funnel money to RE Loans. For their First
Consolidated and Amended Complaint (“Complaint”), Plaintiffs allege as follows:
NATURE OF THE CASE
1. Plaintiffs bring this case to recover on behalf of over 1400 people who
invested in RE Loans, LLC (“RE Loans”) and over 600 who invested in Mortgage
Fund ’08 (“MF08”). These investors lost over $700 million dollars as victims of an
unlawful scheme carried out by the managers of the companies acting in concert with
Greenberg Traurig, LLP, the attorneys for RE Loans and MF08, and Wells Fargo
Foothills, LLC, an opportunistic lender that made an unauthorized line of credit loan to
RE Loans.
2. Both RE Loans and MF08 were hard money lenders who used funds
obtained from investors to make real estate development loans, returning profits from
these loans to the investors. Investors in RE Loans became members of the company in
return for their investments, and are referred to as “Members” in this Complaint. MF08
purportedly employed the same hard money lending business model as RE Loans.
MF08 gave investors promissory notes in return for their investment instead of making
them members of the company. Plaintiffs Deeley and Emanuele and the other investors
in MF08 also are referenced as the “Noteholders” throughout this Complaint.
3. The same individuals managed both RE Loans and MF08. They were
Walter Ng, Kelly Ng, Bruce Horwitz and Barney Ng. These individuals managed RE
Loans and MF08 through two affiliated companies, B-4 Partners, LLC and Bar-K, Inc.
AMENDED AND CONSOLIDATED COMPLAINT 2
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They managed MF08 through The Mortgage Fund, LLC and Bar-K. In this Complaint,
they collectively are referred to as “Managers.”
4. Beginning in mid-2007, the Managers, Greenberg and Wells Fargo
concocted and carried out a scheme through which the Managers, with Greenberg’s and
Wells Fargo’s knowing assistance, took a series of unfair and unlawful actions against
RE Loans Members and MF08 Noteholders. These actions inflicted significant harm on
the RE Loans Members by stripping them of their ownership interests in and rights of
control over RE Loans, and by changing the nature of their investments. The actions
harmed MF08 Noteholders by inducing them to invest in a shell Ponzi scheme
company that, instead of using their funds to make profitable portfolio loans, funneled
money to RE Loans.
5. RE Loans apparently prospered from its inception in 2002 through 2006.
The Managers induced thousands of investors – many of them near or at retirement age
– to place their money with RE Loans by promising them that their money would be
safe, and that they could withdraw it at any time. The Managers were successful
solicitors. By the end of 2006, RE Loans had grown to over 1400 Members. The
Managers reaped substantial financial benefits by paying themselves commissions, loan
servicing fees and fund management fees. Unknown to the Members, RE Loans had
been violating securities laws since commencing operations in 2002. Auditors had
previously warned the Managers and in March 2007 lawyers advised the Managers that
RE Loans potentially faced substantial civil penalties for continuing to violate the
securities laws. They warned them to immediately stop soliciting or accepting any
future investor contributions to avoid knowing violations of California and federal
securities laws.
6. From 2002 through 2006, RE Loans’ supply of operating cash fluctuated,
but was always sufficient to fund its portfolio loan commitments and pay those
Members who wanted to make capital withdrawals. But in mid 2007, the RE Loans
Managers faced a severe cash liquidity shortage that left them unable to fund existing
AMENDED AND CONSOLIDATED COMPLAINT 3
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portfolio loan commitments, investment returns or pay those Members who wished to
withdraw some or all of their investment. They had no source of operating cash
because past securities violations had required them to close RE Loans to further
investments. The liquidity problem posed a significant problem for the Managers
because, for years, they had been assuring the Members that their investments were
both secure and liquid.
7. The RE Loans Managers knew they were bound by their fiduciary duties
to the Members to disclose the past securities violations and cash liquidity problem, as
this information was clearly relevant to the Members’ investment interests. But
disclosure of this information ran the risk that the Members would take steps to protect
themselves, and might seek to withdraw their investments from RE Loans.
8. Rather than disclose the problems to the Members, the Managers elected
to hide their past securities violations and RE Loans’ cash shortage. Together with
Greenberg and Wells Fargo, they developed and carried out a plan intended to keep RE
Loans alive by hiding the past securities violations and existing liquidity problem, at
the expense of the RE Loans Members and MF08 Noteholders
9. The Managers had retained Greenberg, a prominent national law firm, for
legal assistance with their securities violations problems. Greenberg decided to help
the Managers with their cash liquidity problem as well. Greenberg brought in Wells
Fargo, one of its other clients, for the purpose of lending money to RE Loans to enable
the Managers in maintaining the illusion that the company was liquid.
10. There were obstacles with this course of action which could be overcome
by misleading and harming the Members’ interests. The Managers, Greenberg and
Wells Fargo knew that RE Loans lacked authority to borrow operating cash from a
third party lender and encumber RE Loans assets as collateral without approval of the
Members. Moreover, Wells Fargo demanded that the Managers collateralize the $50
million line of credit loan with all of RE Loans’ assets – an amount in excess of $700
million, and demanded that its security interest take priority over any security interests
AMENDED AND CONSOLIDATED COMPLAINT 4
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held by the Members. Wells Fargo also required that RE Loans endorse and deliver
over $250 million of notes receivables to Wells Fargo. Finally, Wells Fargo and the
Managers faced the problem of how RE loans – which could not take new investment
capital – would repay the line of credit loan.
11. Together, the Managers, Greenberg and Wells Fargo implemented a plan
to circumvent these impediments. With Greenberg acting as loan counsel for RE
Loans, Wells Fargo and RE Loans entered the unauthorized line of credit transaction in
secret, with the requirement that Wells Fargo’s security interest be primary and an
arrangement through which the Managers would later manipulate the Members into
acquiescing to the unauthorized transaction. Greenberg masterminded an “exchange
transaction” designed to obtain the Members’ after-the-fact approval of the Wells
Fargo loan and to transform the Members from equity shareholders in RE Loans into
creditors with security interests junior to Wells Fargo’s. To accomplish this, Greenberg
and the Managers prepared and disseminated a number of misleading documents that
misrepresented the loan, the nature of the exchange offering and its ramifications for
the Members.
12. The loan repayment issue was handled by forming a new investment
company – MF08 – to solicit funds from investors and funnel them to RE Loans. This
Ponzi scheme arrangement enabled the Managers to continue the operation of RE
Loans. The Managers and Greenberg created misleading offering documents to induce
investors to invest in MF08. Wells Fargo knew about and assisted the Ponzi scheme
operation of MF08 to facilitate repayment of its loan.
13. The scheme orchestrated by the Managers, Greenberg and Wells Fargo
ultimately came to light. RE Loans defaulted on the line of credit loan, and ultimately
defaulted on the promissory notes it had issued to the Members. MF08 also defaulted
on its obligations to its Noteholders. RE Loans, MF08, Barney Ng, Kelly Ng, Bruce
Horwitz, Walter Ng and B-4 Partners are engaged in bankruptcy proceedings in
California and Texas.
AMENDED AND CONSOLIDATED COMPLAINT 5
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14. As alleged below, the Managers’ conduct breached fiduciary duties they
owed directly to the RE Loans Members and MF08 Noteholders. Their
misrepresentations to investors in both companies constitute both securities and
common law fraud. Greenberg and Wells Fargo participated in the unlawful scheme to
further their own financial interests, knowing that the Managers’ actions breached
fiduciary duties owed to the Members and Noteholders, and constituted securities fraud
under California law. Wells Fargo and Greenberg aided and abetted the Managers’
breaches of fiduciary duties and securities fraud. Greenberg’s actions not only aided
and abetted the Managers’ wrongful conduct, but constituted common law fraud and
negligent misrepresentation as well.
15. The financial harms suffered by Plaintiffs and the class are tragic. The
Managers targeted individuals who were retired or approaching retirement. They
convinced many to invest all of their retirement funds and others their entire life
savings. Some were convinced to mortgage their homes and invest the proceeds. As a
result of Defendants’ unlawful conduct, many of the RE Loans Members and MF08
Noteholders lost their retirement funds and life savings and many of them are now
destitute. Others have lost their homes because they were induced to take out
mortgages and pay the proceeds to RE Loans and MF08.
16. Through this lawsuit, Plaintiffs and class members seek redress for the
financially devastating harm they suffered at the hands of Defendants. Their claims are
direct, not derivative, because the wrongs were directed toward and injured them, not
the companies. Proceeding directly against the Defendants likely is the only chance
Plaintiffs and class members have for any recovery at all.
JURISDICTION
17. Jurisdiction is proper in this Superior Court under California Code of
Civil Procedure (“C.C.P.”) § 410.10 and the California Constitution, Article VI §10.
This Court, and not the United States District Court, has jurisdiction of this class action
because Plaintiffs’ claims fall within the provisions of 29 U.S.C. § 1332(d)(4)(A) (a
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subdivision of the Class Action Fairness Act) for the following reasons:
• More than two-thirds of the members of the proposed classes are
citizens of the State of California;
• Wells Fargo is a defendant (i) from whom significant relief is
sought by members of the proposed classes, (ii) whose alleged conduct
forms a significant basis for the claims asserted by the proposed classes,
and (iii) who is a citizen of the State of California;
• The principal injuries resulting from the alleged conduct or any
related conduct of each Defendant were incurred in the State of California;
and
• During the 3-year period preceding the filing of this class action, no
other class actions have been filed asserting the same or similar factual
allegations against any of these Defendants on behalf of the same or other
person.
This Court also has jurisdiction of this class action under 29 U.S.C. § 1332(d)(4)(B)
because two-thirds or more of the members of all proposed plaintiff classes in the
aggregate, and a primary Defendant, Wells Fargo, is a citizen of the State of California.
18. The Securities Litigation Uniform Standards Act of 2001 ("SLUSA"),15
U.S.C. §§77p, 77v, 77z-1, 78-4 and 78bb (2000), does not apply to mandate the
bringing of this Class Action in federal court because:
• The securities or promissory notes that are the subject matter of this
action are not "covered" securities as defined by sections 18(b)(1) and
18(b)(2) of the Securities Act of 1933.
• The securities or promissory notes that are subject matter of this
action are not listed, or authorized for listing, on the New York Stock
Exchange or the American Stock Exchange, or listed, or authorized for
listing, on the National Market System of the Nasdaq Stock Market (or any
successor to such entities).
• The securities or promissory notes that are the subject matter of this
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action are not listed, or authorized for listing, on a national securities
exchange (or tier or segment thereof) that has listing standards that the
commission determines by rule (on its own initiative or on the basis of a
petition) are substantially similar to the listing standards of the New York
Stock Exchange, American Stock Exchange or NASDAQ (or any
successor entity).
• The securities or promissory notes that are the subject matter of this
action was not issued by an investment company that is registered, or that
filed a registration statement, under the Investment Company Act of 1840.
• The claims asserted herein are made by purchasers and holders of
the promissory notes/securities from their issuers.
19. The claims asserted herein are direct claims for monetary damages and
relief that belong to Plaintiffs and the Class respecting their investments in RE Loans
and/or MF08. These claims are not asserted against any entity that has filed a pending
action in federal court seeking protection under or pursuant to the bankruptcy laws or
statutes of the United States. The claims are not derivative in nature and are not
asserted against assets of a bankrupt debtor.
20. Venue is proper in the County of Alameda pursuant to C.C.P. §§ 395,
395.2, and 395.5 for the following reasons:
• Because Greenberg does business in the State of California and has
not designated with the California Secretary of State a principal place of
business within the State of California pursuant to Corporations Code §
2105(a)(3). Hence, it may be sued in any county in the State of California,
including Alameda County.
• Plaintiffs Arlene Dea Deeley, Phillip Cantor, John Emanuele and
absent Class members reside in Alameda County.
THE PARTIES
The Individual Plaintiffs
21. Plaintiff GORDON NOBLE is a resident of Marin County, California and
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a RE Loans’ Member.
22. Plaintiff ARLENE DEA DEELEY is a resident of Alameda County,
California, and a RE Loans Member and MF08 Noteholder.
23. Plaintiff FREDRIC C. MENDES is a resident of the County of San
Francisco, California and a RE Loans Member.
24. Plaintiff NANCY RAPP is a resident of the County of San Mateo,
California and a RE Loans Member.
25. Plaintiff PHILLIP CANTOR is a resident of the County of Alameda,
California and a RE Loans Member.
26. Plaintiff JOHN EMANUELE is a resident of the County of Alameda,
California and a RE Loans Member and MF08 Noteholder.
