Two developers whose Wichita real estate empire collapsed amid fraud charges won’t face trial on 56 counts because Kansas courts lack jurisdiction to handle allegations that they bilked California investors, a divided state Supreme Court ruled Friday.
Michael Elzufon and David Lundberg, known as the “Minnesota Guys,” once controlled more than 1 million square feet of office, apartment and commercial space in Wichita and were hailed as saviors of downtown.
But their plans for redevelopment of those buildings fell apart, and Elzufon and Lundberg found themselves facing 61 state charges alleging they bilked investors out of more than $3.5 million from 2005 to 2012.
The developers argued at the district court that the Office of the Kansas Securities Commissioner didn’t have jurisdiction to prosecute most of the charges in Kansas, because the transactions were executed in California and the money was transferred to Elzufon and Lundberg at their offices in Minnesota.
Judge Benjamin Burgess, since retired, agreed and threw out 56 of the 61 counts against the developers.
The state appealed and the Kansas Court of Appeals overturned Burgess’ decision, reinstating the disputed charges.
But on Friday, the Supreme Court ruled that Burgess got it right, overturned the appeal ruling and again dropped the 56 disputed charges against Elzufon and Lundberg.
The charges were based on allegations that Elzufon and Lundberg made false statements and/or concealed material facts in order to sell the securities.
The court record shows that the developers recruited intermediaries to solicit investments in the various downtown projects they touted.
“These California intermediaries hosted real estate seminars and roundtables in California at which they made presentations,” the Supreme Court ruling said. “From Minnesota, Lundberg and Elzufon provided some information and materials included in these presentations, but the intermediaries prepared the actual presentations.”
The Kansas Uniform Securities Act “is designed to punish the acts taken as part of the sales or offer of a security within the territorial boundaries of Kansas. And here, all of those acts, according to the stipulated facts, occurred outside Kansas,” the ruling continued.
The majority opinion was joined by justices Lawton Nuss, Lee Johnson and Dan Biles.
The fourth vote to drop the charges came from District Court Judge James Vano, who filed a separate but concurring opinion. Vano sat in on the case in place of Justice Caleb Stegall, who recused himself.
Justice Marla Luckert authored a dissenting opinion that was joined by Justices Carol Beier and Eric Rosen.
Luckert said in her view, “the majority gives lip service to the history and purpose of Kansas securities laws,” which is to protect investors from shady dealers.
“Through the majority’s holding, after today, it becomes a regulatory regime easily skirted by simply stepping across the state line when performing certain acts on behalf of a Kansas LLC otherwise conducting business in Kansas,” Luckert wrote.
The remaining five counts from the original indictment — all involving a single alleged victim and at least $250,000 — were dropped at the state’s request so the appeal could go forward.
All the properties formerly owned by the Minnesota Guys have been sold or defaulted to new owners and some have been successfully redeveloped, including the mammoth former Exchange Place building at 110 N. Market, now known as the Renew Wichita apartments.
“We were happy that someone else took over many of those properties in Wichita and is finally doing something with them,” said Mayor Jeff Longwell. “The reality is I think Wichita’s glad those guys moved on and we’re seeing some things come to completion.”