In a document laying out the state’s case against former downtown developers Michael Elzufon and David Lundberg, the Kansas Securities Commission alleges that the two Minnesota businessmen repeatedly sold unregistered securities, failed to supply required information to investors and frequently didn’t use investors’ money as agreed.
The document, called the affidavit and application for the arrest warrant, was obtained under the Kansas Open Records Act. It provides more detail on how the state believes the two violated state securities law in raising money to buy more than 12 downtown Wichita buildings and renovate some of them.
Originally filed in February, the affidavit lists 61 counts of fraud against numerous investors. According to the affidavit, the investors, many of whom lived in California, lost $3.5 million.
A preliminary hearing is scheduled for May 7. At the hearing, prosecutors must present sufficient evidence to convince a judge the case should go forward. But Elzufon’s attorney Kurt Kerns said it is likely the hearing will be pushed back because he is still receiving documentation from the state.
Kerns said Thursday that his client is essentially the victim of a collapsing business venture.
“It appears to me that if Michael and Dave would have succeeded in what they tried to do, nobody would be complaining,” he said. “Their main fault is not making money in a downturn when nobody else was, either. I feel very good about his defense.”
Elzufon said he had no comment. A spokeswoman for the Kansas Securities Commission also said the agency had no comment beyond the affidavit.
All of the charges in the affidavit generally follow similar outlines: Elzufon and Lundberg, or an agent working for them, would contact an investor. They, or their agent, would deliver a sales pitch and sales documents, and ask the investor to lend money for – or buy shares in – buildings at 125 N. Market, 150 N. Main or 209 E. William in downtown Wichita. In return, they would give the investor a promissory note or ownership shares. Those are considered securities under state law, according to the affidavit, and are regulated by the Kansas Securities Commission.
Those selling securities must disclose certain things to potential investors, such as project finances, who owns what, who is issuing the note and their financial situation, the amount of investment risk and the specific project to which the money would be allotted.
In many cases, the affidavit alleges, the money was spent on their other projects, or for personal use. In all cases, the money was not paid back.
Here’s one example from the affidavit: Lundberg met a real estate broker in Irvine, Calif., in 2005 when he went there to pitch the just-completed Lofts at St. Francis in downtown Wichita as investment opportunities. In 2006, Lundberg called the broker and said that he and Elzufon planned to buy the building at 125 N. Market, then called the SC Telcom building, and the broker agreed to raise $2 million from California investors.
According to the affidavit, the written materials Lundberg provided contained details on the plan to renovate the building, a list of renters in the building and Lundberg’s resume. They later provided financial information that showed that the building would produce a profit right away. In return, the investors received promissory notes promising 12 percent interest per year for two or three years. The principal would be repaid in two or three years.
Two investors, identified only as PC and NC, contributed $275,000. Starting in April 2007, they were paid interest monthly. But by late 2008, Real Development was late with its payment, then missed a few months. The investors received their last interest payment in April 2009 and never got their money back.
In December of 2011, Lundberg went back to PC and NC and offered to exchange the promissory note for the interest in a life insurance settlement. PC and NC refused.
The promissory note was not registered with the securities commission, and the literature failed to disclose how the proceeds would be used, the risks involved and the financial status of the companies and individuals involved.
Lundberg, on Thursday, said neither he nor Elzufon intentionally did anything wrong. He acknowledged they were undercapitalized, but said their efforts collapsed only because of the credit crunch and recession, just as many other developers’ efforts did.
He said they made several million dollars early on and put most of that, along with their investors’ money, into their projects.
He said they hired brokers and legal advisers along the way and thought for seven years they were doing everything properly.
“I bet 99 percent of the state of Kansas doesn’t know a promissory note is a security, I didn’t know,” he said.