The Defendants
27. Defendant GREENBERG TRAURIG, LLP is a limited liability
partnership organized under the laws of New York with its principal place of business
in Florida, and does business at 153 Townsend Street, 8th Floor, San Francisco,
California, 94107. Beginning in June 2007, Greenberg served as general legal counsel
for RE Loans, Bar-K, B-4 Partners and MF08.
28. Defendant WELLS FARGO CAPITAL FINANCE, INC. f/k/a WELLS
FARGO FOOTHILL, LLC, a subsidiary of Wells Fargo & Company, is incorporated in
the State of California with its principal place in Santa Monica, California.
29. Defendant DOES 1-30 are corporations, limited liability companies and
individuals whose true names, identities, and relationships are not yet known to
Plaintiffs. Plaintiffs are informed and believe, and on that basis allege, that each of the
fictitiously named Defendants is responsible in some manner for the matters and
damages alleged herein, and that their actions were authorized by, ratified by, and
known to the named Defendants. At all times mentioned here, each Defendant,
including the DOE Defendants, was acting as the agent of each of the other Defendants
and was acting within the course and scope of such agency, and Defendants are,
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therefore, jointly and severally liable to Plaintiffs for the damages alleged herein.
Plaintiffs will amend this Complaint, or request leave to do so if required, if and when
the identities of the fictitiously-named Defendants become known.
Additional Relevant Non-Parties
30. RE Loans is a California limited liability company organized on January
1, 2002, having its principal place of business at 201 Lafayette Circle, Lafayette,
California 94549. RE Loans is managed by B-4 Partners, LLC. Upon information and
belief, RE Loans is not authorized by California to offer or sell securities. RE Loans is
not a named defendant in this action because it filed for bankruptcy protection on
September 13, 2011 in the United States Bankruptcy Court for the Northern District of
Texas, Case No. 11-35865.
31. Mortgage Fund ’08, LLC (MF08) is a California limited liability
company spin-off from RE Loans that is operated by Bruce Horwitz and Walter Ng and
Kelly Ng through The Mortgage Fund. MF08 operates out of the same office space as
RE Loans. Upon information and belief, MF08 is not authorized by California to offer
or sell securities. MF08 is not a named defendant in this action because an involuntary
petition for Chapter 7 bankruptcy was filed in its name on September 12, 2011 in the
United States Bankruptcy Court for the Northern District of California, Case No. 11-
46803.
32. B-4 Partners, LLC (“B-4 Partners”) is a California limited liability
company that manages RE Loans. B-4 Partners is an affiliate of RE Loans and Bar-K,
Inc., and as the manager, has the power and authority to act for and bind RE Loans.
The members of B-4 Partners are Walter Ng, Bruce Horwitz, Kelly Ng and Barney Ng.
B-4 Partners is managed by Bruce Horwitz. B-4 Partners operates out of the same
office space as RE Loans. As of November 1, 2007, B-4 Partners became a member of
RE Loans. Upon information and belief, B-4 Partners is not authorized by California to
offer or sell securities. B-4 Partners is not a named defendant in this action because of
the bankruptcy filing on December 8, 2011 in the United States Bankruptcy Court for
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the Northern District of California, Case No. 11-72837.
33. Bar-K, Inc. (“Bar-K”) is a corporation incorporated under the laws of the
State of California. Bar-K also originated and services loans for MF08. Bar-K is an
affiliate of RE Loans and B-4 Partners. Bar-K was organized in 1975 by Walter Ng
and is owned by his sons, Barney Ng and Kelly Ng, who each own 50% of the
corporation’s shares. Bar-K operates out of the same office space as RE Loans. As of
November 1, 2007, Bar-K became a member of RE Loans. Upon information and
belief, Bar-K is not authorized by California to offer or sell securities.
34. The Mortgage Fund, LLC is a California limited liability company that
serves as the manager and sole member of MF08. The members of The Mortgage
Fund, LLC are Walter Ng and Kelly Ng. The Mortgage Fund operates out of the same
office space as RE Loans.
35. Walter Ng resides in Contra Costa County, California and is a managing
member of RE Loans, B-4 Partners and MF08. He is the founder and chairman of Bar-
K and a real estate broker. He purports to have been engaged in the business of
arranging and managing trust deed investments since 1958. Neither Walter nor
Maribel Ng is named defendants in this action because they filed for bankruptcy
protection on May 11, 2011 in the United States Bankruptcy Court for the Northern
District of California, Case No. 11-45175.
36. Bruce Horwitz, M.D. resides in Alameda County, California, and is a
managing member of RE Loans and B-4 Partners. He has been a managing member of
B-4 Partners since 1985. He also held himself out as and acted as a manager of MF08.
Upon information and belief, Bruce Horwitz is not authorized by California to offer or
sell securities. Bruce Horwitz is not named as a defendant in this action because of the
bankruptcy filing on December 15, 2011 in the United States Bankruptcy Court for the
Northern District of California, Case No. 11- 73058.
37. Barney Ng is a citizen of California, Walter Ng’s son and a member of B-
4 Partners and Bar-K. He is or was President of Bar-K and a real estate broker. Barney
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Ng joined Bar-K in 1975. He acted as a manager of RE Loans and MF08. Barney Ng
also owned the Siena Hotel Spa and Casino in Reno, Nevada. Barney Ng is not named
as a defendant in this action because of the bankruptcy filing on December 15, 2011 in
the United States Bankruptcy Court for the Northern District of California, Case No.
11- 73061.
38. Kelly Ng is a resident of California, Walter Ng’s son and a member of B-
4 Partners and Bar-K. Kelly Ng is or was Vice-President of Bar-K and a real estate
broker. He acted as a manager of both Re Loans and MF08. Upon information and
belief, Kelly Ng is not authorized by California to offer or sell securities. Kelly Ng is
not named as a defendant in this action because of the bankruptcy filing on December
15, 2011 in the United States Bankruptcy Court for the Northern District of California,
Case No. 11- 73059.
FACTUAL ALLEGATIONS COMMON TO ALL CLAIMS
I. BACKGROUND AND STRUCTURE OF RE LOANS AND MF08
A. RE Loans
39. RE Loans was formed in 2002 by Walter Ng and Bruce Horwitz. RE
Loans operated as a private hard money lender in California, making secured loans to
high-end residential and commercial real estate developers, among others. The projects
on which developer loans were made included single family homes, apartment
buildings, and undeveloped land in a number of states. Many of the developer loans
originated by RE Loans involved delayed funding commitments requiring RE Loans to
advance loan proceeds in increments over time. In exchange for originating loans, RE
Loans received promissory notes from the developers that were typically secured by
first deeds of trust.
40. RE Loans was managed by four individuals – Bruce Horwitz, Walter Ng,
Barney Ng, and Kelly Ng. Bruce Horwitz and Walter Ng, along with Walter Ng’s two
sons, Barney and Kelly Ng, managed RE Loans through their alter ego company, B-4
Partners. Barney and Kelly Ng also operated RE Loans through another alter-ego
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company called Bar-K, which acted as the servicing agent for the portfolio loans of
which they were the sole members. Barney Ng served as Bar-K’s President and Kelly
Ng served as Bar-K’s Vice-President. On or about November 2007 and pursuant to the
November 1, 2007 Exchange Agreement (the “Exchange Agreement”), discussed infra,
Bar-K became a member of RE Loans.
41. RE Loans raised the money to fund the developer loans by selling
unregistered securities to Plaintiffs and thousands of other private investors in
California and other states. Investors became Members of RE Loans by purchasing
shares costing $1.00 apiece, with a minimum subscription of $20,000 (20,000 shares).
42. As the front men for the RE Loans Managers, Walter Ng and Bruce
Horwitz actively solicited investors to invest monies with RE Loans. They targeted
individuals who were retired or approaching retirement. Many invested all of their
retirement funds. Some invested their entire life savings. The Managers convinced
many investors to mortgage their homes and invest the loan proceeds in RE Loans.
43. The Managers’ message to potential investors was twofold: (1) an
investment with RE Loans was safe and profitable; and (2) Members had access to their
money and could withdraw some or all of their investment.
44. From the beginning, Walter Ng and Bruce Horwitz promised to pay the
Members periodic interest payments on their investments – monthly, quarterly, or
semi-annually. The governing operating agreement did not provide a clear method or
protocol explaining how these promised periodic interest payments would be
determined.
45. RE Loans’ website was replete with slogans about the safety of an RE
Loans investment, telling potential investors that “Safety is our cornerstone,” and “The
first objective of our business is safety and that is the one concept we will not change.”
The Managers continually reassured Members that their investments were secure,
claiming they “have never suffered a loss of principal on any mortgage loan
investment” and had “provided investors with investment returns that have always been
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between 7.5% and 12.5% per annum . . . .”
46. The website also assured investors that their investment was liquid,
stating that “After your account is open, funds may be added or withdrawn at any
time.” The website stated: “A fixed regular amount can be scheduled and sent to you
on a monthly, quarterly, semi-annual or annual basis. If you need a check during the
month, one will be cut and mailed on the Thursday following your request.”
47. The ability of RE Loans Members to withdraw some or all of their capital
was a major feature and selling point. Through fund updates, the Managers repeatedly
assured Members that “[Y]ou may add to or withdraw from your account at any time.”
They told Members: “Currently, we offer an option to make scheduled withdrawals
monthly, quarterly, semi-annually, or yearly, or you may make an unscheduled
withdrawal at any time.”
48. Under the governing operating agreement, RE Loans Members had some
control rights. For instance, Members holding a majority of interest (more than 50% of
all RE Loans shares) could remove the Managers and designate a replacement. A
majority interest of Members could vote to dissolve RE Loans, or (with limited
exceptions) amend the operating agreement. Members were also entitled to withdraw
all or a portion of their investment, upon written notice to the Managers.
49. The Managers arranged RE Loans so that they were paid handsomely.
For example, the Managers were paid brokerage fees, determined on a “case-by-case
basis,” for developer loans they sold to RE Loans. To service the developer loans, the
Managers received 1% per annum of the outstanding principal on the loans. The
Managers paid themselves a management fee of 1.05% (per annum) of the total value
of RE Loans’ total loan portfolio. The continued operation of RE Loans was a
tremendous financial boon to the Managers.
B. MF08
50. MF08 was formed in late 2007 by the RE Loans Managers. Like RE
Loans, MF08 was a limited liability company that took investors’ funds, ostensibly to
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invest in developer real estate loans. MF08 differed from RE Loans in two significant
respects. First, MF08 gave investors promissory notes in return for their money instead
of an equity membership in the company. Second, although advertised as an
investment opportunity, MF08 existed primarily to take investor money and funnel it to
RE Loans in a Ponzi scheme arrangement. Many, but not all of the investors in MF08
were investors in RE Loans.
51. Under California law, the Managers owed the RE Loans Members and
MF08 Noteholders’ fiduciary duties. These duties include, but are not limited to: (a)
the duty of undivided loyalty and the duty to refrain from engaging in transactions
which are unfair or inequitable to RE Loan Members and MF08 Noteholders; (b) the
duty to fully disclose all material facts germane to the fiduciary duty; and (c) the duty
to act in the highest good faith to the RE Loans Members and the MF08 Noteholders
and to refrain from obtaining or accepting any advantage over them.
II. RE LOANS’ OPERATIONS 2002 - 2006
52. RE Loans grew rapidly from 2002 through 2006. According to reports by
the Managers, the number of portfolio loans increased from 13 (December 2002) to 68
(June 30, 2006) and were performing well, providing Members with an average
annualized yield of over 8%. By early 2007, the Managers had raised more than $700
million from approximately 1400 Members, and RE Loans had more than $55 million
in cash on hand. During this time period, the amount of RE Loans’ operating cash
fluctuated, but was always sufficient to fund portfolio loan commitments, pay returns to
the Members and capital withdrawals, and pay the Management their lucrative fees and
commissions.
53. Although RE Loans appeared to be prospering, there was a looming
problem. From 2002 through 2006, the Managers had violated state and federal
securities laws in the sales of RE Loans memberships. Although the membership
interests constituted securities, the offerings were not registered with the Securities and
Exchange Commission (“SEC”). Instead, RE Loans membership interests were sold as
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unregistered offerings under California Corporations Code § 25113(b)(1) and certain
SEC exemptions that restricted the Company’s business to qualified California
residents. These violations gave the Members the right to rescind.
54. The Managers violated the operative securities regulatory requirements in
four ways: (i) they actively solicited and sold to investors residing outside of
California; (ii) they lent money on properties located outside of California (including
Texas, Florida, Wyoming, Washington, South Carolina, and Nevada); (iii) they sold
membership interests to more than 800 investors; and (iv) RE Loans had more than $10
million in total assets.
