SEC v. David M. Connolly, Case No. 2:12-cv-02952-WJM-MF (D.N.J.) On May 17, 2012, the SEC charged David Connolly with operating a multi-million-dollar Ponzi-like scheme involving a series of investment vehicles formed for the purpose of purchasing and managing real estate in New Jersey and Pennsylvania. Connolly raised more than $50 million from over 200 investors by selling “shares” in his investment vehicles. Connolly defrauded investors by misrepresenting the use of their funds, concealing the poor performance of the investment vehicles, and hiding his misuse of investor funds. For example, Connolly would tell certain investors that an investment vehicle would be used solely for the specific property or properties for which he formed that investment vehicle. In reality, however, he would use the funds to purchase real estate that was the subject of a different investment vehicle. Connolly did not segregate investor money. Instead, he comingled investor funds and improperly used the money to pay “dividends” to investors and order investment vehicles with funds paid by investors in newer investment vehicles, to refinance properties and use the case for unauthorized purposes, and to improperly pay himself with investor funds. Connolly used at least $2 million in investor funds for personal use. In addition, after his scheme collapsed and he stopped making dividend payments to investors, Connolly continued to collect dividends as well as a $250,000 salary out of investor funds.
The SEC charged Connolly with violating Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and civil monetary penalties.