Susman Godfrey’s Class Action Lawsuit Against Grant Cardone Alleges Undisclosed Self-Dealing & False and Misleading Claims

J. Swift

Well-known member
The Susman Godfrey L.L.P. class action lawsuit against Grant Cardone and Cardone Capital’s Equity Funds V and VI makes for very interesting reading. We urge all Cardone investors, or potential investors, to read it. Captioned Pino v. Cardone Capital LLC and Grant Cardone, the Susman Godfrey LLP press release states:
The class action asserts claims for violations of Sections 12(a)(2) and 15 of the Securities Act of 1933. The complaint alleges that defendants made materially false and misleading statements and omissions of material fact regarding, among other things, investors’ expected rates of return on their investment. In this action, plaintiff seeks, among other things, an award of rescission or rescissory damages and prejudgment interest.
An excerpt from the complaint, a downloaded PDF copy of which is posted at the bottom of this article:
B. Material Misstatements and Omissions in the Securities Offering Documents
1. Cardone Capital Misrepresented How Properties Would Be Financed
53. The offering statements represented that Cardone Capital would secure the necessary financing before obtaining properties on behalf of the Funds: “When the Company identifies a location or a potential property, it will secure the necessary financing, sign a contract and place an escrow deposit to be held with the designated escrow agent. The Company will take the time necessary to complete all its due diligence to the property including: site inspection, reviewing all leases, income and expenses, as well as securing a first mortgage on the property. After the due diligence process has been completed, the Company will determine whether the property is suitable or not.”

54. This statement was materially misleading because instead of obtaining loans to finance the acquisition of the properties from third parties, Grant Cardone personally, through entities that he owns and controls, purchased the properties from third parties before selling them to the Funds. Grant Cardone acknowledged his practice of buying properties personally and then selling them to investors in an April 21, 2020 interview: “I buy the deal. In the past at least, up until this moment right now, our current fund, I buy the deal with my money before I offer it to the public.”

55. As to Fund V, for example, mortgage documents show that Grant Cardone, signatory for Cardone Capital, on behalf of Cardone Delray Member, LLC (through the entity Atlantic Delray Beach, LLC) took out a $60,125,000 mortgage on the property on September 27, 2018. But Fund V investors did not acquire the property until January 1, 2019, when the Fund “immediately purchased an investment in Cardone Delray Member, LLC which owns, Atlantic Delray Beach, LLC (dba 10X Living at Delray).”

56. The operating statements further described that “the purchase price of any Property or real estate investment acquired from or sold to an affiliated party will be based upon the fair market value of the asset established by a third-party appraisal or fairness opinion that is dated within the last 120 days prior to the transaction.” This is materially misleading because, Cardone Capital did not obtain a third-party appraisal or fairness opinion for those real estate investments it sold to the equity funds. With the exception of one property, Grant Cardone has failed to disclose the acquisition price for any of the properties he sold to Funds. Cardone Capital has also failed to disclose whether Grant Cardone acquired the properties at a different acquisition price than that paid by investors in the Funds.

57. Not only did Grant Cardone purchase properties with his own money before selling them to the Funds, he stated that he was “loaning” the money to investors, and charged the Funds interest.

58. The April 21, 2020 Fund V SEC Form 1-K states that Grant Cardone loaned millions of dollars to the Fund to acquire the properties being sold to the Fund, and charged investors interest: “When each Cardone Member entity purchases a multifamily property, Grant Cardone contributes his equity and loans the balance needed to purchase the property to each Cardone Member entity. The aggregate principal balance loaned by Grant Cardone on behalf of the Company to the Cardone Member entities to acquire the investments amounted to approximately $42,159,000. Each loan pays 6% interest rate, is unsecured and is payable on demand. As of December 31, 2019, all loans had been repaid and the Company’s proportional share of interest paid totaled $216,266.”

59. Similarly, the April 21, 2020 Fund VI SEC Form 1-K states: “When each Cardone Member entity purchases a multifamily property, Grant Cardone contributes his equity and loans the balance needed to purchase the property to each Cardone Member entity. The aggregate principal balance loaned by Grant Cardone on behalf of the Company to the Cardone Member entities to acquire the investments during 2019 amounted to $10,126,000. Each loan pays 6% interest rate, is unsecured and is payable on demand. As of December 31, 2019, the Company’s proportional share of principal outstanding and interest incurred totaled to $5,877,743 and $50,487, respectively.”

60. Cardone Capital’s failure to disclose that Grant Cardone would charge investors interest on Cardone’s loans to acquire properties is a material omission because investors were contributing capital to provide the equity to acquire interests in properties. There was no apparent need for Grant Cardone to loan money that investors were providing to the Funds, and then to charge investors for the loan. Investors contributed their capital based on the fees expressly described in the offering statement. For example, Cardone Capital disclosed that investors would pay Grant Cardone an asset management fee, based on fees charged to Fund V and Fund VI for “the management of [their] investments” and an acquisition fee for fees “charged to the company as properties are acquired.” To the extent Cardone Capital intended to charge investors additional fees relating to acquiring the properties, the fees should have been disclosed.

61. Similarly, Cardone Capital failed to disclose that Grant Cardone had already acquired Cardone Delray Member LLC which owns Atlantic Delray Beach, LLC (dba 10X Living at Delray) at the time of the offering statement. In the offering statement, Cardone Capital claimed, “However, because as of the date of this Offering Circular, we have not identified the assets we expect to acquire and because our Members will be unable to evaluate the economic merit of assets before we invest in them, they will have to rely on the ability of our manager to select suitable and successful investment opportunities.” The offering statement was dated October 22, 2018. Cardone Capital acquired 10X Living at Delray on September 28, 2018. This statement is materially misleading because it implies that investors were paying Grant Cardone an acquisition fee for his ability to target properties for investment when, in fact, Cardone Capital was selling investors interests in Funds which for he already owned the properties. It is further misleading because, had Cardone Capital disclosed its acquisition of 10X Living at Delray, investors could have evaluated the merit of the property prior to investing in Fund V. Finally, the statement is misleading because Cardone charged investors interest for Cardone “contribut[ing] his equity and loaning the balance needed to purchase the property,” even though Cardone Capital had acquired 10X Living at Delray months before Fund V invested in the property.