III. THE MANAGERS, GREENBERG AND WELLS FARGO CONCOCT AND IMPLEMENT AN UNLAWFUL SCHEME
55. By early 2007, the Managers had raised more than $700 million from
approximately 1400 Members, and RE Loans had more than $55 million in cash on
hand.
56. But as 2007 progressed, RE Loans began experiencing a cash liquidity
problem. The burden of funding loan commitments to developers and paying
distributions to the Members surpassed RE Loans’ fundraising capacity. The cash
shortage was exacerbated when, in April 2007, the Managers were told to stop taking
investments in RE Loans because their selling of shares in RE Loans was violating
state and federal securities laws.
57. As alleged above, the Managers had been violating state and federal
securities laws in their sales of RE Loans membership interests since 2002. In March
2007, lawyers from the law firm of Morgan Miller Blair told the Managers that RE
Loans had been violating securities laws since commencing operations in 2002. They
advised the Managers that RE Loans potentially faced substantial civil penalties for
violating the securities laws. They warned them to immediately stop soliciting or
accepting any future investor contributions to avoid knowing violations of California
and federal securities laws.
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58. As of June 2007, RE Loans owed approximately $20 million in portfolio
loan commitments, but had only a little over $1 million in operating cash. Not only
could RE Loans not meet its portfolio loan commitments, it lacked the liquidity to pay
capital withdrawals requested by the Members. Because RE Loans was closed to
further investment, the Managers had no way to raise operating cash and restore the
company’s liquidity.
59. Plaintiffs’ claims are not based on the liquidity problems RE Loans
experienced. Rather, they allege that the Managers, with knowing assistance from
Greenberg and Wells Fargo, pursued a scheme designed to hide RE Loans’ illiquidity,
as well as hide its past securities violations. In doing so, the Managers, Greenberg and
Wells Fargo inflicted devastating harm on the RE Loans Members by stripping them of
their ownership interests in and rights of control over RE Loans, and by devaluing their
investments.
60. The RE Loans Managers knew they were bound as fiduciaries to disclose
to the Members the past securities violations and the existing shortage of operating
cash and address the issues with the Members’ involvement. But disclosing the
information ran the risk that the Members would lose confidence in the Managers and
the safety of their investments. At worst, disclosure of the problems could prompt the
Members to exercise their control rights against the Managers, possibly ending their
ability to continue reaping financial benefits from operating RE Loans.
61. The Managers therefore elected to hide the liquidity and securities
problems. They retained Greenberg to handle the securities violations problem so they
could resume soliciting investment capital. Upon learning of RE Loans’ liquidity
problem, Greenberg attorneys made arrangements with Wells Fargo to provide a line of
credit loan, thus helping the Managers hide the company’s liquidity problem. Upon
information and belief, Greenberg represented Wells Fargo as a client of the law firm
in July 2007 and had represented Wells Fargo and certain of its affiliates in the past.
62. Together, the Managers, Greenberg and Wells Fargo hatched and
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implemented a scheme designed to hide RE Loans’ securities problems and give the
company the illusion of liquidity. The plan involved obtaining a loan from Wells
Fargo, orchestrating a process to trick RE Loans’ Members and thereby obtain
approval of the loan after the fact and ensure that Wells Fargo obtained a primary
security interest in RE Loans assets, and establishing a mechanism for repaying the line
of credit loan.
63. The initial step in the scheme was the line of credit loan from Wells
Fargo to RE Loans. Upon information and belief, Greenberg represented RE Loans
and the Managers in arranging and negotiating the loan transaction.
64. The terms of the line of credit loan – dictated by Wells Fargo – were
draconian. As security for the loan, the Managers acceded to Wells Fargo’s exorbitant
demand for an assignment of all of RE Loans’ assets as security – an amount in excess
of $700 million and – an astounding collateral-to-debt ratio. Wells Fargo required that
RE Loans endorse and deliver $250 million in notes receivables. Upon information
and belief, Wells Fargo demanded and the Managers granted it a first position security
interest in all of RE Loans’ inventory, equipment, chattel paper, books, records, and
trade fixtures, together with all additions, substitutions, replacements, improvements
and repairs to the same.
65. The line of credit loan was a suspicious transaction. The loan was
negotiated, documented and closed within 45 to 60 days, an abnormally expedited
timetable within the commercial lending industry for a $50 million loan. This was
especially true in July 2007. The over $700 million in collateral demanded for a $50
million loan was irregular and excessive.
66. The Managers, Greenberg and Wells Fargo knew that RE Loans lacked
authority to borrow from a third party lender and encumber company assets without
approval of the Members. The operating agreement did not authorize such an action.
To the contrary, the agreement authorized the raising of operating capital only through
cash subscriptions from new investors, existing portfolio developer loans and mergers
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with existing partnerships or LLCs. The operating agreement neither authorized nor
permitted the Managers to assign or pledge the Fund’s assets or any portion of the
Fund’s loan portfolio as security for third-party borrowings.
67. Moreover, the Managers repeatedly promised the Members that RE
Loans would not raise capital through borrowing from third party lenders. For
example, in RE Loans’ first offering circular (the “Initial Offering Circular”), the
Managers told the Members that RE Loans would be capitalized solely from monies
deposited by investors and the proceeds of the Fund’s portfolio loans, not from banks.
The language of the Initial Offering Circular makes this clear; the “Summary of the
Offering” section expressly specified that “the Funds capitalization may be derived
from three sources: (1) cash subscriptions from new investors; (2) contributions of
whole or fractional interests in existing mortgage loans . . . and (3) mergers with
existing limited partnerships and limited liability companies affiliated with the
manager, whose sole assets are qualifying mortgage loans.” The Initial Offering
Circular expressly stated that RE Loans would not seek operating capital from
institutional lenders. In a section entitled “FEDERAL INCOME TAX
CONSEQUENCES,” the Initial Offering Circular assured potential investors that their
investment would not result in unrelated business taxable income, which would accrue
with third-party financing. The Managers stated: “Since the Fund will not utilize
borrowed funds for the purpose of making or investing in loans, interest earned on
Fund loans should not constitute unrelated business taxable income. ...”
68. Between 2002 and the end of 2006, the Managers issued three additional
offering circulars. Each circular contained the same representations and promises as
the Initial Offering Circular. Each disclaimed borrowing money from a third-party
lender, and described a business plan that anticipated adequate amounts of cash in the
operation of the mortgage pool so to obviate the need of any loans or lines of credit
from a third-party lender. And each affirmatively told the Members that “the Fund will
not utilize borrowed funds for the purpose of making or investing in loans . . . .”
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69. Like the RE Loans Managers, Greenberg knew the line of credit loan was
an unauthorized transaction. Upon being retained, Greenberg sent two of its Boston
attorneys to RE Loans’ California headquarters to perform an audit of the internal
compliance and review of RE Loans financial operations and structures. Greenberg
was thus aware that the operating agreement provided no authority for borrowing from
third party lenders, and that the offering circulars expressly stated that the Managers
would not do so.
70. Wells Fargo also knew that the loan was unauthorized. The line of credit
loan agreement states that, as part of its due diligence, Wells Fargo comprehensively
reviewed RE Loans business documents. Wells Fargo was undoubtedly aware of the
RE Loans’ operating agreement and the Managers’ offering circulars.
71. Moreover, upon information and belief, the loan covenants (i)
acknowledged the existence of the Members and their rights with respect to RE Loan
assets pledged to secure the Line of Credit, (ii) required the Members’ interests to be
subordinate to Wells Fargo’s interest in the Line of Credit collateral and (iii)
contemplated the implementation of the Exchange Agreement and the formation of a
new fund to facilitate loan repayment by raising capital from investors.
72. Thus, Wells Fargo knew and understood RE Loans’ structure, the
Managers’ fiduciary duties owed to the Members and that the Managers were acting in
a fashion inconsistent with those duties to the prejudice of the Members’ interests.
73. Nevertheless, the Managers, Greenberg and Wells Fargo decided to
proceed with the line of credit loan in secret. They came up with a process – an
exchange agreement – to try to legitimize the unauthorized loan by obtaining the
Members’ after-the-fact approval.
74. Upon information and belief, Wells Fargo required an after-the-fact
process to obtain loan approval to avoid potential legal problems or conflicts with the
Members over an unauthorized loan.
75. The exchange offering was designed to accomplish more than securing
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approval for the unauthorized Wells Fargo loan. A condition of the line of credit loan
was that Wells Fargo’s security interest be primary over any security interests held by
the Members. Consequently, the exchange offering was designed to eliminate the
Members’ equity shares in RE Loans and replace them with promissory notes with
security interests junior to that held by Wells Fargo.
76. In the exchange offering, RE Loans Members exchanged their equity
membership shares for promissory notes secured by RE Loans’ portfolio loan assets.
The Managers attempted to portray the exchange offering as a legitimate
“restructuring” of RE Loans. But the exchange was in reality a subterfuge to: (i)
persuade the Members to unwittingly agree post-facto to the unauthorized line of credit
loan; (ii) cover up legitimize the Managers’ past undisclosed securities violations; and
(iii) divest the Members of their interests and control rights as members of RE Loans.
77. The Managers and Greenberg made numerous false and misleading
statements of material fact to convince the Members to agree to the exchange offering.
Greenberg drafted the documents related to the exchange offering, and was therefore
fully aware that many of the statements were false or misleading. Through these
misrepresentations, the Managers with Greenberg’s knowing help breached fiduciary
duties to the Members. Moreover, by making these false statements to the Members,
the Managers and Greenberg knowingly committed securities fraud, negligent
misrepresentation and common law fraud.
78. Upon information and belief, Wells Fargo also was aware of the
misleading and false statements contained in the exchange offering documents. Wells
Fargo knew that the representations in the exchange offering documents were false and
misleading as it had full knowledge of the true state of the financial condition of RE
Loans and that the Managers did not have authority to obtain third-party financing or
pledge assets of RE Loans as collateral to Wells Fargo. Wells Fargo required the
process to secure approval of the secret loan, to divest Members of any rights of control
of RE Loans (and therefore any ability to object to or challenge the loan), and to
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cement its position as the primary secured party with respect to RE Loans assets.
79. Together, the Managers and Greenberg drafted a misleading “Fund
Update,” dated August 31, 2007, that the Managers distributed to the Members in
September of 2007 (“Fund Update”). The Fund Update, which was designed to
“reassure” the Members, falsely represented that the funds loan portfolio was
performing well and that the “growth of the Fund requires us to reorganize the Fund
and the structure of your investment to achieve regulatory and operating efficiencies.”
The Fund Update also represented that RE Loans “entered into a line of credit with . . .
Wells Fargo . . . to facilitate liquidity to meet additional cash flow needs” and that the
“use of the line of credit by the Fund is not expected to adversely affect the Fund’s
over-all financial returns.”
80. These representations were materially false and misleading. In reality,
the exchange offering did not result from the “growth of the Fund” nor was it “to
achieve regulatory and operating efficiencies.” Instead, the transaction was
orchestrated to conceal and paper over RE Loans’ longstanding intentional and
undisclosed violations of federal and state securities laws.
81. The Fund Update also represented that the promissory notes would be
secured by all the assets of RE Loans. This was materially false, as it failed to disclose
that the Managers had already pledged substantial RE Loans assets to Wells Fargo in
the line of credit loan transaction.
82. Three months after the Line of Credit was established and depleted –
Greenberg and the Managers sent the investors an October 8, 2007 letter (“October 8
Letter”) explaining the exchange offering, urging Members to convert their equity
membership interests in RE Loans to promissory notes. The letter was drafted by
Greenberg.
83. The October 8 Letter was accompanied by a “Confidential
Memorandum” entitled “R.E. LOANS, LLC, REORGANIZATION PLAN AND
NOTE PROGRAM” (the “Confidential Memorandum”). Greenberg also prepared the
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Confidential Memorandum and the related offering documents, including a proposed
exchange agreement and new operating agreement. Greenberg intended for the
Members to rely upon those documents in their consideration of the exchange
transaction: “This Memorandum is intended to present a general outline of the process
and terms of the reorganization of the Company and the restructuring of the current
Members’ equity investment interests in the Company as debt investment interests.”
84. The Confidential Memorandum falsely represented that the exchange
transaction was being proposed for the purpose of “meeting certain regulatory
requirements” without disclosing that RE Loans had been raising funds through the
illegal sale of securities in violation of federal and state securities laws and that the
Members therefore had the right to rescind their investments as an illegal sale of
securities.
85. The Confidential Memorandum also falsely represented that the Wells
Fargo line of credit would “provide liquidity and facilitate the Fund’s lending capacity
during and after the Reorganization.” This material representation was false because
the Managers had substantially exhausted the Wells Fargo Line of Credit immediately
after it was established months earlier.
