'How Do I Know This Is Not A Ponzi Scheme?': Investors Recount CRE Scandal's Losses

Keith Merron thought he had done his due diligence.

Before investing $600K over four years in Professional Investors Security Fund, one of two companies founded by the late Kenneth J. Casey now suspected of being tools in a Ponzi scheme, the 64-year-old North Bay resident said he consulted with a lawyer and financial adviser.

He even decided to pay Casey a visit in his office, where, nagged by the feeling PISF was too good to be true and surrounded by photos of PISF-owned properties, he asked Casey, "How do I know this is not a Ponzi scheme?"

"Well, Ponzi schemes are built on nothing. Look at all these properties," Casey said, pointing to the company's portfolio, according to Merron.

Now, months after Casey's sudden death and the company's flagging of its operations as potentially illegal, the fate of those properties, and the money put into the plan by over 1,000 investors, is still up in the air. An investigation by the Securities and Exchange Commission was requested by Ragghianti Freitas partner Eric Sternberger at the direction of Casey's ex-wife, Charlene Albanese, who divorced Casey in 1996 but was left the companies in Casey's will.

Also of interest to investors and federal investigators is the companies' former CEO, Lewis Wallach, who "may have also benefited from the manner in which Mr. Casey ran the Companies," Hogan said in his bankruptcy declaration.

In June, as Hogan was coming on as chief restructuring officer, Wallach and other PFI corporate officers agreed to resign.

“I don’t know how much Lewis knew or how involved he was," Berkeley resident Joel Rubenzahl, who spoke with Wallach when considering investing, said. "But it seems to me that he must have known and was involved."

Wallach did not reply to requests for comment. 

An internal investigation will now be steered by Armanino Managing Director Michael Hogan and Akerman partner Michael Goldberg, a bankruptcy and reorganization specialist and expert on Ponzi schemes. The latter, a Florida-based attorney, will come on as PFI's new independent director, an Armanino spokesperson confirmed to Bisnow this week.

Albanese will now be replaced by Goldberg, who said in a statement that she agreed to assume the independent director position on the advice of counsel.

"I am heartbroken and sick to my stomach that so many investors, myself included, have been devastated by Ken’s actions," Albanese said in a statement. "Like all of the other investors, I am waiting to see what can be preserved."

The addition of Goldberg comes amid bankruptcy proceedings, as Hogan and PFI lawyers dig through "more than 30 years of misconduct" at the company from which "interest payments could not be funded without new investment," according to investor letters issued in June and July by Hogan. 

Hogan told investors in those letters that while he has received estimates pinning the value of PFI- and affiliate-owned properties at about $555M, debt for those properties total over $400M, with over $250M owed to investors, court filings show. Hogan also said he anticipates at least six of 30 properties owned directly by PFI have no equity, he wrote in a July 14 letter. 

What can be preserved of investments made by PFI and affiliate companies is unclear. Rubenzahl said he thinks the outcome will be a restructuring of the company, rather than liquidation, to best preserve investor capital. Rubenzahl invested an undisclosed amount in 2017 after hearing about the opportunity from a friend of a friend. 

“One of the things that I have learned from talking to a good number of people now is that a lot of this started with personal relationships," Rubenzahl said. "Ken Casey knew a whole slew of people. A lot of people have said, ‘I was his friend and he took advantage of me.'"

Merron said he wishes he took the extra step of looking into Ken Casey, who in the late 1990s was sentenced to 18 months in prison after he pleaded guilty to 41 counts of bank fraud, five counts of tax evasion and one count of conspiracy to defraud the federal government. 

Instead, he said he instilled too much trust in Casey, who it seemed like "was doing everything for all the right reasons."

"In my mind, I did my due diligence," Merron said. "And now I regret it."