Court reinstates fraud charges against ‘Minnesota Guys’ Elzufon, Lundberg

The Kansas Court of Appeals has reinstated 56 charges against former Wichita developers Michael Elzufon and David Lundberg of Real Development that had been dismissed by a district court last year.

The state had filed 61 counts of securities fraud and unlawful sale of unregistered securities against the two – known as the Minnesota Guys – but the judge in the case dismissed most of those charges. The state appealed.

The appeals court remanded the case to the district court to rehear, but Lundberg’s attorney, Richard Ney, said they will appeal to the Kansas Supreme Court.

Elzufon and Lundberg, both from the Minneapolis area, arrived in Wichita in 2004 and over the next few years bought at least 11 aging downtown office buildings. They renovated and resold some of them at high prices as investment properties to dozens of small-time investors.

They recruited most of these investors during trips to California where they pitched the buildings at property investment gatherings.

While the credit bubble inflated, the two appeared to see success. But when it popped, their plans collapsed into a messy tangle of building foreclosures, lawsuits, unpaid contractors and investor bankruptcies.

In 2015, the Kansas Securities Commission charged the pair with 61 counts of selling unregistered securities to investors, failing to supply required information to investors and not using investors’ money as agreed. According to the affidavit, the investors lost $3.5 million.

But when the case went to trial last year, the substance of the charges wasn’t settled. Instead, it turned on a point of law.

Judge Ben Burgess agreed with a defense motion that 56 of the offers to sell the Wichita property actually took place outside of Kansas and that Kansas securities law didn’t apply. The state later dismissed the remaining five charges in order to proceed with the appeal.

But in Friday’s ruling, the appeals court disagreed with Burgess, saying that enough of the transactions had occurred in Kansas that there was “sufficient territorial nexus” to justify that the securities law would apply, and Kansas courts have jurisdiction.

Ney, Lundberg’s attorney, originally filed the motion for dismissal in the district court. On Friday, he said he disagreed with the appeals court’s interpretation of the jurisdiction question.

“There is really no Kansas case law on whether this sort of situation is in the jurisdiction of the state of Kansas,” he said.

This story was originally published March 3, 2017 at 12:21 PM with the headline "Court reinstates fraud charges against ‘Minnesota Guys’ Elzufon, Lundberg."