As news broke yesterday that Robert Morgan—Rochester’s most prominent real estate developer—had been charged as part of a 114-count federal indictment alleging a large-scale fraud against multiple banking and insurance entities, it stirred much buzz and media coverage throughout Western New York. So much so, in fact, that it largely overshadowed the release of the civil fraud complaint that was filed against Morgan later in the day by the Securities and Exchange Commission. Yet the SEC case truly illuminates how Morgan was able to keep his business afloat and foreshadows some of the yet-unknown effects that his downfall may have on Rochester.
As that lawsuit explains, in addition to his numerous alleged efforts to swindle financial institutions, Morgan spent considerable time raising money directly from retail investors. Over an approximately five-year period beginning in 2013, Morgan raised more than $110 million from more than 200 investors. While the lawsuit does not identify these investors by name, it indicates that “many” of them are residents of the Western District of New York (a region that encompasses the greater Rochester and Buffalo areas). The complaint also notes that dozens of these investors made these investments directly through their retirement accounts, and that “a pension plan for an electrical workers union” in the Western District was also an investor.
While the investment documents mandated that Morgan use the invested funds to acquire or manage various properties, authorities allege that Morgan instead pooled the money into “a single, fraudulent slush fund, repeatedly using the funds for purposes inconsistent with the representations and disclosures made to investors.” In some cases, Morgan used the slush fund to make “Ponzi scheme-like redemptions of earlier investors.” In other situations, he would improperly use these funds however they were temporarily needed to overcome the “persistent cash flow issues facing his companies.”
To cover up these improper activities, Morgan “papered these transfers using sham loan documents to make the transfers appear legitimate,” the complaint alleges.
While Morgan’s alleged scheme seems more obvious in retrospect, I believe the warning signs were there several years ago. First, the investment terms Morgan offered were unusually good. When I was approached around 2016 about whether I might be interested in investing with Morgan, I was immediately struck by what I was hearing.
Morgan was “essentially guaranteeing” an 11 percent annual return, with payments being made to investors monthly. Plus, I was told that Morgan was “personally guaranteeing” the loans, meaning that my principal was “safe.” From the SEC complaint, we know that these are the same terms that were offered to all investors.
Additionally, since I had never met Morgan, I was offered the opportunity to meet him and get to know him before I decided on the investment. A few days later, I received a folder of materials about the investment. The materials were slick and compelling, just like great marketing ought to be.
Yet it all left me with the same thought: Why would someone as super-successful as Morgan need to try so hard and offer such good terms to raise money? How could it be worth his time to meet one-on-one with someone like me about a small potential investment? I didn’t suspect that Morgan was conducting a fraud. I just couldn’t figure out the answer to the same question asked by Vito Corleone to Sollozzo in the first “Godfather”movie: “Why do you come to me? Why do I deserve this generosity?”
I ultimately concluded that Morgan’s properties must be very heavily leveraged, and therefore the investment had more risk than it appeared. I turned down the meeting with Morgan and the investment opportunity.
I encountered the second potential warning sign in early 2017. At the time I was helping an out-of-town friend explore options to buy some apartment buildings around Rochester. After making calls to area real estate agents, I heard that the inventory of apartment buildings for sale was very low because Morgan was “snapping up” so many of them.
Again, I found this striking. Nearly all of the successful businesspeople I know are cautious by nature. They do not indiscriminately “snap up” available deals but rather turn down the vast majority of the opportunities presented to them.
Given what we have now learned from the SEC complaint and the federal indictment, this constant buying spree makes more sense. Morgan needed to keep buying buildings since that enabled him to keep borrowing more money and drawing in investors.
What might this mean for Rochester?
According to the SEC charges, retail investors are still owed more than $63 million of the amounts they put into Morgan’s investment vehicles. But the SEC indicates there are “few if any assets” left in these investment vehicles beyond the IOUs from other Morgan companies. Further, since Morgan borrowed so heavily against all of his properties—and these bank loans have priority over the money that is owed to retail investors—it seems reasonable to conclude that all or some of that $63 million owed to retail investors will never get paid back.
We do not know exactly how much of that $63 million is owed to Rochester-based investors. But given that Morgan and his alleged co-conspirators lived, worked and were most active here, it is reasonable to believe that a substantive portion of those financial losses will be experienced locally.
These losses will be felt acutely by the local individuals who invested money, perhaps depleting their ability or willingness to invest in other local projects or startups. But more broadly, the audacity and infamy of Morgan’s alleged misdeeds might have a chilling effect on many other local investors (who had not invested with Morgan).
It is one thing to lose money on an investment because an idea didn’t take off as planned. It’s quite another to lose money because the person you entrusted money to ended up being a criminal. After this kind of public scandal, it is natural for people to be more suspicious as investors. This might especially affect private investments in real estate deals and young startups, since feeling you can trust the CEO is a big factor in startup investments.
Additionally, what we learned from the SEC complaint was that Morgan’s properties are financially vulnerable and only seemed to be thriving because slush fund money was able to be continually moved around to cast the illusion that Morgan sought to portray. Now that this slush fund money can no longer be used, will these properties now be bleeding cash?
Morgan’s companies have 67 apartment complexes in Monroe County, as well as 34 more in other parts of upstate. He has been the largest private property owner in the county. While tenants need not worry yet, it is fair to be concerned about what will happen once banks feel the need to foreclose on the properties. Additionally, the hundreds of individuals that work at—and provide services to—Morgan buildings might certainly feel some disruption.
And finally, there is the matter of the $17 million in loans that Morgan had from the city of Rochester as recently as last year. Are those in danger of not being repaid and becoming a burden on taxpayers?
While the crimes alleged in the complaints filed against Morgan are certainly not at the dollar level of Bernie Madoff’s Ponzi scheme, they may end up feeling every bit as significant in Rochester. Despite all of Morgan’s personal guarantees.