62. Cardone Capital also represented that its strategy would be to buy multi-family apartment communities at “below-market prices.” This statement is materially misleading because, upon information and belief, Cardone Capital did not acquire multi-family apartment communities at “below-market prices,” which raised the costs to investors.
Based upon the allegations, it seems Cardone Capital’s equity funds may be nothing more than captive entities that can only purchase properties from Grant Cardone. As Cardone is both the seller and the buyer, this is an inherent conflict of interest. Cardone has long claimed that there is no middle man in his deals. However, to the extent he purchases properties and then resells them to his captive entities, he himself becomes the middle man and makes money as such.

In this Facebook post below of June 10, 2018 Grant Cardone is misleading. He is correct in stating that he raised Reg A money directly and did not use broker-dealers as middlemen. However, did his Reg A investors know that Cardone purchased properties himself, “loaned” the funds his money at 6% interest to purchase his properties, and therefore effectively acted as a middleman? Not according to the lawsuit.

In addition to paying himself 6% for loaning his funds money, Cardone, as the manager of the funds, took a 1% acquisition fee when the fund purchased his property. That money came right out of investor money and thus reduced their net investment by what Cardone paid himself up front.

For example, Cardone’s payday for spending the $360 million he raised to buy apartments was a 1% acquisition fee of $3.6 million. This is over and above the 6% interest he on loaning his own money to his own fund. This type of slippery conduct is why Cardone Capital LLC and Grant Cardone as an individual are being sued.

 

Attachments

HelluvaHoax!

Well-known member
Excellent reportage, Jeff, as always!

I have been following the Cardone story since the suspicions arose about possibly shady dealings many months ago. You have been on top of this story since the beginning as well.

I assume the key battleground(s) on this for Cardone are:

1). SEC: If he fully cooperates and pays the fines/penalties, he just might skate and continue being able to sell securities without a cease and desist order. That assumes his full cooperation and the SEC giving him one monumental 'get out of jail card'---since he already was warned to stop the misrepresentations (in a previous cease and desist order by the SEC) and he 100% ignored it and treated it like cute little homo sapiens joke.

2). INVESTORS: This is likely the more dangerous and nuclear battle zone. If a very large number of investors sign onto the CLASS ACTION SUIT, then it means that the bar is very significantly raised for him to simply write a few modest sized checks and settle with them. He is not going to "settle" for hundreds of millions. He doesn't have that money, it's all locked down in highly leveraged properties that are already seriously underperforming.

Number 2 above is the key one I think because if he solves that he MIGHT be able to also solve #1 and keep his celebrity investment schemes moving forward, even though his Rolls blew out a couple tires from the SEC's spiked stop-strip.

The investors!! Live by the investors, die by the investors!

KEY QUESTION: Do all the investors get noticed and briefed by the law firm managing the CLASS ACTION LAWSUIT? This is a well seasoned firm that knows the ecosystem. I think they must have a very good high-percentage move to get in touch with all those investors without violating solicitation statutes and practices.

NEXT KEY QUESTION: Would any investor in their right mind NOT sign up for the class action lawsuit if they felt they might get shafted by Cardone the Magnificent Money Magician? Would any investor "trust" him now to treat them fairly and honestly if they left their money in the deals---AFTER HE BURNED THEM SEVERAL DIFFERENT WAYS ALREADY, by raking money off the TOP, BOTTOM and SIDES of the deal. It's like the Mafia-financed casinos "kicking up" the SKIM money every month to their mafia financiers. Cardone is skim money on steroids!

What would any investor do? I imagine most will run not walk to sign onto the class action suit. Probably Cardone will try to scare them off of that if he can figure out a way to do it. Same tactic as Reid Slatkin in the early days when the SEC began to chase him for financial disclosures and documents. I remember people being freaked out that he might give them their investment back---and begged him to keep it. LOL. Some I spoke to at that time were actually boasting that they were so "special" to Slatkin that he "allowed them" to keep their funds in his investment company. Naturally they got blown out just like everyone else. But he spooked a good number of investors in order to dissuade them from demanding a return of principal.

I cannot imagine any investor dumb enough to leave that money there and not join the CLASS ACTION because they are still in love with their money messiah---after they learned that he cut himself in several ways for various slices of their hard-earned money BEFORE the property ever made a dime. Who would trust such a vicious predator after that?

PREDICTION: The investors kick his ass in the CLASS ACTION LAWSUIT and the SEC is right there like a police dog with its iron jaws clamped down on his leg, shaking him up like rag doll. I think the SEC is likely (based on press and investor class action leverage) going to take Mr. Money's keys away and put them into the hands of a receiver until the investors get squared away and the SEC gets its revenge for being ignored the last time they gave him a chance to stay in business.

I wonder if one day Grant will one day join the bankrupt Feshback in doing workshops at the Ideal Orgs to teach the small beings there to one day become a big mega-rich being like him!

In many more ways than can easily be listed, Slatkin, Feshback, Cardone and the rest are all perfect showcases for the same scam Hubbard and Miscavige run. The messiah mythology where you pay them to get miraculous superpowers that they don't have. Because they are crooks and liars.....but the victims find out about that long after the checks have all been cashed and spent.

.
 
Top