86. The Confidential Memorandum further falsely represented that the Wells
Fargo Line of Credit was secured by a senior lien that was “typical for such lines of
credit” when, in reality, the Managers had encumbered all of the Fund’s assets to Wells
Fargo at a grossly excessive and atypical ratio, and endorsed and delivered $250
million in notes receivables to secure the $50 million Line of Credit. The Confidential
Memorandum failed to disclose the amount of collateral already assigned to Wells
Fargo or the disproportionate and unfavorable collateral-to-debt ratio. By failing to
disclose the extent of collateral already pledged to Wells Fargo, the Memorandum
deprived the RE Loans Members of the ability to make informed decisions.
87. The Confidential Memorandum falsely assured the investors that all was
well with RE Loans through misleading statements that “[t]he Loan Portfolio continues
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to perform well,” the properties securing those loans “is adequate in value to preserve
the Fund’s economic interests,” it was “likely . . . that the Fund will be able to pay
principal and interest on” the investor notes, the investor notes would be secured by a
priority lien on RE Loans’ assets (without disclosing that Wells Fargo had a senior lien
encumbering 30% of those assets) and that the investors would be better off after the
proposed reorganization. This was absolutely false as RE Loans was in the midst of a
liquidity crisis and facing insolvency.
88. One of the falsehoods in the Confidential Memorandum was the claim
that RE Loans had always been authorized to borrow from third-party lenders and
encumber company assets in the process. The Confidential Memorandum stated: “The
Fund has authority to borrow capital from third party lenders. As noted in [the] Initial
Offering Circular, [repeated phrase omitted] it is likely that most or all of the Fund’s
loan portfolio would be assigned to such lender as security for the loan(s).”
89. In reality, the Initial Offering subsequent offerings provided that RE
Loans would not incur third-party debt and did not authorize the Managers to assign all
or any of the loan portfolio to a third-party lender. The language quoted in the
Confidential Memorandum is found only in an uncirculated December 2006 offering
circular that was never circulated to the Members.
90. The false and misleading representations disseminated by the Managers
and Greenberg had their intended effect. On or about November 1, 2007, the exchange
offering was approved.
91. The unauthorized line credit loan and exchange offering provided RE
Loans with some operating cash. The Managers used some of the line of credit money
to pay capital distributions to Members, thus perpetuating the illusion that RE Loans
was liquid. The money also enabled the Managers to continue the existence of the
company from which they had been reaping significant financial gains.
92. But these transactions had a devastating effect on the rights and interests
of the RE Loans Members. The Managers’ decision to pledge previously
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unencumbered assets to Wells Fargo materially impaired the interests and rights of the
Members by stripping them of any recourse to RE Loans’ assets. As a result of the
assignment, the Members were placed in a subordinate position to Wells Fargo.
93. The decision to raise money through borrowing from a third party lender
fundamentally altered the nature of the company in which the Members had invested.
By entering the loan in secret, the Managers breached their duty of disclosure to the
Members. Moreover, the Managers breached their duty of fair treatment by unilaterally
– and without notice – encumbering the asset base that existed to back the Members’
investments.
94. In sum, the Exchange Agreement turned the Members into holders of
promissory notes with security interests second to that held by Wells Fargo. In one
transaction orchestrated by the Managers, Greenberg and Wells Fargo, the Members
lost all rights they had as equity shareholders in RE Loans and were relegated to
second-tier creditors with junior security interests.
95. Through deceit and non-disclosure, Defendants disenfranchised the
Members, encumbered the assets upon which the Members’ investments were based,
and kept them in the dark about RE Loans’ continuing liquidity problems. The
Managers retained all ownership and control of RE Loans, and were able to continue
benefitting themselves through the payment of commissions, servicing and
management fees.
IV. THE PONZI SCHEME WITH MF08
96. As part of their scheme, the Managers, Greenberg and Wells Fargo
agreed to the formation of a new investment company – MF08 – that would solicit
investor capital and funnel it to RE Loans to enable RE Loans to repay the loan and
perpetuate the illusion of the company’s liquidity.
97. The formation of MF08 was envisioned from the beginning. The
Managers, Greenberg and Wells Fargo knew that RE Loans was closed to new
investments and therefore knew that RE Loans would need another source of income
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with which to repay the loan. Indeed, the line of credit agreement acknowledged that
RE Loans was no longer accepting new investor contributions and that the Fund
Managers intended to set up a new feeder fund, MF08, to funnel new investor funds
from it to capitalize RE Loans and to service the debt created by the Line of Credit.
98. Soon after the exchange offering, the Managers formed MF08, which was
managed by the same individuals and entities who managed RE Loans. The Managers
solicited new and existing RE Loan investors to invest in MF08 and began raising tens
of millions of dollars from them.
99. Knowing that RE Loans’ investors were unaware of its liquidity problems
and could no longer invest in that company, the Managers targeted them to invest in
their new company, MF08. Their efforts were successful. In a short period of time,
MF08 had raised tens of millions of dollars from these investors.
100. Ironically, the Managers enticed MF08 investors with the same “safe
investment” approach they used with RE Loans. They highlighted the fact that MF08
was “sponsored by the principals of RE Loans.” The Managers failed to mention,
however, that RE Loans already had been illiquid for several months. Nor did they
mention anything about the unauthorized borrowing from Wells Fargo or the unfair
exchange offering. A number of RE Loans Members, still unaware of their unfair
treatment as investors in RE Loans and misled by the Managers’ continued
misrepresentations, also invested in MF08.
101. From the beginning, the MFO8 Managers operated MF08 in a Ponzi
scheme arrangement, using MF08 to funnel cash to the now-closed RE Loans. The
purpose of creating MF08 was not as represented to investors but rather was to be a
quick source of money for RE Loans to pay distributions and other expenses of RE
Loans, including its loan obligations to Wells Fargo.
102. The Managers and Greenberg committed negligent misrepresentation,
securities and common law fraud a second time by creating and giving potential MF08
investors solicitation materials that contained false or misleading statements of material
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fact. In the Fall of 2007, Greenberg once again prepared these materials. As alleged
above, Greenberg knew that MF08 was a Ponzi-scheme company set up to funnel funds
from investors to RE Loans. The Managers and Greenberg therefore knew that the
representations about MF08 as a legitimate investment company established to make
legitimate portfolio loans were materially false. They knew that the representations
about MF08 being a safe investment vehicle were false. Greenberg created and
disseminated these materials with intent that investors rely on them and invest their
money with MF08.
103. The MF08 Offering Memorandum emphasized the safety of the
investment by stating that the portfolio loans for which it was spending the investors’
money would “be secured by liens against real property and associated personal
property.” But soon after its formation, MF08 transferred approximately $40 million to
RE Loans without any security.
104. The MF08 offering memorandum (entitled “Mortgage Fund ’08 Note
Program”), prepared by Greenberg and given to potential investors, stated that MF08
was being formed for the purpose of lending capital to borrowers to finance real estate
projects. In reality, while MF08 may have made some legitimate portfolio loans, its
true purpose was to channel money raised from MF08 investors to RE Loans and
potentially to Wells Fargo for repayment of the Loan.
105. The MF08 offering circular states that that the principals of the company
(who are also principals of RE Loans) have a “proven lending record” of sponsoring
investments that “produce solid returns to their investors,” and that “[t]o date, no
investor has experienced a loss of investment principal through investment vehicles
sponsored by the Principals or their affiliates.” In reality, RE Loans was at the time
experiencing a liquidity crisis that prevented the Members from making capital
withdrawals from their accounts.
106. The Managers operated RE Loans and MF08 in tandem as a Ponzi
scheme. Funds raised from the MF08 investors were loaned to RE Loans to pay
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distributions and other expenses of RE Loans. Bruce Horwitz described it under oath
as follows:
Q. Was it true that there was a $40 million transfer from
Mortgage Fund ‘08 into RE Loans?
A. I don’t know the exact numbers, but what happened was we
were winding the Fund [RE Loans] down and we needed
more money for investors [in] the fund.
107. The Managers’ accounting of these transfers from MF08 to RE Loans, to
which Wells Fargo was undoubtedly privy, is also telling. Instead of recording the
$40,129,801.42 as a straight liability owed by RE Loans to MF08, transfers were listed
in the RE Loan’s books as investors purchasing membership shares in the RE Loans.
The transfers, which started in December 2007 and continued through March 2008, and
RE Loans’ accounting of them, were made to make the RE Loans appear liquid.
108. Wells Fargo knew about and assisted the Ponzi scheme operation of
MF08. Wells Fargo wanted to be repaid for its line of credit loan, but knew that RE
Loans was closed to new investments and therefore unlikely to be able to generate
sufficient funds for loan repayment. Wells Fargo was aware of the plan to create a new
fund because it is included in the loan agreement provisions. As RE Loans began
having difficulties making loan payments, Wells Fargo repeatedly amended the
operative Loan documents, imposing penalties, higher interest rates and more onerous
collateral requirements. Through this process, Wells Fargo kept a close eye on RE
Loans business and was fully aware that RE Loans was improperly taking monies from
MF08.
109. Wells Fargo assisted in covering up the Ponzi scheme relationship
between RE Loans and MF08. When MF08 transferred $40 million to RE Loans
without any accompanying security agreement in favor of MF08, Wells Fargo
intervened, instructing the RE Loans Managers to disguise the Ponzi scheme
transaction and re-characterize the MF08 transfer as a “sale” of properties from RE
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Loans to MF08. To facilitate this, Wells Fargo allowed the Managers to select three
properties RE Loans had previously assigned to Wells Fargo as security for the line of
credit, and assign them instead to MF08. Wells Fargo executed a series of collateral
assignments and reassignments that were made “effective” as of earlier dates.
110. The Managers solicited investors with the false and misleading MF08
Offering Memorandum from the Fall of 2007 until at least June 20, 2009.
111. The incestuous commingling of tens of millions of dollars of funds
between RE Loans and MF08, ultimately rendered MF08 insolvent. MF08 promissory
notes are worthless.
112. Within months after the exchange transaction, RE Loans defaulted on the
Wells Fargo Line of Credit. On January 15, 2009, Development Specialists, Inc., the
designated collateral agent under the Members promissory notes security agreement,
declared that RE Loans had defaulted on the promissory notes held by the Members.
MF08 also is in default and has failed to make payments as required by its notes to
investors.
113. Wells Fargo has exercised its rights as secured creditor with respect to the
collateral assigned by RE Loans and is in the process of liquidating the underlying
properties. RE Loans, MF08, Bruce Horwitz, Barney Ng, Kelly Ng, Walter Ng and B-
4 Partners have all filed (voluntarily or involuntarily) for bankruptcy protection.
V. THE UNLAWFUL SCHEME HARMED THE RE LOANS MEMBERS
114. The RE Loans Managers’ decision to engage in the secret and deceitful
plan with Greenberg and Wells Fargo ultimately caused the decimation of the
Members’ investments. In June 2007, when RE Loans’ operating cash shortage became
severe, RE Loans’ portfolio loans upon which the Members’ investments were based
apparently were performing satisfactorily. Had the Managers disclosed the information
to the Members about the past securities violations and existing liquidity problem – as
their fiduciary duty required – the ensuing secret and fraudulent plan with Greenberg
and Wells Fargo that stripped the Members of their equity rights and undermined their
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investments would not have been carried out. Had the Managers honored their
fiduciary duty of loyalty and told the Members the truth, the Members would have at
least had the option to take steps to save at least some of their initial investments. The
actions of the Managers, Greenberg and Wells Fargo effectively prevented the
Members from protecting themselves.
APPLICATION OF THE DISCOVERY RULE
115. Plaintiffs and the Class did not and could not reasonably have discovered
the alleged breaches of fiduciary duties, misrepresentations and corresponding
securities violations and fraud until on or after April 2010, when Bruce Horwitz and
Walter Ng for the first time disclosed (in unrelated litigation) copies of two certified
letters, both from Barney Ng, one addressed to B-4 Partners and the other to the
Company. These letters set forth in detail the misconduct of the Managers. Plaintiffs
and the Class could not have reasonably discovered this proprietary, insider
information any sooner than April 2010. Indeed, the only parties who have access and
control of this information – Greenberg, Wells Fargo, and the individual defendants
and their entities – all have obvious incentives to keep this information secret and out
of the public domain. Even looking beyond its self-interest, Greenberg will not and
cannot divulge client confidences. Similarly, Wells Fargo has denied at least one, and
likely several, Noteholders’ requests for this information on the basis of confidentiality.
