How Alberta became a wild west for small investors

Nearly $2 billion lost. As many as 20 troubled or bankrupt companies. How Alberta regulators failed to guard against the biggest losses.

For “Maria,” the gnawing doubt began shortly after she signed papers handing over her life savings to a real estate developer in Alberta. She attended a seminar in Ottawa in 2009 touting the benefits of investing in real estate, which promised better returns than the tumultuous stock market. Among the investments on offer was a company called CBI Group, run by Red Deer brothers Ron and Travis Cadman, which promised a chance to invest in an array of projects they were developing around Alberta—a luxury vacation property in the resort community of Sylvan Lake, a condo project in Red Deer that listed a movie theatre and a resident chef among its amenities—as well as a chance to invest in foreclosed properties in Arizona.

Maria (who spoke on the condition her real name wouldn’t be used) signed on to invest $100,000 in two CBI investments, half in Arizona and half in Alberta. Almost immediately, she says, she grew concerned about her investment in Arizona since it wasn’t one she could easily sell on short notice. She pulled out and got a full refund. But she stuck with her $50,000 Alberta investment, which promised 11 per cent annual interest, paid quarterly until 2012. Real estate in Alberta was booming, the salesman told her, and it was about the safest bet you could make. “I remember thinking, ‘Well, yeah, I am investing in bricks and mortar and Alberta is hot right now.’ ”

For the next three years, the quarterly interest payments came regularly, totalling $10,000. But in March 2012, three months before her investment was set to mature, Maria says she got a bad feeling about the investment. “I started making some phone calls. There was no one answering any of the calls.” By June, the company sent a letter saying that due to “recent economic times” they were having trouble selling units in a condo project in Red Deer and wouldn’t be able to pay interest to investors. That, says Maria, was the last she heard of her $50,000.

What CBI didn’t mention in its note to investors was that in February, the Alberta Securities Commission had suspended the registration of the Cadmans’ investment dealership, Frank Capital Partners, which sold some CBI funds—including the one in which Maria was invested. While her fund has not come under scrutiny by regulators, the ASC has issued cease-trade orders for two of CBI’s other real estate investment funds. It wasn’t the first time the Cadmans had run afoul of the regulator. In 2008, they were slapped with a two-year suspension and a $250,000 fine for not disclosing to investors in a company they ran called Keystone Real Estate Investment Corp. that they had filed for bankruptcy in 1997. Shortly after the sanction, Keystone changed its name to CBI.

In an interview, CBI co-founder Travis Cadman says his company was the victim of an Alberta property bubble that burst, killing demand for vacation properties and condos. He understands why investors are furious, but says he’s still committed to finishing its projects, or possibly selling the land to pay investors. “Anytime an investor loses money, whether you invest in Lehman Brothers or you go into any of those dot-com busts, anytime that happens it absolutely makes an impact on the investors,” he says. “But be real clear—we’re an active company. We’re doing business. We’re moving ahead with these projects. Nobody is walking away.”

CBI is just one of as many as 20 Alberta real estate investment companies that have run into trouble in the past year after raising an estimated total of nearly $2 billion. Much of that money came from small Canadian investors now scrambling to recoup even a portion of their savings. The incidents have raised troubling questions as to how provincial regulators failed to guard against some of the biggest losses. Class-action suits, meanwhile, are piling up in Alberta, which is fast gaining a reputation as the new Wild West for investors.

In October, investors launched a lawsuit against Platinum Equities, a firm that bought and sold commercial real estate in Calgary—often, allegedly, at a huge loss—saying the firm owes nearly 2,200 investors a total of $160 million. The Alberta Securities Commission (ASC) is investigating Platinum for allegations it illegally distributed its securities. The lawsuit comes months after the ASC issued its largest-ever penalty—$3.3 million—against Platinum’s one-time chief marketing officer, Dave Humeniuk, for an earlier $118-million real-estate investment, Concrete Equities, that collapsed in 2009. He was previously banned from being a mortgage broker.

Earlier this year, a group of investors tried unsuccessfully in court to win control over Harvest Group of Companies and Foundation Capital, real estate development firms run by a former Lethbridge pastor named Ron Aitkens that raised at least $93 million from investors. The company filed for bankruptcy protection late last year and a court-appointed monitor found it had transferred millions of dollars of investors’ money into projects in Ontario and Panama. The Alberta Securities Commission sanctioned Aitkens and Foundation Capital in 2009 for engaging “in illegal trading and distributions of the securities” and “making misleading or untrue statements” about its developments.

Last month, the ASC laid fraud charges against Calgary property developer Lucid Group, started by a 28-year-old former competitive figure skater. Investors have forced one of the company’s developments into foreclosure and are selling its Calgary property for $4.8 million, or about half of what they invested.

This spring, the Alberta regulator permanently banned a Calgary real estate developer named Jeanette Cleone Couch, saying her company Shire International Real Estate Investment, which raised money to develop property in Alberta and Hawaii, was actually a $20-million “fraud.”

All of these companies operate in Alberta’s freewheeling exempt markets. Unlike public companies that raise money on stock markets where investments are policed by a securities commission, companies operating on the exempt market aren’t required to have their investments reviewed by any regulator. Until recently, their salespeople didn’t need to be trained or licensed. Alberta has some of the most relaxed regulations for exempt markets in the country. In Ontario, for instance, investors who buy exempt market securities have to be “accredited,” either by having a high net worth or being able to spend at least $150,000 in a single investment. In Alberta, anyone can invest in speculative real estate development on the exempt market, although small investors are limited to $10,000 in any one fund.

