Real Estate Ponzi Scheme

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7^th Circuit Court of Appeals

Case Name: SEC v. BC57, LLC

Case No.: 23-1870

Officials: Easterbrook, St. Eve, and Jackson-Akiwumi, Circuit Judges.

Focus: Real Estate Ponzi Scheme

It was alleged that Jerome and Shaun Cohen through their companies, EquityBuild, Inc., and EquityBuild Finance, LLC (EBF), orchestrated a real estate Ponzi scheme spanning from 2010 to 2018. The Cohens marketed promissory notes to investors, with each note representing a partial stake in a specific real estate asset, mainly situated in underdeveloped areas of Chicago and backed by mortgages. As the scheme unraveled, the Cohens shifted to offering investment opportunities in real estate funds. BC57, LLC, a private lender and investor, extended roughly $5.3 million to EquityBuild, purportedly in exchange for a primary mortgage on five properties already owned by EquityBuild, subject to existing liens from individual investors.

Following the collapse of the scheme in 2018, the Securities and Exchange Commission (SEC) initiated legal action against the Cohens, EquityBuild, and EBF. Subsequently, a court-appointed receiver devised a strategy for recovering and liquidating all remaining, recoverable assets under receivership. The receiver sold the five properties, holding the proceeds, totaling over $3 million, pending the resolution of the claims process. The individual investors, whose loans BC57’s investment allegedly settled, asserted priority to these proceeds, contending they never received payment or relinquished their interests, notwithstanding releases signed by Shaun Cohen. BC57 disputed this, claiming precedence.

The district court ruled in favor of the individual investors, determining that the mortgage releases were facially flawed and that EBF lacked the authority to execute them. The Seventh Circuit upheld the district court’s decision, reasoning that according to the Illinois Mortgage Act, payment alone does not nullify any pre-existing interest without a valid release. Furthermore, the court deemed the releases supposedly executed by EBF as facially invalid, affirming the individual investors’ entitlement to maintain their interests in the five properties.

Affirmed.

Decided 05/06/24

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