Eight years ago, a realtor named Eric Malley decided to launch a fund that would buy hundreds of luxury Manhattan residences on the cheap and, before selling them off to an institutional investor, would lease them to corporate tenants. He named this the MG Capital Management Residential Fund III and raised $23 million from about 60 investors for it. This both seems an incredibly small amount of money with which to buy hundreds of high-end New York City apartments, and is a far cry from Malley’s $525 million target. But it certainly seemed successful enough to convince him to launch a sequel, Fund IV, which sought a more modest $250 million from a more modest group of investors, and raised $35 million.
All of this would seem very strange to you, were you to read the marketing materials and offering documents for Funds III and IV, given that they trumpet two previous funds managing a combined $1.18 billion with a decade-long record of overperformance. Surely, the investors in those funds would be racing to join their successors, which after all were “100 percent protected from loss” and already boasted a $250 million balance sheet at the ready to make good on that claim.
Of course, if in spite of the names of Funds III and IV there were, in fact, no Funds I and II, no decade-long track record of overperformance, no $250 million balance sheet to cover losses, no pre-signed multi-year lease agreements with hundreds of prospective tenants, it would all make a lot more sense. And, indeed, the SEC says it was all a part of the wild imagination of one Eric Malley, especially the part about total protection from loss.
According to Fund III’s audited financial statements, from the February 2014 launch through December 31, 2018, Fund III suffered net operating losses of approximately $860,000….
Fund IV financial records show that, from the September 26, 2017 launch through December 31, 2019, Fund IV earned $1.6 million in rent and incurred operating expenses of $8.3 million, resulting in net operating losses of approximately $6.7 million.
Financial records also reflect $4.7 million in unrealized losses on portfolio investments, bringing Fund IV’s total net loss to approximately $11.4 million.
And what, you might be asking, was Malley doing when he, holder of a New York real-estate license but no securities licenses, on account of his alleged total lack of experience in the field of investment management aside from the above, wasn’t inventing massive portfolios of Manhattan pieds-à-terre and quarter-billion-dollar backstops and enormously successful predecessor funds? Why, he was living in an entirely different fantasy world:
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SEC Charges Real Estate Fund Manager With Misappropriating Over $7 Million From Retail Investors [press release]
SEC v. Malley and MG Capital Management [SEC]