Even after 2010, when provincial regulators began requiring exempt market dealers to be licensed, Alberta was one of three provinces—along with B.C. and Saskatchewan—to pass a rule that allowed many companies to avoid registration under certain circumstances. “There’s nothing to prevent someone who may have served time for fraud, a disbarred lawyer, or a real estate broker who lost their licence from going into one of these provinces and selling products in the exempt market,” says Ermanno Pascutto, founder of the investor rights group FAIR Canada.

Among the practices that went on under the watch of the Alberta regulator was an unusual arrangement that allowed a company called Eyelogic Systems, whose core business was renting equipment to eye doctors, to become a controlling shareholder in at least a dozen of the now-troubled real-estate ventures. Eyelogic was started by a Calgary doctor who had developed computer software that could replace traditional eye exams. But aside from renting ophthalmology equipment, the company also invested in hundreds of real estate ventures in Alberta in an arrangement that allowed many of the firms to market their investments as RRSP-eligible.

Under Canadian tax laws, investors can’t use registered funds to invest in most real estate developments unless they are public companies, or have a majority shareholder that is a public company. Eyelogic, which is listed on the TSX Venture exchange, paid an average of just $600 to buy a 60 per cent share in each real estate investment corporation. That allowed developers to offer their investments as retirement savings vehicles, opening the door to potentially millions of dollars in RRSP money that would otherwise be out of reach to developers.

In return, the company earned a percentage of all the RRSP money invested as a “management fee,” although it stated in offerings that it had little involvement in managing any of the firms that it controlled. At its height, in 2008, Eyelogic paid a total of $98,311 for a controlling interest in 171 private real estate companies in return for $660,000 in management fees.

While Eyelogic was backing investments and collecting management fees, a sister company, Olympia Trust, handled the RRSP accounts investors used to direct their retirement money into the real estate developments, charging investors an annual fee for its services. In an interview, Rick Skauge, CEO of both Olympia and Eyelogic, says he originally developed the arrangement as a way to help raise money for his own real estate project, called Bearspaw Tree Farm. It made sense to expand it to other investments, he says, giving small businesses access to needed cash and small investors better return on their money.

“It was just a way to facilitate businesspeople raising money,” he says. “It certainly wasn’t a licence to rob people of their wealth.” Skauge says he, too, was taken in by many of the now-failed developers, some of whom had a history of successful developments. “You’re assuming you can tell the good guys from the bad guys and you can’t,” he says. “I’ve been in this business a long time and I can’t tell the difference between the crooks and the good guys face-to-face.”

In some cases, he says, Eyelogic was able to remove bad managers from troubled companies. In other cases, he says, company management simply ignored Eyelogic’s requests. Eyelogic took Shire, the banned Calgary company, to court to force a management overhaul, but it went into receivership before the case was over.

Investors, meanwhile, have launched as many as six different lawsuits against Eyelogic over allegations it failed to properly act as a controlling shareholder. None of the lawsuits have been successful, Skauge says. Investors may be looking for someone to blame, he adds, but they all signed disclosure statements that set out Eyelogic’s involvement in the deal, and agreements indemnifying Olympia Trust. “We weren’t the investors’ partners. Eyelogic made a small fee for that and we’ve been dragged into court enough times that we’ve paid significant legal bills,” he says. “But we probably had 260 companies that were controlled subsidiaries. Do you think for a minute we didn’t think some of them would go bad? They had to.”

But investors say the structure allowed potentially thousands of unsophisticated investors to pour their RRSPs into risky real-estate deals they didn’t understand. Myron Achtman and his twin brother, Malcolm, lost money in two different real estate developments that listed Eyelogic as a controlling shareholder in order to make them RRSP-eligible. They are now leading investor groups fighting to recoup their losses. “Some investors put in everything they owned,” Myron says. “Some of these people lost their homes.”

While investors can sue to try to recoup their money, the process is time-consuming and expensive, and courts have little ability to force regulatory change. “It’s not like the courts will be able to do anything about this,” says Kevin McGuigan, the Calgary lawyer leading the $160-million lawsuit against Platinum Equities. “The question that does come up then is regulation—who should be regulating this, and how should it be scrutinized in order to protect the public interest?”

Alberta Securities Commission chair and executive officer Bill Rice says the regulator investigates all allegations of fraud and misconduct and takes action when necessary. But not every investment that goes bust is illegal, he says. “It’s not our mandate to sanction people for incompetence,” he says. “We are simply not in a position to go and sanction people because investors make strong allegations concerning their conduct.”

Ultimately, he says, it’s up to the investor to decide whether a deal that sounds too good to be true is worth the risk. “We spend a great deal of time and money trying to warn people that they should look after themselves,” he says. “But in the end, it’s the investor who is going to make his or her own choice.” He says that the real estate problems represent a small piece of Alberta’s exempt markets, which are a useful tool for small businesses to raise capital.

Despite the problems in exempt markets, Skauge has no plans to get out of the industry. Instead, he says he’s come up with a new structure that he believes will “fix the industry.” Rather than simply pass money between investors and developers, Skauge says Olympia Trust now plans to act as a custodian, essentially keeping investors’ money in escrow and passing it to developers when they’re ready to buy land, in exchange for title to the property. Olympia will charge developers a fee. “The crooks won’t like this new structure because they won’t have any chance to take their dollars and do things they’re not supposed to do with it,” he says.

On the other hand, Travis Cadman says he’s taking a break from the exempt markets. He now runs a company called Arizona Investar, which buys foreclosed properties in the Phoenix area, renovates them and sells them to investors. He says the exempt market has become too difficult a place to raise money, now that it’s been tainted by too many investor lawsuits and fraud accusations.

“I’ve been in the real estate space for 28 years and seen a lot. I just look at it and I’m just not comfortable,” he says. “I think there are a few shysters out there who shouldn’t be in the business.”

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