There is simply no other possible avenue Plaintiffs or the Class could have pursued to
obtain this highly individualized and specific insider information. Nor is there any
other entity willing to produce it.
116. The Barney Ng letters, which are dated December 30, 2009, were
disclosed in the midst of litigation in an unrelated case. They are not everyday public
records. Nor are they available or readily accessible to the everyday reasonable
investor. Instead, the information in the letters is pure insider, off-the-books
information that for the first time triggered storm warnings indicative of Defendants’
several breaches of fiduciary duties and material misstatements of facts made in
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conjunction with the exchange offering.
117. The RE Loans Members and MF08 Noteholders could not reasonably
have discovered the wrongdoing earlier due to Defendants’ active concealment of the
facts. For example, on December 19, 2008, the Managers sent a letter to all investors
regarding the missed interest payments in which they gave assurances to the investors
explaining that they had “finally reached an agreement with the bank wherein the Fund
would be permitted to draw against the line of credit for purposes of (1) paying interest
to Noteholders and (2) advancing construction monies pursuant to the Fund’s current
portfolio loan obligations.”
118. Plaintiffs and the Class aver that despite their reasonable efforts, the
causes of action alleged herein could not have accrued until at the very earliest April
2010.
ALLEGATIONS CONCERNING THE PLAINTIFFS
I. Plaintiff Gordon Noble
119. Plaintiff Gordon Noble started investing in RE Loans in or about May
2002.
120. Mr. Noble thereafter met with Bruce Horwitz at RE Loans’ Lafayette,
California headquarters. At that meeting, Bruce Horwitz explained the history of RE
Loans and provided a general description of its operations and business model to Mr.
Noble.
121. Mr. Noble thereafter opened an account, RE Loans’ account number
1NOB015. This investment was made in the name of the Gordon Noble IRA, # N0067.
122. From May 2002 forward, RE Loans sent Mr. Noble various documents
including the offering circulars, the operating agreement and letters soliciting
additional investments and assuring him that his investment was safe and would remain
safe going forward. RE Loans sent these types of letters to Mr. Noble through the end
of 2007 and he continued to rely upon them in keeping his investment with RE Loans.
123. In 2007, Mr. Noble received the written exchange offering materials and
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relied upon them in voting for the Exchange Agreement.
124. On or about November 1, 2007, Mr. Noble received a “Secured
Promissory Note” from the Managers in exchange for his membership interest, which
had increased in value since May 2002 due to the reinvestment of interest.
125. As of December 31, 2010, Mr. Noble’s account totaled $543,016.
126. To date, RE Loans has not made any payments on the promissory note
held by Mr. Noble.
127. Had Mr. Noble known about the Wells Fargo Line of Credit, the pledging
of RE Loans’ assets for that credit, its operating cash problems, or that RE Loans was
engaged in ongoing and systematic SEC violations, he would not have continued to
invest in RE Loans, voted for the Exchange Agreement, or kept his money invested
with the Company.
128. As a direct result of the conduct alleged herein, Plaintiff Gordon Noble
has been damaged in an approximate amount of $543,016.
II. Plaintiff Arlene Dea Deeley
129. In August 2005, Plaintiff Arlene Dea Deeley inherited one of her
mother’s investments with RE Loans with a then-value of approximately $76,896.71.
Prior to her mother’s death, Ms. Deeley had joined her mother at one of RE Loan’s
investor appreciation dinners at the Silver Dragon Restaurant in Alameda County and
heard the Managers’ message about the safety of investing in its Fund.
130. With her inheritance, Ms. Deeley replaced her mother as a Member in RE
Loans, holding approximately 76,900 units.
131. The Managers continued to send Ms. Deeley letters soliciting additional
investments and assuring that her existing investment was safe and would remain safe
going forward. They sent these types of letters to Ms. Deeley through the end of 2007.
132. In considering the proposed Exchange Agreement, Ms. Deeley relied
upon the written information sent to her by the Managers which assured her that the
new promissory notes would be secured by all of RE Loans’ assets.
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133. On or about November 1, 2007, Ms. Deeley received a “Secured
Promissory Note” in the amount of $92,052.07 from the Managers in exchange for her
membership interest, which represented an increase in value (due to reinvestment of
interest) since she inherited her mother’s units in 2005.
134. That same month, Ms. Deeley began receiving materials from the
Managers touting their new investment vehicle, MF08. The solicitations began with a
November 2007 form letter from Walter Ng and Kelly Ng for The Mortgage Fund
announcing the MF08 fund and asking for her consideration of the enclosed materials.
Enclosed with the letter were MF08’s Confidential Offering Memorandum, a
Subscription Booklet, a form of Security Agreement, and closing instructions.
135. The Managers’ solicitations continued. For example, a February 18,
2008 letter from the RE Loans Managers advertised MF08.
136. Through these solicitations, the Managers made the same assurances
about MF08 that they made about RE Loans – that investments were safe and that
MF08 would take a conservative approach to lending.
137. Ms. Deeley believed the Managers’ representations. In May 2008, in
reliance on the Managers’ representations, she invested $120,000 in MF08 in exchange
for another purportedly “secured” promissory note.
138. The balance as of January 1, 2010 of Ms. Dea Deeley’s RE Loans
Company account is $99,025.84 and her MF08 Company account is $130,862.47.
139. To date, neither RE Loans nor MF08 has made any payments on the
promissory notes held by Ms. Deeley.
140. Ms. Deeley did not know until recently, and was not advised by the
Managers that RE Loans established a line of credit with a third-party lender.
141. Nor did the Managers ever ask Ms. Dea Deeley, as a member, to pre-
approve the establishment of the Line of Credit.
142. Ms. Deeley also did not know until recently, and was not advised by the
Managers that the Company had pledged its assets as security for that Line of Credit.
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143. Had Ms. Deeley known about the Line of Credit, the pledging of RE
Loans’ assets for that credit, the company’s operating cash problems, or that RE Loans
was engaged in ongoing and systematic SEC violations, she would not have continued
to invest in RE Loans, would have voted against the Exchange Agreement, or
withdrawn her money invested with RE Loans.
144. Ms. Deeley did not know until recently, and was not advised by the
Managers, that contrary to the Managers’ representations that MF08 would be using the
investors’ funds to make loans secured by liens against real property, MF08 was
instead establish to serve as a feeder fund for RE Loans and to service RE Loans’ line
of credit loan debt. Had Ms. Deeley known about the true purpose of MF08, she would
not have invested her money in MF08 and would have withdrawn her investment in RE
Loans.
145. As a direct result of the conduct alleged herein, Plaintiff Arlene Dea
Deeley has been damaged in an approximate amount of $229,888.31.
III. Plaintiff Fredric C. Mendes
146. Plaintiff Fredric Mendes started investing in RE Loans in or about 2005.
147. Mr. Mendes thereafter opened three accounts: (1) RE Loans account
number MEN027, in the name of the IRA Service Custodian for the benefit of Fredric
S. Mendes’ IRA account number 015945; (2) RE Loans account number MEN025, in
the name of Fredric S. Mendes, Trustee of Fredric S. Mendes Revocable Trust; and (3)
RE Loans account number MEN026, in the name of Fredric S Mendes or Nora
Mendes. From 2006 forward, RE Loans sent Mr. Mendes various documents including
the offering circulars, the operating agreement and letters soliciting additional
investments and assuring him that his investment was safe and would remain safe
going forward. RE Loans sent these types of letter to Mr. Mendes through the end of
2008 and he continued to rely upon them in keeping his investment with RE Loans.
148. In September of 2007, Mr. Mendes received the written exchange
offering materials and relied upon them in voting for the Exchange Agreement.
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149. On or about November 1, 2008, Mr. Mendes received a “Secured
Promissory Note” from the Managers in exchange for his membership interest, which
had increased in value since 2005 due to the reinvestment of interest.
150. As of September 2, 2011, Mr. Mendes’ accounts totaled (1)
$1,173,293.00, (2) $180,528.00, (3) $5,906.00.
151. To date, RE Loans has not made any payments on the promissory note
held by Mr. Mendes.
152. Had Mr. Mendes known about the Wells Fargo Line of Credit, the
pledging of RE Loans’ assets for that credit, its operating cash problems, or that RE
Loans was engaged in ongoing and systematic SEC violations, he would not have
continued to invest in RE Loans, voted for the Exchange Agreement, or kept his money
invested with the Company.
153. As a direct result of the conduct alleged herein, Plaintiff Fredric Mendes
has been damaged in an approximate amount of $1,359,727.00.
IV. Plaintiff Nancy Rapp
154. Plaintiff Nancy Rapp started investing in RE Loans in or about January
2002.
155. Ms. Rapp thereafter opened RE Loans’ account number RAP015. The
investment was made in the name of the Nancy Lee Rapp Trustee, Nancy Lee Rapp
Living Trust.
156. From 2002 forward, RE Loans sent Ms. Rapp various documents
including the offering circulars, the operating agreement and letters soliciting
additional investments and assuring Ms. Rapp that her investment was safe and would
remain safe going forward. RE Loans sent these types of letter to Ms. Rapp through
the end of 2008 and she continued to rely upon them in keeping her investment with
RE Loans.
157. In September 2007, Ms. Rapp received the written exchange offering
materials and relied upon them in voting for the Exchange Agreement.
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158. On or about November 1, 2007, Ms. Rapp received a “Secured
Promissory Note” from the Managers in exchange for her membership interest, which
had increased in value due to the reinvestment of interest.
159. As of September 1, 2001, Ms. Rapp’s account totaled $1,932,918.00.
160. To date, RE Loans has not made any payments on the promissory note
held by Ms. Rapp.
161. Had Ms. Rapp known about the Wells Fargo Line of Credit, the pledging
of RE Loans’ assets for that credit, its operating cash problems, or that RE Loans was
engaged in ongoing and systematic SEC violations, she would not have continued to
invest in RE Loans, voted for the Exchange Agreement, or kept her money invested
with the Company.
162. As a direct result of the conduct alleged herein, Plaintiff Nancy Rapp has
been damaged in an approximate amount of $1,932,918.00.
V. Plaintiff Phillip Cantor
163. Plaintiff Philip Cantor started investing in RE Loans in or about July 3,
2003.
164. Mr. Cantor thereafter opened RE Loans’ account number CAN015. The
investment was made in the name of the Philip T. Cantor, Philip T. Cantor Living
Trust.
165. From 2003 forward, RE Loans sent Mr. Cantor various documents
including the offering circulars, the operating agreement and letters soliciting
additional investments and assuring him that his investment was safe and would remain
safe going forward. RE Loans sent these types of letter to Mr. Cantor through the end
of 2008 and he continued to rely upon them in keeping his investment with RE Loans.
166. In September 2007, Mr. Cantor received the written exchange offering
materials and relied upon them in voting for the Exchange Agreement.
167. On or about November 2007, Mr. Cantor received a “Secured Promissory
Note” from the Managers in exchange for his membership interest, which had
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increased in value since due to the reinvestment of interest.
168. As of September 2011, Mr. Cantor’s account totaled $2,346,625.00.
169. To date, RE Loans has not made any payments on the promissory note
held by Mr. Cantor.
170. Had Mr. Cantor known about the Wells Fargo Line of Credit, the
pledging of RE Loans’ assets for that credit, its operating cash problems, or that RE
Loans was engaged in ongoing and systematic SEC violations, he would not have
continued to invest in RE Loans, voted for the Exchange Agreement, or kept his money
invested with the Company.
171. As a direct result of the conduct alleged herein, Plaintiff Phillip Cantor
has been damaged in an approximate amount of $2,346,625.00.
VI. Plaintiff John Emanuele
172. Plaintiff John Emanuele started investing in RE Loans in or about
January 2002.
173. Mr. Emanuele thereafter opened RE Loans’ account number EMA010.
The investment was made in the name of John Emanuele. The investment was made in
the name of the John Emanuele.
174. From 2005 forward, RE Loans sent Mr. Emanuele various documents
including the offering circulars, the operating agreement and letters soliciting
additional investments and assuring Mr. Emanuele his investment was safe and would
remain safe going forward. RE Loans sent these types of letter to Mr. Emanuele
through the end of 2008 and he continued to rely upon them in keeping his investment
with RE Loans and Mortgage Fund 08.
175. In January 2002, Mr. Emanuele opened RE Loans’ account number
EMA010. The investment was made in the name of the John Emanuele Trustee of the
John Emanuele 1984 Trust.
176. In 2008, Mr. Emanuele thereafter opened an account, Mortgage Fund 08’
account number 08EMA00. He invested $25,000. The investment was made in the
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name of the John Emanuele Trustee of the John Emanuele 1984 Trust.
