November 9, 2012

Downtown developers could face criminal charges

State securities officials aren’t ruling out criminal charges against downtown Wichita’s biggest developer and three other local companies.

State securities officials aren’t ruling out criminal charges against downtown Wichita’s biggest developer and three other local companies.

Kansas Securities Commissioner Aaron Jack late Thursday issued a cease-and-desist order against Real Development, the downtown redevelopment team headed by Michael Elzufon and Dave Lundberg, who were also named individually in the order.

The order alleges that Real Development, Hybrid Asset Management, Sutton MN and Churchill Capital Strategies violated the Kansas Uniform Securities Act by “attempting to deliver interests in fraudulent life settlement policies to a Topeka bank and unknown investors.”

Elzufon and Lundberg , known locally as “the Minnesota Guys,” did not return calls Thursday or Friday seeking comment.

Other individuals named in the order include Jeffrey K. Williams, Sherrilynn L. Frierson and Mark K. Nordyke of Hybrid, all with prior securities convictions, according to the order, and Gordon Schultz, the former superintendent of Word of Life Traditional School in Wichita. A school spokeswoman said Schultz’s affiliation with the school ended last year.

The case is reverberating as far south as Kingsland, Ga., where city officials approached by Real Development for public incentives to build a $200 million destination complex say they’re watching developments in Kansas “closely.”

A search warrant executed Thursday at the Wichita Executive Centre, 125 N. Market, resulted in the seizure of a wide range of electronics and several boxes of information, said Jeff Kruske, general counsel to Jack. Hybrid and Churchill are Real Development tenants at Wichita Executive Centre, where Real Development also is headquartered.

Kruske confirmed Friday morning that the investigation into the case continues, and provided details on the execution of the search warrant.

“We were able to speak with several people named in the cease-and-desist order,” Kruske said. “We seized cellphones, computers and 12 banker’s boxes of information. A lot of our time going forward will be spent going through that material as part of the investigation.”

Kruske said his office also has spoken with Wichita City Attorney Gary Rebenstorf and is working closely with the city.

“We anticipate comparing notes to see what we can develop from there,” Kruske said.

Based on these developments, can the state rule out criminal charges in the case?

“No,” Kruske replied.

According to Jack’s order, the issue began unfolding Oct. 12 when an unnamed Topeka banker contacted the securities commissioner. The banker told state officials he had contacted Williams, the general manager of Hybrid, about a delinquent $2 million construction line of credit loan on Sutton Place, one of the Real Development properties and current home to a local office of the Kansas Department of Labor.

The order outlines a myriad of proposed complex financial transactions to retire the loan, including the sale of Sutton Place to Schultz by Sutton MN that would have been secured by the life settlement policies.

Real Development still had a major deal with the city in the works, the $65 million conversion of the decaying Exchange Place building at Douglas and Broadway into a series of apartments.

Elzufon told The Eagle last week that deal still was on the front burner, as Real Development waits for approval of a $30 million HUD loan guarantee that was set to trigger $11 million in city incentives, based on a development agreement with the city.

But city officials, unhappy with Real Development’s lack of performance on its Wichita projects, have been saying for months that development agreement could be voided by more than two years of inaction on the project.

And Vice Mayor Janet Miller said late Thursday that the Exchange Place project and any other Real Development downtown deals would have to clear the one-year-old downtown project review board before the city will proceed – only if no convictions result from the current securities case.

Mayor Carl Brewer said Friday that the city will cooperate fully with the state investigation, and is weighing its options to recover its investments – about $1.5 million for building facade improvements.

“Obviously, there’s not a lot we can do right now because we don’t own the buildings,” Brewer said. “But we’re certainly going to work closely with the state to see what we can do.”

Ken Kessler, the Kingsland, Ga., planning director, said his city wasn’t expecting any direct financial requests from Real Development for their planned project on I-95 until next year.

But on Nov. 26, the group was slated to appear before the Kingsland council to request formation of a TAD, or tax allocation district, the Georgia equivalent of tax increment financing in Kansas. That district would generate an estimated $22 million over 10 years for the proposed 475-acre destination entertainment complex.

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