The
Wall Street Journal has
reported that Pinnacle Development Partners LLC is being investigated for its ads by California securities regulators. The Post-Gazette has also picked up the
story. Basically, the company is promising 25% returns in 60 days based on their ability to buy distressed property, clean it up and sell it. Apparently, Pinnacle is the only business in America that isn't being affected by the slowdown in real estate. Of course, if they were really doing what they say, they would be able to borrow money for far less than the imputed 100% interest that they are offering in their ads.
So, what's special about this one? Nothing much. Barry Minkow, the once infamous child-star of fraud who knows a thing or two about fake refurbishing of buildings, appears to be one of the folks pushing regulators into examining what Pinnacle is doing. In the "it takes one to know one" category, Minkow now runs the Fraud Discovery Institute and it's quite likely that he is correct in his assessment of the actions of this company.
So, what's happening? The article tells us that the inquiries are slowing Pinnacle's ability to spend advertising dollars:
Pinnacle's ads, promising 25% returns, have run in major publications, including this newspaper and Barron's, both published by Dow Jones & Co. In April, Newsweek began running a full-page ad for Pinnacle. "Stocks still low?" begins the ad in Newsweek's current issue. "Invest now in Atlanta's booming real estate market." A Pinnacle newsletter distributed to current and potential investors says the company is "anticipating the addition of many new investors" as a result of the Newsweek ad.
A spokeswoman for Washington Post Co.'s Newsweek said the magazine had received an official inquiry about Pinnacle earlier this week, "and made the decision not to run any more of the ads until the investigation is complete."
Other than confirming that Pinnacle was an advertiser, Robert Christie, a Dow Jones spokesman, declined to comment.
It's nice to see that the advertising folks at the Wall Street Journal won't talk to the reporters there.
The company seems to be flipping properties among related entities and paying out the money to old investors from the cash from new investors. There just aren't enough property transactions reported to match the stated business activities of Pinnacle. The real kicker here is that the heedless greed of Pinnacle's investors may manage to do more than wipe out their equity. Pinnacle appears to have gotten around the securities registration requirements by structuring each investment as a general partnership. Guess what? If you are a general partner, you are legally obligated for all debts of the partnership.
For some reason, when the absurdly high returns start to return to normal, people seem quite willing to be suckered in more easily than at other times in the cycle. I expect to see more stories like this.