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NY Sues for Flipping, Ponzi Scheme

East Coast Capitalís Ponzi scheme netted over $2 million while blighting Buffalo neighborhoods

ALBANY, N.Y. -- (May 23, 2007) -- Attorney General Andrew M. Cuomo today announced the area’s first major house flipping lawsuit against an investment company that used a Ponzi scheme that increased urban blight in Buffalo neighborhoods.

The Attorney General’s suit accuses East Coast Capital (ECC), LLC and others of defrauding unknowing investors through an elaborate Ponzi scheme involving over 50 properties throughout Buffalo. In the scheme, high returns are paid to investors with money paid from other investors instead of actual profits from the real estate venture. ECC duped investors by promising high returns if they invested in distressed real estate by providing mortgages that – also unknown to the investors – grossly exceeded the market value. In a Ponzi scheme, an infinite number of investors are needed to provide the high returns to the other investors. Therefore, Ponzi schemes inevitably “implode,” leaving many investors with significant losses.

“These people led a fraudulent, greed-driven scheme to line their pockets at the expense of Buffalo’s neighborhoods,” said Attorney General Cuomo. “In Western New York, we are setting an example that house flipping cannot and will not take place at the expense of our neighborhoods and communities. I applaud Mayor Brown, his Anti-Flipping Task Force and community activists for bringing much-needed attention to this issue.”

The case is assigned to New York State Supreme Court Justice John M. Curran, who issued a temporary restraining order barring the sale or transfer of any of the properties or funds involved in the scheme (except as allowed by a court of competent jurisdiction), and barring the destruction of any business records belonging to ECC and it’s affiliates.

Also named in the lawsuit as defendants are consulting firm IMA Equities and the owners of JD Realty & Management, Inc., siblings Joshua and Jessica Doucette. Jessica is a 20-year old college student who ECC told investors was supposed to rehabilitate many of the properties.

ECC operator Norman Dansker solicited private investors by telling them that ECC bought distressed properties and quickly sold them to rehabilitation contractors. ECC then provided short-term bridge loans to the contractors with the investors’ money, based on the supposed worth of the property. Investors, led by ECC to believe that they would receive a high return from the resale of the renovated property, initially accepted interest-only payments from the contractors. Investors were supposed to receive full repayment, but in actuality, only a few received a full return. The few times ECC actually paid back the original investors or paid any mortgages, it did so with other investors’ money.

ECC paid a total of $961,300 for 53 properties in the Buffalo area, and then received private investor mortgages totaling $2,753,500. ECC then transferred the properties to Jessica Doucette, who has no experience as a contractor, who then defaulted on the grossly inflated mortgages. Meanwhile, ECC actually paid Doucette at least $500,000 as a concession for taking the property off their hands. In the end, ECC obtained hundreds of thousands of dollars while investors lost large sums of money because the values of the collateral properties were well below the mortgage amounts.

Over 40 of the properties owned by either ECC or Jessica Doucette have been cited for various building code violations, which are subject to city court proceedings. Doucette failed to appear at multiple court appearances regarding the violations and was briefly imprisoned in the Erie County Holding Center.

Buffalo Mayor Byron W. Brown said, “I applaud Attorney General Cuomo for his decisive action in the case of house flipping by East Coast Capital. A primary goal of my Administration is to improve the quality of life for all city residents and, by stopping all fraudulent house flippers, we can strengthen our overall effort in attaining that goal. With Attorney General Cuomo's key and dedicated support, our ability to eradicate house flipping is made even stronger.”

Senator Bill Stachowski, co-chairman of the Mayor’s Anti-Flipping Task Force (AFTF), said, “For nearly two years, the members of the Mayor's Anti-Flipping Task Force have worked diligently to make a case against these individuals and their firms. We have been relentless in pursuing the flippers doing business in Buffalo, and we believe that our work will produce more results like this. If you've been illegally flipping properties in Buffalo, or are looking to make money by flipping derelict properties, we will find you and prosecute you.”

Assemblymember Sam Hoyt, co-chair of the AFTF, said, “I applaud Attorney General Cuomo for recognizing the seriousness of this problem and acting decisively. The AG’s lawsuit against these house flippers sends a clear message to those who think that they can make a profit at the expense of our neighborhoods. As the AFTF unravels these webs of deceit we will undoubtedly see more legal action and we will send a message to the rest of the country that we will not tolerate this type of illegal activity in Buffalo.”

Michele Johnson, a housing court liaison, community activist and cofounder of the AFTF, said, “Buffalo is no longer going to be known as the city where anything goes. We welcome positive investment as our city has much opportunity but we will continue to fight against fraudulent flipping because it is a destructive practice.”

The lawsuit is being handled by Assistant Attorney General James Morrissey of the Buffalo Regional Office, under the supervision of Assistant Attorney General In-Charge Russell Ippolito. Assisting in the case are Investigators Harold Frank and Paul Scherf. The Attorney General acknowledged the contributions made by the Mayor of Buffalo’s Anti-Flipping Task Force and the Economic Crime Investigation Program of Hilbert College in Hamburg for their assistance with the investigation.

SOURCE: Office of the New York State Attorney General

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