177. Mr. Emanuele received the written RE Loans exchange offering materials
and relied upon them in voting for the Exchange Agreement.
178. Mr. Emanuele received the written Mortgage Fund 08 offering materials
and relied upon them in investing $25,000.00 in Mortgage Fund 08.
179. On or about November 1, 2007 Mr. Emanuele, received a “Secured
Promissory Note” from the Managers in exchange for her membership interest in RE
Loans, which had increased in value due to the reinvestment of interest.
180. As of October 2, 2008, RE Loans account Mr. Emanuele account totaled
$183,215.00.
181. As of March 31, 2009, the MF08 account Mr. Emanuele account totaled
$25,930.
182. To date, RE Loans and MF08 have not made any payments on the
promissory notes held by Mr. Emanuele.
183. Had Mr. Emanuele known about the Wells Fargo Line of Credit, the
pledging of RE Loans’ assets for that credit, its operating cash problems, or that RE
Loans was engaged in ongoing and systematic SEC violations, he would not have
continued to invest in RE Loans, voted for the Exchange Agreement, or kept her money
invested with the Company.
184. Had Mr. Emanuele known about the purchase of RE Loans assets by
MF08, the Wells Fargo Line of Credit the pledging of RE Loans’ assets for that credit,
its operating cash problems, or that RE Loans was engaged in ongoing and systematic
SEC violations, he would not have continued to invest in MF08 and would not have
kept his money invested with either company.
185. As a direct result of the conduct alleged herein, Plaintiff, Mr. Emanuele
has been damaged in an approximate amount of $234,145.00.
CLASS ALLEGATIONS
186. Plaintiffs bring this action on behalf of the following investor classes (the
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“Classes” or the “Class”): • All persons who (a) purchased or held a membership interest in R.E.
Loans, LLC and (b) received a promissory note(s) from R.E. Loans on or after November 1, 2007, that have not been fully repaid (“the RE Loans Class”).
• All persons who purchased or held a promissory note(s) issued by Mortgage Fund ’08 that have not been fully repaid (“the Mortgage Fund ‘08 Class”).
187. Excluded from the Class are: (a) The Managers, the Defendants, and (b)
members of their families, their estates, any entity in which they have a controlling
interest or which is a parent, subsidiary or affiliate of or is or was controlled by RE
Loans, MF08, Walter Ng Investments, Bar-K, B-4 Partners, The Mortgage Fund and
their officers, directors, managers, employees, affiliates, agents, legal representatives,
heirs, predecessors, successors, and assigns.
188. Membership in the Class is so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial
benefits to the parties, Class members, and the Court. Although the number of Class
Members and their names are presently unknown, this information can be readily
determined from RE Loans’ and MF08’s records. Upon information and belief, the
Class includes thousands of investors, most of whom are California citizens.
189. There is a well-defined community of interest in the questions of law and
fact involved in this case. Questions of law and fact common to the members of the
Classes that predominate over questions that may affect only individual members of the
Classes include:
• Whether Defendants violated and are liable for violations of the
California Securities Act;
• Whether Defendants may invoke any statutory or common law
defense to liability under the California Securities Act;
• Whether Defendants have aided and abetted others in breaching
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fiduciary duties owed to the Class;
• Whether Defendants made false misrepresentations and/or omitted
to disclose material information to Plaintiffs and the Class and/or aided
and abetted others, and whether Plaintiffs and the Class have sustained
injury by reason of Defendants’ actions, misrepresentations and
omissions;
• Whether Defendants are jointly and severally liable for their
actions, misrepresentations and omissions;
• Whether Plaintiffs and the other members of the Class are entitled
to equitable relief; and
• Whether Plaintiffs and the other members of the Class are entitled
to recover damages and the amount of damages that members of the
Class are entitled to recover.
190. Plaintiffs’ claims are typical of the Class members’ claims, and are based
on and arise out of uniform misrepresentations, omissions and breaches as described
above. If litigated individually, the claims of each Class member would require proof
of the same material and substantive facts, rely upon the same remedial theories, and
seek the same relief. Then, once Defendants’ liability is established, the Court and a
jury can determine the claims of each member of the Class on the uniform basis of the
value and date of their investments. There will also be no difficulty in the management
of this litigation as a class action.
191. Plaintiffs have retained counsel competent and experienced in class
action, securities fraud, and Ponzi scheme litigation. Plaintiffs have no interests
antagonistic to or in conflict with those of the Class, will fairly and adequately protect
the interests of the Class members, and are committed to the vigorous prosecution of
this action.
192. A class action is superior to other available methods for the fair and
efficient adjudication of this controversy since joinder of all members of the Class is
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impracticable. Proceeding as a class action will permit an orderly and expeditious
administration of the Classes’ claims, will foster economies of time, effort and expense
and will ensure uniformity of decisions.
LEGAL CLAIMS RELATING TO MEMBERSHIP IN RE LOANS
FIRST CAUSE OF ACTION AIDING AND ABETTING BREACH OF FIDUCIARY DUTIES
(Defendants Greenberg and Wells Fargo)
193. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
194. At all times relevant hereto, B-4 Partners, Bar-K, Walter Ng, Bruce
Horwitz, Barney Ng and Kelly Ng acted and failed to act as Managers of RE Loans. In
their capacity as the Company’s Managers, they owed certain fiduciary obligations to
Plaintiffs and the Class, including but not limited to those duties prescribed under the
RE Loans’ Operating Agreement and the several published Offering Circulars under
which Plaintiffs and the Class purchased their membership units.
195. The Managers also owed Plaintiffs and the Class the following fiduciary
obligations under Cal. Civ. Code § 17153 and by its reference § 16404(a):
a. The duty of undivided loyalty and the duty to refrain from
engaging in unfair transactions with Members;
b. The duty to fully disclose all material facts germane to the
fiduciary relationship;
c. The duty to refrain from acting on behalf of any party having an
interest adverse to the Members interests; and/or
d. The duty to act in the highest good faith to the Members and to
refrain from obtaining or accepting any advantage over them in the
Company’s affairs by the slightest misrepresentation or
concealment.
196. Additionally, Plaintiffs and the Class reposed trust and confidence in the
Managers to handle their investments. And in turn, the Managers accepted that trust
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and confidence, thereby creating a fiduciary relationship.
197. The Managers breached their fiduciary obligations to Plaintiffs and the
Class and caused damages to Plaintiffs and the Class in an amount to be proven at trial
through their specific actions and inaction as alleged in ¶¶ 55-114, 119-85, supra.
198. Defendant Wells Fargo acted with complicity and knowledge of those
breaches, as alleged in ¶¶ 59, 61-76, 78, 94-97, 107-09, supra.
199. Defendant Greenberg acted with complicity and knowledge of those
breaches, as alleged in ¶¶ 59, 61-66, 69, 77-89, 96-97, 102-05, supra.
200. Defendant Greenberg aided and abetted, encouraged, and rendered
substantial assistance to B-4 Partners, Bar-K, Walter Ng, Bruce Horwitz, Barney Ng
and Kelly Ng in breaching their fiduciary duties to Plaintiffs and the Class, as alleged
in ¶¶ 59, 61-66, 69, 73, 77-90, 94-97, supra.
201. Defendant Wells Fargo aided and abetted, encouraged, and rendered
substantial assistance to B-4 Partners, Bar-K, Walter Ng, Bruce Horwitz, Barney Ng
and Kelly Ng in breaching their fiduciary duties to Plaintiffs and the Class, as alleged
in ¶¶ 59, 61-65, 70-75, 78, 94-98, 101, 107-09, supra.
202. Defendants Greenberg and Wells Fargo realized and intended that their
conduct would substantially assist the accomplishment of the wrongful conduct and
scheme alleged herein at ¶¶ 59, 61-65, 70-74, 77-90, 96-98, 102-05, 108-09, supra.
203. As a result of the substantial assistance of Defendants Greenberg and
Wells Fargo, Plaintiffs and the Class have suffered and continue to suffer monetary
losses, all in an amount to be determined according to proof at trial.
204. Defendants Greenberg’s and Wells Fargo’s individual and collective acts
and omissions were substantial contributing factors and causes of violations of the
duties as set forth in this Count and to Plaintiffs’ and the Class’ indivisible harm and
damages, rendering Defendants jointly and severally liable to Plaintiffs and the Class.
SECOND CAUSE OF ACTION SECONDARY LIABILITY FOR SECURITIES FRAUD
AMENDED AND CONSOLIDATED COMPLAINT 42
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(Defendants Greenberg and Wells Fargo)
205. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
206. RE Loans investment units were sold to Plaintiffs and the Class. Those
units, as described under the several published Offering Circulars conveying
membership interests, were securities under Cal. Corp. Code § 25019.
207. The November 1, 2007 exchange of Plaintiffs’ and the Class members’
membership interest securities for promissory notes created a debt interest security,
which is still a security under Cal. Corp. Code § 25019.
208. RE Loans’ securities were sold in, within or from California.
209. In connection with the offer and sale of securities, RE Loans directly and
indirectly made untrue statements of material fact and omitted to state material facts
necessary to make the statements made, in light of the circumstances under which they
were made, not misleading, in violation of under Cal. Corp. Code § 25401, including
but not limited to the misrepresentations and omissions set forth in ¶¶ 77-89, supra.
210. B-4 Partners, Bar-K, Bruce Horwitz, Walter Ng, Kelly Ng and Barney Ng
knowingly and substantially assisted the Company’s securities law violations in the
manner and for the reasons set forth in ¶¶ 57, 62, 73-89, supra. B-4 Partners, Bar-K,
Bruce Horwitz, Walter Ng, Kelly Ng and Barney Ng’s actions were done with the
intent to induce the investors’ reliance on knowing misrepresentations or omissions,
and such actions and misrepresentations materially assisted in the securities fraud.
211. Greenberg knowingly and substantially assisted the Company’s securities
law violations in the manner and for the reasons set forth in ¶¶ 57, 73-89, supra.
Greenberg’s actions were done with the intent to induce the investors’ reliance on
knowing misrepresentations or omissions, and such actions and misrepresentations
materially assisted in the securities fraud.
212. Wells Fargo knowingly and substantially assisted the Company’s
securities law violations in the manner and for the reasons set forth in ¶¶ 67-78, 107-09,
AMENDED AND CONSOLIDATED COMPLAINT 43
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supra. Wells Fargo’s actions were done with the intent to induce the investors’
reliance on knowing misrepresentations or omissions, and such actions and
misrepresentations materially assisted in the securities fraud.
213. Accordingly, pursuant to Cal. Corp. Code § 25504.1, Greenberg and
Wells Fargo are jointly and severally liable to Plaintiffs and the Class for rescessionary
damages, monetary restitution and pre- and post-judgment interest at the legal rate,
costs, and any additional relief as this Court may deem appropriate under the
circumstances.
THIRD CAUSE OF ACTION FRAUD BY MISREPRESENTATION
(Defendant Greenberg)
214. Plaintiffs incorporate by reference each of the preceding paragraphs as
though fully set forth herein
215. Greenberg and the Managers made material misrepresentations to
Plaintiffs and the Class as alleged in ¶¶ 77-90, supra.
216. As described in ¶¶ 69, 77, 79, supra, Greenberg and the Managers knew
that these statements to Plaintiffs and the Class were false.
217. Greenberg and the Managers made these statements with the intent to
defraud Plaintiffs and the Class of their equity interests and rights through the
Exchange Agreement, as set forth in ¶¶ 61-66, 69-75, 77, 83, 87, 94-95, supra.
218. Greenberg’s and the Managers’ misrepresentations were conveyed
through uniform writings mailed to each Member, including Plaintiff and the Class, as
set forth in ¶¶ 76-77, 78-88, supra.
219. Plaintiffs and the Class believed the representations made by Greenberg
and the Managers were true or were ignorant of their falsity.
220. In reliance on Greenberg’s and the Managers’ misrepresentations,
Plaintiffs and Class Members were induced to, and did, accept the Exchange Offering.
Had Plaintiffs or the Class known the true facts, they would not have taken such action.
AMENDED AND CONSOLIDATED COMPLAINT 44
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221. Plaintiffs’ and the Class’ reliance upon Greenberg’s and the Managers’
representations were reasonable and justified.
222. As a proximate result, Plaintiffs and the Class Members have been
injured by Greenberg’s and the Managers’ fraudulent actions.
223. According to Cal. Civil Code § 1709, Greenberg is liable for Plaintiffs’
and the Class Members’ damages.
224. The actions of Greenberg as alleged herein, constitute oppression, fraud,
or malice, as those terms are defined in California Civil Code § 3294, entitling
Plaintiffs, and each of them, to an award of punitive damages.
