U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23059 / August 4, 2014
Securities and Exchange Commission v. Walter Ng, Kelly Ng, Bruce Horwitz, and The Mortgage Fund, LLC, Civil Action No. C-13-0895 (N.D. Cal. filed Feb. 28, 2013)
San Francisco Bay Area Real Estate Fund Managers Settle Fraud Claims
The Securities and Exchange Commission today announced that Kelly Ng and Walter Ng, their affiliated investment advisory firm The Mortgage Fund, LLC, and Bruce Horwitz agreed to resolve fraud charges against them, which fully resolves the Commission's litigation. In the settlement, Kelly Ng, Horwitz, and The Mortgage Fund, LLC will pay a total of $5,205,367 and Kelly Ng and Walter Ng will be barred from the securities industry. The SEC filed a complaint against the Ngs, Horwitz and the firm in federal court in Oakland, California in 2013, alleging that they defrauded investors in their real estate fund called Mortgage Fund '08 LLC (MF08) by secretly using its assets to rescue an older, rapidly collapsing fund called R.E. Loans, LLC.
According to the SEC's complaint, the Ngs and Horwitz promoted MF08 in the midst of the 2008 financial crisis as a new opportunity to invest in conservatively underwritten commercial real estate loans secured by deeds of trust. But the Ngs and their advisory firm, The Mortgage Fund LLC, immediately began transferring money raised by MF08 to R.E. Loans so that they could afford distributions to investors in that fund. From December 2007 to March 2008, the Ngs transferred almost $39 million from MF08 to R.E. Loans. They later attempted to justify the transfers by claiming MF08 had purchased three loans from R.E. Loans that totaled around $39 million.
The SEC further alleged that both the Ngs and Horwitz lured investors into MF08 by making false claims about its performance and the R.E. Loans fund's performance. What investors did not know was that both R.E. Loans and MF08 began to experience significant and dramatic borrower defaults in 2008. Despite the funds' rapidly disintegrating portfolios, the Ngs and Horwitz repeatedly assured investors that R.E. Loans and MF08 were performing well and the underlying loans were safe and secure.
Walter Ng, Kelly Ng, Horwitz, and The Mortgage Fund, LLC, without admitting or denying the SEC's allegations, all consented to the entry of final judgments, which the court entered on August 1, 2014. Under the terms of the settlements, Kelly Ng and the Ngs' firm will pay a total of $4,480,025 in disgorgement, prejudgment interest, and civil monetary penalties and Horwitz will pay $725,342. The Commission intends to ask the Court to authorize the transfer of any disgorgement, interest, and penalty payments collected to the MF08 Liquidating Trustee for distribution to MF08 investors. All four agreed to be permanently enjoined from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Kelly Ng, Walter Ng, and The Mortgage Fund further agreed to be permanently enjoined from violating Sections 206(1) and (2) of the Investment Advisers Act of 1940.
Walter Ng and Kelly Ng further agreed to be barred from the securities industry, including association with any brokerage firm or investment adviser. Kelly Ng currently is incarcerated and serving an 18 month sentence after he pled guilty to twenty counts of structuring cash transactions to avoid bank reporting requirements.
Previous release: Litigation Release No. 22627 (Feb. 28, 2013).