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News Release: 01-02
GRAY DAVIS, Governor
Date: 01/10/01
WILLIAM KENEFICK, Acting Commissioner
Court Orders Issued Against Inland Empire "Risk Free" Investment Scheme
Promoters Barred from Securities Industry, Enjoined and Fined
Los Angeles, January 10, 2001 — The Department of Corporations announced today that Riverside County Superior Court Judge Gloria Conner Trask has issued orders against the defendants in a real estate investment scheme that targeted senior investors in a variety of fraudulent ventures. The defendants include: Alliance Financial Investment Services, Inc. and KM Properties, LLC of Hemet and San Diego; their president and general manager, Russell Millard; and 27 limited liability companies formed to invest in shopping centers, warehouses, storage facilities and other commercial real estate properties throughout the Southwest and West. Of the total 27 investment programs, 25 are now in bankruptcy.
The court issued orders prohibiting the defendants from selling securities without a license, levied penalties and costs of $100,000 and barred the promoters from employment as securities broker-dealers or investment advisers for five years. The complaint filed by the department alleged that the defendants solicited more than $38 million from at least 500 investors in a variety of speculative real estate ventures through seminars, targeted advertising and cold calling. The majority of the investors are from San Bernardino, Riverside and San Diego counties. The seniors were given free lunches to listen to investment pitches in which they were told that the investments were "risk free" and had a guaranteed minimum return of 10-20% and that no investor had ever lost a dime in their investments.
What the investors were not told, according to the complaint, was that the management fees and costs might amount to as much as 60% of their investments, that investment funds were being commingled with the investment funds of the other entities, that many of the promissory notes they were given were not secured by the properties, that the promoters were in precarious financial shape and that under-performing properties were being kept alive by payments from properties that were making a profit. The result was that the fortunes of the 27 investment entities were, in effect, pooled and they were being operated as one investment fund.
On May 22, 2000, the investment programs filed bankruptcy petitions under Chapter 11 of the U.S. Bankruptcy Code. On June 12, 2000, J. Michael Issa was appointed by the bankruptcy court as "responsible officer" over the debtors to manage the properties on a day-to-day basis until a plan of reorganization or liquidation could be developed.
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information on how investors can protect themselves, click on the "Investor Education" button or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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