FOURTH CAUSE OF ACTION FRAUD BY CONCEALMENT & SUPPRESSION OF FACTS
(Defendant Greenberg)
225. Plaintiffs incorporate by reference each of the preceding paragraphs as
though fully set forth herein
226. The Managers concealed and suppressed material facts from the
Members. They had a duty to disclose these facts because: (1) a fiduciary relationship
existed between themselves and Plaintiffs and the Class as RE Loans’ Members, and
(2) they communicated information that was misleading in light of the facts concealed
and suppressed.
227. The Managers concealed and suppressed facts from the Members as set
forth in ¶¶ 56-101, 107, 114, supra.
228. As described in ¶¶ 56-101, 107, 114, supra, the Managers knew that these
facts were necessary to make material statements made not misleading.
229. The Managers made misrepresentations and, concealed and suppressed
facts with the intent to defraud Members of their equity interests and rights in RE
Loans through the Exchange Agreement, as set forth in ¶¶ 56-101, 107, 114, supra.
230. Greenberg also concealed and suppressed facts from Plaintiffs and the
Class as alleged in ¶¶ 61-66, 69, 73, 76-77, 79-90, supra.
AMENDED AND CONSOLIDATED COMPLAINT 45
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231. As described in ¶¶ 61-66, 69, 73, 77, 80, supra, Greenberg knew that
these statements to Plaintiffs and the Class were false and that additional statements
needed to be included in the documents it drafted to make its material statements not
misleading.
232. Greenberg concealed and suppressed these facts with the intent to defraud
Plaintiffs and the Class of their equity interests and rights through the Exchange
Agreement, as set forth in ¶¶ 61-63, 75-77, 79-80, 82-90, supra.
233. Greenberg was under a duty to disclose the facts it suppressed and
concealed because Greenberg: (1) actively concealed material facts from Plaintiffs and
the Class by preparing documents that purported to disclose and explain those facts, as
alleged in ¶¶ 79-88, supra, and (2) made partial representations about the Wells Fargo
Line of Credit, the Exchange Agreement, and RE Loans’ business operations and
financial condition, but suppressed crucial facts while making those representations, as
alleged in ¶¶ 79-88, supra, and elsewhere herein.
234. The Managers and Greenberg withheld the concealed and suppressed
these facts from uniform writings given to each Member, including Plaintiffs and the
Class.
235. Plaintiffs and the Class believed that the representations made were true
or were ignorant of their falsity or misleading nature.
236. In reliance on these misrepresentations, which concealed and suppressed
material facts, Plaintiffs and the Class were induced to, and did, participate in the
Exchange Agreement and continue their investment in RE Loans.
237. If Plaintiffs had known the actual facts, they would not have exchanged
their ownership interests for promissory notes or taken other actions which were
injurious to their interests.
238. Plaintiffs’ and the Class’ reliance upon these representations, which
concealed and suppressed material facts, was reasonable and justified.
239. As a proximate result, Plaintiffs and the Class have been injured by the
AMENDED AND CONSOLIDATED COMPLAINT 46
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Defendants’ fraudulent actions.
240. According to Cal. Civil Code § 1709, Greenberg is liable for Plaintiffs’
and the Class’ damages.
241. The actions of Greenberg as alleged herein, constitute oppression, fraud,
or malice, as those terms are defined in California Civil Code § 3294, entitling
Plaintiffs and the Class, and each of them, to an award of punitive damages.
FIFTH CAUSE OF ACTION AIDING AND BETTING FRAUD
(Defendant Greenberg)
242. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
243. As alleged in ¶¶ 55-114, supra, B-4 Partners, Bar-K, Walter Ng, Bruce
Horwitz, Barney Ng and Kelly Ng made fraudulent misrepresentations to and
concealed and suppressed facts from Plaintiffs and the Class through their alleged
actions and inactions.
244. Greenberg acted with complicity and knowledge of the fraud, as alleged
in ¶¶ 59, 62, 65-66, 69, 77, 94, supra.
245. Greenberg aided and abetted, encouraged, and rendered substantial
assistance to the Managers in making fraudulent misrepresentations to and in
concealing and suppressing facts from Plaintiffs and the Class, as alleged in ¶¶ 61-63,
73, 77, 79-90, 94, supra.
246. Greenberg realized and intended that their conduct would substantially
assist the accomplishment of the wrongful conduct and scheme alleged herein at ¶¶ 61-
63, 75-77, 79-80, 82-90, supra.
247. As a result of the substantial assistance of Greenberg, Plaintiffs and the
Class have suffered and continue to suffer monetary losses, all in an amount to be
determined according to proof at trial.
248. Greenberg’s individual and collective acts and omissions were substantial
AMENDED AND CONSOLIDATED COMPLAINT 47
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contributing factors and causes of the fraudulent conduct as set forth in this Count and
to Plaintiffs’ and the Class’ harm and damages, rendering Defendants jointly and
severally liable to Plaintiffs and the Class.
249. The actions of Greenberg as alleged herein, constitute oppression, fraud,
or malice, as those terms are defined in California Civil Code § 3294, entitling
Plaintiffs and the Class, and each of them, to an award of punitive damages.
SIXTH CAUSE OF ACTION VIOLATION OF UNFAIR COMPETITION LAW
BUSINESS & PROFESSIONS CODE § 17200, et seq. (Defendants Greenberg and Wells Fargo)
250. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
251. California’s Unfair Competition Law, Business & Professions Code §§
17200 et seq. (the “UCL”) prohibits acts of unlawful and unfair competition, including
any “unlawful, unfair or fraudulent business act or practice,” any “unfair, deceptive,
untrue or misleading advertising” and any act prohibited by Business & Profession
Code §17500.
252. Greenberg and Wells Fargo have committed business acts and practices
that violate the UCL by aiding, abetting, and participating in breaches of fiduciary
duties and by committing fraud in the manner and for the reasons set forth in the six
Causes of Action listed above.
253. Greenberg’s and Wells Fargo’s conduct, as alleged above, also
constitutes unfair competition and fraudulent business practices in that, for the reasons
set forth above, the acts and practices offend public policy and are unethical,
oppressive, and unscrupulous, and are substantially injurious to the public.
254. Additionally, Greenberg’s conduct in advising the Managers in unlawful
activities, as alleged above, further violated the California Rules of Professional
Conduct, Rule 3-210, which provides that “[A] member shall not advise the violation
of any law … unless the member believes in good faith that such law … is invalid.”
AMENDED AND CONSOLIDATED COMPLAINT 48
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255. Greenberg’s and Wells Fargo’s conduct was a proximate cause of
Plaintiffs’ and the Class’ damages herein, and it caused and continues to cause
substantial injury to Plaintiffs and the Class. Such conduct therefore should be
enjoined.
SEVENTH CAUSE OF ACTION NEGLIGENT MISREPRESENTATION
(Defendant Greenberg)
256. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
257. As alleged in ¶¶ 59, 61-63, 65, 66, 69, 73, 77, 79-90, 94, supra,
Greenberg made multiple assertions of past or existing material facts that were false
and for which Greenberg had no reasonable grounds for believing to be true.
258. Greenberg intended that its misrepresentations as alleged herein would
induce the reliance of Plaintiffs and the Class denying them of their equity interests and
rights through the Exchange Agreement, as set forth in ¶¶ 61-63, 75-77, 79-80, 82-90,
supra.
259. Moreover, aside from its intent to induce Plaintiffs’ and the Class’
reliance, Greenberg had access to extensive non-public information from RE Loans that
disconfirmed the misrepresentations contained in the communications it prepared, and
Greenberg therefore played more than a “secondary role” in preparing those
communications, as alleged in ¶¶ 63, 69, supra.
260. In reliance on these misrepresentations, Plaintiffs and the Class were
induced to, and did, participate in the Exchange Agreement and continue their
investment in RE Loans.
261. Under the circumstances as alleged in ¶¶ 55-114, supra, Plaintiffs and the
Class’ reliance on Greenberg’s representations was reasonable and justified.
262. As a proximate result, Plaintiffs and the Class have been injured by
Greenberg’s negligent misrepresentation.
AMENDED AND CONSOLIDATED COMPLAINT 49
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LEGAL CLAIMS RELATING TO INVESTMENTS IN MF08
EIGHTH CAUSE OF ACTION SECONDARY LIABILITY FOR SECURITIES FRAUD
(Defendant Greenberg)
263. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
264. Investment units in MF08 were sold to Plaintiffs and Class members.
Those units, as described in the MF08 Note Program, conveyed noteholder interests
and were securities under Cal. Corp. Code § 25019.
265. MF08’ securities were sold in, within or from California.
266. In connection with the offer and sale of securities, MF08 directly and
indirectly made untrue statements of material fact and omitted to state material facts
necessary to make the statements made, in light of the circumstances under which they
were made, not misleading, in violation of under Cal. Corp. Code § 25401, including
but not limited to the misrepresentations and omissions set forth in ¶¶ 102-05, supra.
267. The Mortgage Fund, B-4 Partners, Bar-K, Bruce Horwitz, Kelly Ng,
Walter Ng and Barney Ng are MF08 control persons under Cal. Corp. Code § 25504.1,
as they were Managers of MF08 and had control over MF08. They caused the
representations to be made and knew that the representations made to Plaintiffs and the
Class were false or, alternatively, required the disclosure of additional facts to make
them not misleading.
268. Kelly Ng, Bruce Horwitz, B-4 Partners, Walter Ng, Barney Ng, The
Mortgage Fund, and Bar-K knowingly and substantially assisted MF08 securities law
violations in the manner and for the reasons set forth in ¶¶ 96-110, supra. Their actions
were done with the intent to induce the investors’ reliance on knowing
misrepresentations or omissions, and such actions and misrepresentations materially
assisted in securing investors, including Plaintiffs and the Class in MF08.
269. Greenberg knowingly and substantially assisted MF08 securities law
AMENDED AND CONSOLIDATED COMPLAINT 50
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violations in the manner and for the reasons set forth in ¶¶ 96-97, 102-06, supra.
Greenberg’s actions were done with the intent to induce the investors’ reliance on
knowing misrepresentations or omissions, and such actions and misrepresentations
materially assisted in securing investors, including Plaintiffs and the Class.
270. Accordingly, pursuant to Cal. Corp. Code § 25504.1, Greenberg is
severally liable for restitution and the monetary losses caused by the statutory securities
fraud violations set forth in Count nine, supra.
NINTH CAUSE OF ACTION FRAUD BY MISREPRESENTATION
(Defendant Greenberg)
271. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
272. The Mortgage Fund, B-4 Partners, Bar-K, Bruce Horwitz, Kelly Ng,
Barney Ng and Walter Ng made material misrepresentations to the Noteholders as set
forth in ¶¶ 102-05, supra.
273. As described in ¶¶ 96-107, supra, the Managers knew that these
representations were false.
274. The Managers made these statements with the intent to defraud Plaintiffs
and the Class, as set forth in ¶ 102, supra.
275. Greenberg also made material misrepresentations as alleged in ¶¶ 102-05,
supra.
276. As described in ¶ 96-105, supra, Greenberg knew that these
representations to Plaintiffs and the Class were false.
277. Greenberg made these statements with the intent to defraud Plaintiffs and
the Class, as set forth in ¶ 102, supra.
278. The Mortgage Fund’s, B-4 Partners’, Bar-K’s, Bruce Horwitz’s, Barney
Ng’s, Walter Ng’s, Kelly Ng’s, and Greenberg’s misrepresentations were conveyed
through uniform writings given to each Noteholder, including Plaintiffs and the Class,
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as set forth in ¶¶ 102-05, supra.
279. Plaintiffs and the Class believed that these representations were true or
were ignorant of their falsity.
280. In reliance on these misrepresentations, Plaintiffs and the Class were
induced to, and did, invest funds with MF08 in the form of secured promissory notes.
Had Plaintiffs or the Class known the true facts, they would not have taken such action.
281. Plaintiffs’ and the Class’ reliance upon these representations was
reasonable and justified.
282. As a proximate result, Plaintiffs and the Class have been injured by the
Defendants’ fraudulent actions.
283. According to Cal. Civil Code § 1709, Greenberg is liable for Plaintiffs’
and the Class’ damages.
284. The actions of Greenberg as alleged herein, constitute oppression, fraud,
or malice, as those terms are defined in California Civil Code § 3294, entitling
Plaintiffs and the Class, and each of them, to an award of punitive damages.
TENTH CAUSE OF ACTION FRAUD BY CONCEALMENT & SUPPRESSION OF FACTS
(Defendant Greenberg)
285. Plaintiffs incorporate by reference each of the preceding paragraphs as
though fully set forth herein
286. The Managers concealed and suppressed facts from the Noteholders as
set forth in ¶¶ 102-05, supra.
