In a little less than three years, a San Diego investment fund manager raised nearly $18 million from 270 investors who were getting a 12 percent return on the money that was purportedly being invested in mortgage transactions.
The payouts were huge.
In 2003, the Emvest Mortgage Fund — managed by Milon Lyle Brock, 60 — paid out just over $908,000 to investors. Through the first eight months of this year, the money paid to investors grew to $1.174 million.
But now the Securities and Exchange Commission (SEC) in Washington has filed suit against Brock, claiming his Emvest Fund is little more than a Ponzi scheme in which new investors were paid with money provided by new investors.
U.S. District Judge Dana M. Sabraw of the Southern District of California has frozen distributions from the fund and has ordered a temporary injunction that for now closes Brock’s companies — Emvest Mortgage Fund and Emvest Inc., according to a written statement from the SEC.
If Sabraw grants the preliminary injunction federal regulators are seeking, Emvest would be out of business for good.
According to its statement and the civil lawsuit filed in San Diego against Brock, the SEC describes Emvest as a classic Ponzi scheme.
“The fund purports to raise capital from investors to make and purchase loans secured by California real property,” the SEC said in the statement. “Instead, the defendants used substantial amounts of new investors’ capital to pay returns to existing investors and to cover the fund’s operating losses.”
Brock is accused of not informing investors of the true nature of how the fund operated, including using investors’ money to pay finder’s fees or commissions to another company affiliated with Emvest.
“The defendants misrepresented that the fund’s investment objectives included preserving the investors’ capital, when in reality the defendants were decreasing the investors’ capital by distributing it as part of the returns paid to investors,” according to the SEC lawsuit.
Calls to Brock’s office were not returned and his lawyer could not be reached.
Brock has been in trouble before.
According to a report in the San Diego Union in 1994, Brock lost his real estate license, declared Chapter 7 bankruptcy and was ordered by California regulators to stop selling unqualified limited partnerships.
Then in 1999 he was briefly jailed after being arrested and charged with extortion, grand theft and filing a false document for his alleged role in a scheme where he made high interest loans to people who put up real estate for collateral.
Brock started Emvest in February of 2002. According to the lawsuit, he used cold calls, newspaper and radio ads, a newsletter and a Web site — megayield.com — to entice investors with a promise of 12 percent returns.
By the summer of this year Brock has raised nearly $18 million. But the SEC said that in 2003 the fund had an operating profit of only $584,696 but paid $908,442 to existing investors.
The government claims that $323,766 of new investors’ money was used in paying off existing investors.
Through August of this year the fund lost $112,000, the SEC claims in its suit. During the same period the fund paid out $1.174 million, using $1.286 million of new money to cover losses and pay investors.
Accountants once working for Brock raised questions, but eventually quit after he ignored their concerns, according to the suit.
The SEC says that the fund’s books are in disarray.
“The fund does not have current financial statements showing the true value of each investor’s capital account,” the SEC said. “The defendants have not prepared financial statements showing the current value of each investor’s capital account since late 2003.”
The SEC wants the injunction because “there is a reasonable likelihood that the defendants’ fraudulent conduct will continue” and “if defendants are not immediately stopped there is a serious risk that they will continue to dissipate assets in the fund.”
The government is also seeking unspecified damages and restitution from Brock and his company.
