NEW YORK, N.Y. – A federal judge has frozen the assets of a California-based real estate company after authorities accused it of running a securities scam that counts at least 30 active-duty Marines and several churches as investors.
U.S. District Judge Charles R. Breyer in San Francisco took the action against Chicago D&P (search) after the Securities and Exchange Commission (search) filed a lawsuit May 3 against the company and its owners, Pat Morgen (search), and her son Shalom Gibson.
"They are running a classic Ponzi [pyramid] scheme," Marc Fagel, assistant district administrator at the SEC's San Francisco office, told Fox News.
According to the SEC lawsuit, Chicago D&P "lured investors into a fraudulent Ponzi scheme by guaranteeing profits of 36 percent per year, and at times promising to double investors' money within a year."
Pat Morgen, president of Chicago D&P, disagrees with the SEC and promised to answer all of the accusations to the court's satisfaction. The company is based in Emoryville, Calif.
"If we were so bad, wouldn't there be complaints against us?" she asked in an interview with Fox News.
The SEC filing also alleges Chicago D&P raised millions of dollars from hundreds of investors since 2001, including more than $6 million in the last six months.
Fox News has learned that some of those investors include church organizations and up to 30 active U.S. Marines, who were apparently referred to the fund by a superior officer. According to Morgen, Chicago D&P offered "bonuses," or referral fees of up to 10 percent of a new investment to members of the fund.
"The concept of a Ponzi scheme is lost to the public," Fagel explained. "There's a common misperception that if I'm getting checks every month, then it's OK. What people don't understand is that as long as the scam is getting new money, they can pay out to investors. But once that last round of investors is done and no new money is coming in, that money is gone," he said.
"We try to get the word out there how these things really work."
The SEC, as well as the FBI, was alerted to the alleged scam by Barry Minkow, a reformed white-collar criminal who co-founded the Fraud Discovery Institute, (search) a for-profit organization that provides fraud detection services to individuals and corporations. Minkow is also a frequent contributor to "Your World With Neil Cavuto" on FOX News Channel as an expert in fraud detection.
"The SEC is always happy to receive leads from third parties on potential criminal activity," Fagel said.
According to the Better Business Bureau (search), zero complaints have been filed against the company, which has been a BBB member in good standing for three years running.
"There has been a lot of negative information that has come in on Chicago D&P, but so far there is not one consumer complaint," said Pat Wallace, president of the Greater Bay Area of the BBB in San Francisco.
"What's troubling is that they are dealing with real estate and they do not have a real estate broker's license or a securities broker's license in the state of California. Also, all of their mailing addresses that we have checked on are drop boxes," Wallace said.
Indeed, a few of the addresses Fox News checked on were traced to Mail Boxes Etc., but Morgen said that's just part of doing business.
"There are several legitimate companies that use mail drops for business," she said. As for the license issue, Morgen said she uses a California state-licensed broker to handle their real estate properties. Fox News did verify that the broker Morgen identified is registered with the California Department of Real Estate.
But Fox News also discovered that Morgen was sued under the name of Patricia Gibson in 2000 and the plaintiff, Bridge LN Funding Corporation, was awarded a judgment of more than $400,000 in a property dispute in Chicago. There are also records that she filed for Chapter 13 bankruptcy protection under the name Patricia Daniel in 1996, also in Chicago.
Morgen said she has several names because she was married more than once, and explained she ran into some financial difficulty after a divorce. However, she said doesn't see how her personal history has anything to do with the status of her current company.
"I don’t, because some of the information is incorrect and has to do with another person who was using my identity, and I don’t see how it pertains to these lenders because they receive their money," she said.
"If you try to discredit the person — let me ask you — would that person have paid out properly for the last four years? If lenders ask for their money back we give them their money back," she said. "In most cases, the same day." (Fox News was unable to independently verify Morgen's claims of identity theft).
But Fagel said that after Chicago D&P was served with the subpoena, the SEC was notified that the company tried to withdraw $300,000 from a financial institution.
According to Morgen, Chicago D&P is doing nothing wrong and believes that in the end, the company will resolve the matter.
Minkow said the confusion is with securities laws. "Whether it's property or bonds or stocks, it's all a security, and they are not licensed to deal in securities anywhere," he said.
But Morgen said she doesn't run an investment fund. "We have loans with individuals who basically we pay back at a very high rate," she said. "We have been ethical and honest to our lenders. We just took them on a trip to Kaui and we're about to take the company to a whole new level," she said.
Morgen also said the Fraud Discovery Institute was most likely furnished with information by a disgruntled employee, since there was personal information about Chicago D&P's lenders in its report, which was provided to Fox News.
But Minkow quickly rebuffed that statement.
"I received a prospectus that is signed by Ms. Morgen and it has investors' home and cell phone numbers in it, so that I could call for references," he said. Minkow also provided the prospectus to Fox News, as well as the SEC and the FBI.
Securities regulators will seek a permanent injunction against Chicago D&P in a federal court hearing scheduled for 2 p.m. PDT on Monday.
FOX News' Kirsten Noyes contributed to this report.
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