287. As described in ¶¶ 96-105, supra, the Managers knew that these facts
were necessary to make material statements made not misleading.
288. The Managers made these statements with the intent to defraud Plaintiffs
and the Class, as set forth in ¶ 102, supra.
289. Greenberg also concealed and suppressed facts from Plaintiffs and the
Class as alleged in ¶¶ 102-05, supra.
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290. As described in ¶ 96-105, supra, Greenberg knew that these facts were
necessary to make material statements made not misleading.
291. Greenberg was under a duty to disclose the facts it suppressed and
concealed because Greenberg: (1) actively concealed material facts from Plaintiffs and
the Class by preparing documents that purported to disclose and explain those facts, as
alleged in ¶¶ 102-05, supra, and (2) made partial representations about MF08’s
business operations and purpose, but suppressed crucial facts while making those
representations as alleged in ¶¶ 102-05, supra, and elsewhere herein.
292. Greenberg concealed and suppressed these facts with the intent to defraud
Plaintiffs and the Class, as set forth in ¶ 102, supra.
293. The Managers and Greenberg withheld the concealed and suppressed
facts from uniform writings given to each Noteholder, including Plaintiffs and the
Class.
294. Plaintiffs and the Class believed that the representations made were true
or were ignorant of their falsity or misleading nature.
295. In reliance on these misrepresentations, which concealed and suppressed
material facts, Plaintiffs and the Class were induced to, and did, invest funds with
MF08 in the form of secured promissory notes. Had Plaintiffs or the Class known the
true facts, they would not have taken such action.
296. Plaintiffs’ and the Class’ reliance upon these representations, which
concealed and suppressed facts, was reasonable and justified.
297. As a proximate result, Plaintiffs and the Class have been injured by the
Defendants’ fraudulent actions.
298. According to Cal. Civil Code § 1709, Greenberg is liable for Plaintiffs’
and the Class’ damages.
299. The actions of Greenberg as alleged herein, constitute oppression, fraud,
or malice, as those terms are defined in California Civil Code § 3294, entitling
Plaintiffs and the Class, and each of them, to an award of punitive damages.
AMENDED AND CONSOLIDATED COMPLAINT 53
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ELEVENTH CAUSE OF ACTION AIDING AND BETTING FRAUD
(Defendant Greenberg)
300. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
301. As alleged in ¶¶ 102-05, supra, The Mortgage Fund, B-4 Partners, Bar-K,
Walter Ng, Bruce Horwitz, Barney Ng and Kelly Ng made fraudulent
misrepresentations to and concealed and suppressed facts from Plaintiffs and the Class
through their alleged actions and inactions.
302. Greenberg acted with complicity and knowledge of the fraud, as alleged
in ¶¶ 96-105, supra.
303. Greenberg aided and abetted, encouraged, and rendered substantial
assistance to B-4 Partners, Bar-K, Walter Ng, Bruce Horwitz, Barney Ng and Kelly Ng
in making fraudulent misrepresentations to Plaintiffs and the Class, as alleged in ¶¶ 96-
105, supra.
304. Greenberg realized and intended that their conduct would substantially
assist the accomplishment of the wrongful conduct and scheme alleged herein at ¶¶ 96-
105, supra.
305. As a result of the substantial assistance of Greenberg, Plaintiffs and the
Class have suffered and continue to suffer monetary losses, all in an amount to be
determined according to proof at trial.
306. Greenberg’s individual and collective acts and omissions were substantial
contributing factors and causes of the fraudulent conduct as set forth in this Count and
to Plaintiffs’ and the Class’ indivisible harm and damages, rendering Defendants jointly
and severally liable to Plaintiffs and the Class.
307. The actions of Greenberg as alleged herein, constitute oppression, fraud,
or malice, as those terms are defined in California Civil Code § 3294, entitling
Plaintiffs and the Class, and each of them, to an award of punitive damages.
AMENDED AND CONSOLIDATED COMPLAINT 54
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TWELFTH CAUSE OF ACTION AIDING AND ABETTING BREACH OF FIDUCIARY DUTY
(Defendant Greenberg and Wells Fargo)
308. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
309. At all relevant times, The Mortgage Fund, B-4 Partners, Bar-K, Walter
Ng, Bruce Horwitz, Barney Ng and Kelly Ng held themselves out and represented
themselves to be the Managers of MF08.
310. As alleged in ¶¶ 96, 98-100, 103-05, supra, these MF08 Managers
solicited investments in MF08 by targeting existing RE Loan investors with whom they
had pre-existing, and often long-term, relationships and emphasizing that MF08 was a
safe investment because it would be run by RE Loans’ Managers.
311. At this time, the MF08 Managers had not disclosed any of RE Loans’
financial problems, as alleged in ¶ 99, supra.
312. The MF08 Confidential Private Offering Memorandum states that the
MF08 Managers had a confidential relationship of trust with the Noteholders. The
Private Offering Memorandum states that Noteholders must rely on the good faith and
integrity of the MF08 Manager to comply with the laws, rules and regulations
governing the offering of the Notes for purchase, the Company’s relationship with the
Noteholder, and to cause the Company to meet its obligations under the Note Purchase
Agreement, the Notes, and the Securities Agreement.
313. Information concerning RE Loans’ true financial status and the real
purpose for the MF08 Managers’ creation of MF08 was held exclusively by the
Managers and the Defendants.
314. The MF08 Managers’ preexisting relationship and confidential
relationship of trust with the Noteholders imposed upon them fiduciary duties on behalf
of the Noteholders.
315. The MF08 Managers owed Plaintiffs and the MF08 Class a fiduciary
obligation under California law, including a duty to act with the utmost good faith for
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the benefit of the Noteholders.
316. Unaware of RE Loans’ financial problems, that they likely had already
lost much of their investments in RE Loans, or that MF08 was created to serve as a
feeder fund to satisfy RE Loans’ financial obligations, Plaintiffs and the MF08 Class
placed their trust and confidence in the MF08 Managers to handle their investments
and collectively gave the MF08 Managers millions of dollars to invest in MF08.
317. As alleged in ¶¶ 96-111, supra, the MF08 Managers breached their
fiduciary obligations to Plaintiffs and the MF08 Class.
318. As alleged in ¶¶ 96-97, 100-05, supra, Greenberg knew and participated
in a scheme of fraud with the MF08 Managers and knew that the Managers were
violating their fiduciary duties to Plaintiffs and the MF08 Class.
319. Greenberg aided and abetted, encouraged, and rendered substantial
assistance to the MF08 Managers in breaching their fiduciary duties to Plaintiffs and
the MF08 Class by intentionally drafting the MF08 Offering Memorandum, which they
knew would be provided to Plaintiffs and the MF08 Class, that, among other things:
• misrepresented the investment in MF08 as having “a conservative risk
profile,” when it knew and failed to disclose that the investment was in
reality a high-risk and illegal Ponzi scheme;
• misrepresented that investments in MF08 would be used to fund loans to
real estate developers that were secured by liens against the real property
at issue, when it knew and failed to disclose that MF08 was created
primarily to serve as a feeder fund for RE Loans by using investments in
MF08 to pay down the Wells Fargo Line of Credit and pay RE Loans’
other obligations; and
• misrepresented that MF08 was a good investment because it was going to
be managed by RE Loans’ Managers, when it knew and failed to disclose
that RE Loans was insolvent.
320. As alleged in ¶¶ 96, 97, 107-09, supra, Wells Fargo knew and
participated in the Managers’ breach of fiduciary duty.
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321. Defendants Greenberg and Wells Fargo knew and intended that their
conduct would substantially assist the accomplishment of the wrongful conduct and
scheme alleged herein.
322. As a result of Defendants Greenberg’s and Wells Fargo’s substantial
assistance to the MF08 Managers in breaching their fiduciary duties, Plaintiffs and the
MF08 Class have been damaged in an amount to be proven at trial.
323. Greenberg’s and Wells Fargo’s individual and collective acts and
omissions were substantial contributing factors and causes of the MF08 Managers’
violations of their fiduciary duties to Plaintiffs and the Class, resulting in indivisible
harm and damages, and rendering Greenberg jointly and severally liable with the MF08
Managers to Plaintiffs and the MF08 Class.
324. The wrongful acts of Greenberg and Wells Fargo were done maliciously,
oppressively, and/or with the intent to mislead and defraud, thereby entitling Plaintiffs
and the MF08 Class to punitive and exemplary damages to be ascertained according to
proof, which is appropriate to punish and make an example of Defendants, pursuant to
Cal. Civ. Code § 3294.
THIRTEENTH CAUSE OF ACTION NEGLIGENT MISREPRESENTATION
(Defendant Greenberg)
325. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
326. As alleged in ¶¶ 96-97, 102-05, supra, Greenberg made multiple
assertions of past or existing material facts that were false and for which Greenberg had
no reasonable grounds for believing to be true.
327. Greenberg intended that its misrepresentations as alleged herein would
induce the reliance of Plaintiffs and the Class in investing in MF08, as set forth in ¶¶
96-105, supra.
328. Moreover, aside from its intent to induce Plaintiffs’ and the Class’
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reliance, Greenberg had access to extensive non-public information from MF08 and RE
Loans that disconfirmed the misrepresentations contained in the communications it
prepared, and Greenberg therefore played more than a “secondary role” in preparing
those communications as alleged in ¶¶ 66, 96-97, 102, supra.
329. In reliance on these misrepresentations, Plaintiffs and the Class were
induced to, and did, invest funds with MF08 in the form of secured promissory notes.
Had Plaintiffs or the Class known the true facts, they would not have taken such action.
330. Under the circumstances as alleged in ¶¶ 55-114, supra, Plaintiffs and the
Class’ reliance on Greenberg’s representations was reasonable and justified.
331. As a proximate result, Plaintiffs and the Class have been injured by
Greenberg’s negligent misrepresentation.
FOURTEENTH CAUSE OF ACTION VIOLATION OF UNFAIR COMPETITION LAW
BUSINESS & PROFESSIONS CODE § 17200, et seq. (Defendants Greenberg and Wells Fargo)
332. Plaintiffs hereby incorporate by reference each of the preceding
paragraphs as though fully set forth herein.
333. California’s Unfair Competition Law, Business & Professions Code §§
17200 et seq. (the “UCL”) prohibits acts of unlawful and unfair competition, including
any “unlawful, unfair or fraudulent business act or practice,” any “unfair, deceptive,
untrue or misleading advertising” and any act prohibited by Business & Profession
Code §17500.
334. Greenberg and Wells Fargo have committed business acts and practices
that violate the UCL by aiding and abetting the breach fiduciary duties, committing
fraud in the manner and for the reasons set forth above. Their conduct as alleged above
constitutes unlawful competition in that, for the reasons set forth above, said acts and
practices violate the Corporations Code.
335. The conduct of Greenberg and Wells Fargo as alleged above also
constitutes unfair competition in that, for the reasons set forth above, the acts and
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practices offends public policy and are unethical, oppressive, and unscrupulous, and are
substantially injurious to the public.
336. Additionally, Greenberg’s conduct in advising the Managers in unlawful
activities, as alleged above, further violated the California Rules of Professional
Conduct, Rule 3-210, which provides that “[A] member shall not advise the violation
of any law … unless the member believes in good faith that such law … is invalid.”
337. Defendants’ conduct was a proximate cause of Plaintiffs’ damages
herein, and it caused and continues to cause substantial injury to Plaintiffs and the
Class.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, individually and on behalf of the Class, pray for an order
and judgment against Defendants and in their favor as follows:
A. Certifying the Classes as set forth in this Complaint, and appointing
Plaintiffs as Class representative for these Classes;
B. Awarding Plaintiffs and the Classes restitution with interest at the legal
rate;
C. Awarding Plaintiffs and the Classes rescission;
D. Awarding Plaintiffs and the Classes monetary damages and interest at the
legal rate;
E. Enjoining Defendants from further violations of their legal and fiduciary
duties;
F. Awarding Plaintiffs and the Classes the costs and disbursements of this
action, including reasonable counsel fees, costs and expenses in amounts to be
determined by the Court;
G. Awarding pre- and post-judgment interest; and
H. Granting such other and further relief as is just and proper.
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REQUEST FOR JURY TRIAL
Plaintiffs hereby request a trial by jury on all issues.
Dated: January 9, 2012. CHAVEZ & GERTLER LLP BONNETT, FAIRBOURN, FRIEDMAN
& BALINT, P.C. Andrew S. Friedman
Attorneys for Plaintiff
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