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Fraudulent Mortgage Investment Scheme Halted by the SEC

Monday, October 24, 2011

Yoomi Lee | Bloomberg LawSEC v. Temme, No. 11-CV-00655 (E.D. Tex. filed on Oct. 14, 2011); SEC Litigation Release No. LR-22130 (Oct. 18, 2011); SEC Press Release No. PR-2011-213 (Oct. 18, 2011) The Securities and Exchange Commission (SEC) obtained an asset freeze against James G. Temme and his company Stewardship Fund, LP (Stewardship, and together, Defendants) in connection with an alleged fraudulent investment scheme that raised money from investors for the purpose of investing in distressed mortgages and other related transactions. Defendants allegedly raised at least $35 million since 2008 from various investor groups. The SEC'scomplaint charges Defendants with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Additionally, the SEC seeks to (1) preliminarily and permanently enjoin Defendants from further violations, and (2) order payment of civil penalties and disgorgement.

Fraudulent Scheme

According to the complaint, Temme was the managing general partner of Stewardship, which functioned as the general partner of various limited partnerships that Defendants allegedly induced to purchase and restructure pools of non-performing home mortgages during the wake of the housing market's decline. Temme purportedly told the investors that they would be paid returns based on the payment streams from homeowners or from the proceeds obtained from the resale of the mortgages or underlying properties. For example, Temme represented to Equitas Housing Fund III, LP that he was offering them the opportunity to acquire interests in a limited partnership that would acquire a group of non-performing residential mortgages. Temme allegedly lured them by using his relationship with a Texas-based public company that provides mortgage restructuring services and an investment adviser representative with a major investment bank's private wealth management group. In reality, Temme allegedly never acquired certain mortgages he claimed to have and tried to transfer the same pool or mortgages to multiple sets of investors. Moreover, to carry out his fraudulent scheme, Temme created false documents and forged them, and also used investor funds to pay off other investors.

Other Private Litigations

Defendants have also been sued multiple times by different sets of investors in private state court actions since October 2010 according to the SEC's complaint. The investors in the private actions allege, among other things, that Defendants failed to pay promised returns, misappropriated investors' funds, and misrepresented the use of proceeds from the investments. The SEC maintains that this piecemeal litigation has only generated more misrepresentations from Defendants instead of curbing their fraudulent conduct. For example, a state court froze Defendants' assets in Canadian Peso 21 v Stewardship Fund, LP, No. DC-11-05254 (Tex. D. Ct., Dallas County, filed Apr. 27, 2011), but Defendants allegedly have ignored the asset freezes, opened new bank accounts, and raised money from new investors.   DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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