Ponzi scheme bilked soldiers, others

A broker barred from the industry in several states resurfaced last month as the key player in an alleged $11.2 million real estate fraud that preyed on military personnel, among others, in Southern California, Arizona and elsewhere.

Last month, the Securities and Exchange Commission charged James B. Duncan and two other promoters — Hendrix M. Montecastro and Maurice E. McLeod — with violating anti-fraud and registration provisions of federal securities laws.

They ran a Ponzi scheme by using money from new investors to make mortgage payments on previously purchased homes that were touted as investments, according to the SEC.

The three defendants allegedly stole substantial amounts of investor money, using it to purchase or lease expensive cars and — in one instance — take an $18,000 vacation to Malta.

Mr. Duncan, who was touted as a “financial genius” during the scam, had a rich history with state securities and insurance regulators, according to the SEC.

In 2005, he fell afoul of regulators in Wisconsin, which issued an order against him prohibiting him from selling unregistered securities.

And in 2002 and 2003, the Iowa Insurance Division in Des Moines and the Washington State Department of Financial Institutions’ Division of Securities in Olympia issued cease-and-desist orders against Mr. Duncan relating to violations of each state’s broker-dealer or salesperson registration requirements.

The three, who operated various businesses in and around Murietta, Calif., and were named in the complaint, allegedly targeted military families in the scheme. Some victims were forced into bankruptcy and their homes into foreclosure, the SEC said.

The scam also preyed upon other affinity groups, including the Southern California Filipino community and church members, the SEC said.

The issue of military personnel falling prey to scam artists, or unscrupulous reps or advisers, has become a national issue for lawmakers.

As part of a new federal law, the Military Personnel Financial Services Protection Act, designed to protect soldiers and other members of the military from financial predators, state insurance regulators in 2006 were given a year to work with the Department of Defense to find ways to protect members of the armed forces “from dishonest and predatory insurance sales practices while on a military installation of the United States” (InvestmentNews, Sept. 17).

In fact, the SEC did a sweep last fall of all broker-dealers who were involved in the military market, said David Smith, president and chief executive of Intervest International Equities Corp. of Colorado Springs, Colo. Intervest specializes in financial planning for a number of groups, including the military.

“The SEC wanted to see if firms like ours are complying” with the new law, Mr. Smith said.

In this case, a technical sergeant in the Air Force was instrumental in the fraud, the SEC alleged. One of several “referral partners” involved in various communities, the sergeant allegedly solicited over 48 investors, some of whom were his fellow servicemen at Davis-Monthan Air Force Base in Tucson, Ariz.

The $11.2 million that encompassed the fraud had two separate parts, the SEC said. From April 2004 to February 2006, Mr. Duncan raised $1.2 million from at least 20 investors selling unregistered securities through an entity called the Total Return Fund, the SEC said.

Around the same time, the three defendants raised $10 million from 75 investors in a fraudulent offering, buying $118 million in homes. According to the SEC, the three charge exorbitant real estate transaction fees for their investments and also submitted false mortgage applications on behalf of investors.

The three men sold investors securities in the form of investment contracts that centered on the purchase and management of those homes, according to the SEC.

E-mail Bruce Kelly at [email protected].