A wave of new lawsuits connected to an alleged Ponzi scheme by a real estate investment firm in Bellevue, Washington, has ensnared Marcus & Millichap, Perkins Coie LLP and Columbia Bank.
The lawsuits stem from the 2023 bankruptcy proceedings of 34 entities related to iCap Equity, a real estate investment firm that also sold real estate-focused securities. During those proceedings, Chief Judge Whitman Holt found “substantial” evidence that iCap operated as a Ponzi scheme between 2018 and 2023, paying off earlier investors with money from later investors, The Seattle Times reported.
Lawyers for former iCap CEO Chris Christensen disputed the findings with The Seattle Times but didn’t present evidence against the findings in court, according to the report.
In late September, iCap Trust, which represents more than 1,800 former investors in iCap Equity, filed 46 lawsuits seeking to recover what it can from some $250M in assets, co-trustee Seth R. Freeman told Bisnow. Five lawsuits have been filed against Christensen and his brother, Jim Christensen, who co-founded the real estate investment firm.
Bisnow‘s attempt to reach the Christensens was unsuccessful.
ICap Trust is also suing Marcus & Millichap Capital Corp., Perkins Coie and Columbia Bank, alleging they made iCap’s real estate dealings possible by ignoring red flags of fraudulent behavior. In addition, 41 lawsuits have been filed against investors who received profits from iCap in excess of $100K over their initial investments.
Columbia Bank has disclosed its exposure to possible litigation in connection with iCap in the bank’s quarterly Securities and Exchange Commission reports since May 2023, a bank spokesman said.
“We intend to vigorously defend our bank against any and all claims,” it said in an emailed statement. “We do not intend to comment further on ongoing litigation.”
Marcus & Millichap and Perkins Coie didn’t respond to requests for comment.
These kinds of lawsuits are common after a Ponzi scheme is uncovered, Kons Law partner Josh Kons said.
“The fallout from a securities fraud is kind of like nuclear waste where anyone that touches it or is around it has liability,” he said.
Kon’s firm specializes in fraud litigation and has represented former iCap investors but isn’t connected to the trust.
The U.S. Bankruptcy Court for the Eastern District of Washington
The trust is suing Marcus & Millichap’s mortgage banking arm for brokering the sale of a multifamily property called Colpitts Sunset in Renton, Washington. The lawsuit says the Christensens took a 10% stake in the project with investor money, then sold it at a very favorable price, according to The Seattle Times.
The trust is also suing law firm Perkins Coie LLP and Columbia Bank for allegedly failing to detect obvious signs of iCap’s fraudulent behavior. One lawsuit zeroes in on the behavior of a former branch manager at Umpqua Bank, which has since merged with Columbia Bank, according to a Tacoma News-Tribune report. The suit alleges the manager overlooked frequent transfers and large cash deposits and gave iCap special treatment to ensure the firm maintained its deposits at the bank’s branch.
This continued despite concerns raised by the bank’s risk management division, which flagged iCap’s entities as “high risk” and conducted 17 enhanced “due diligence” reviews, according to the report.
Fraud litigation attorney Kathy Bazoian Phelps, a partner with Raines Feldman Littrell LLP, said she has seen the incidents of real estate-based Ponzi schemes accelerate sharply. Litigation against connected institutions frequently happens in the aftermath, as they may be the only ones left with money for recovery, she said.
“That’s why third-party targets get sued so much, because the fraudsters spent the money on whatever they spent it on,” Bazoian Phelps said.
The investors will argue that those institutions may have willfully turned a blind eye or didn’t do their due diligence, exposing investors to unnecessary risk.
ICap was created in 2011 and ran as a traditional real estate firm. The parent company was allegedly already in deep financial trouble by the time it created an investment arm a few years later. As the investment arm ramped up, it set out to raise up to $500M in real estate-backed securities, according to a 2020 SEC filing. Most of the $250M that was eventually raised for these securities came from investors from China, who received just $1.4M in returns, according to the trust.
“The Trustees are committed to vigorously pursue and collect financial recoveries to provide the largest possible distributions to the iCap Ponzi scheme victims,” Freeman wrote in an email.
The remaining lawsuits name investors who made more than $100K over their investments with iCap. Even if these early investors aren’t found culpable in the scheme, they may end up owing money to other investors anyway, Kons said.
“It doesn’t mean they’re liable for securities fraud or anything like that,” Kons said. “It just may be an equitable clawback to redistribute the net gains.”
Other institutions are also grappling with the ripple effects of the iCap collapse. Somerset Securities Inc. was sued for recommending iCap’s securities to some investors. Somerset Securities said in a press release that iCAP’s bankruptcy represented “the most challenging event in our firm’s 35-year history.”
“We have been disheartened by the reputational damage our firm has suffered, particularly from legal actions and complaints seeking to litigate against us for this product’s failure,” the press release says.
Somerset Securities CEO Thomas Hamlin didn’t respond to a request for comment.
Institutions and investors can often detect behavior indicative of a Ponzi scheme, but only if they are willing to look, Bazoian Phelps said. Institutions that fail to do their due diligence risk exposure to liability.
“All professionals, particularly those who are in a gatekeeping role … need to stay very aware and mindful of red-flag warning signs,” she said. “They need to ask the hard questions and listen to the answers and ask follow-up questions. Because with some simple awareness and due diligence, most schemes can be detected.”