The Scientology Money Project

Susman Godfrey’s Class Action Lawsuit Against Grant Cardone Alleges Undisclosed Self-Dealing & False and Misleading Claims

December 2019: Grant Cardone meets with Sheikh Nahyan bin Mubarak Al Nayhan, Minister of Culture, Youth and Social Development for the United Arab Emirates. Cardone was seeking a sovereign investment from the UAE in Cardone Capital LLC to purchase apartments in Florida. Cardone has also traveled to Dubai, Moscow, Singapore and dozens of other countries seeking investment capital.

The Susman Godfrey L.L.P. class action lawsuit against Grant Cardone and Cardone Capital’s Equity Funds V and VI makes for very interesting reading. We urge all Cardone investors, or potential investors, to read it. Captioned Pino v. Cardone Capital LLC and Grant Cardone, the Susman Godfrey LLP press release states:

The class action asserts claims for violations of Sections 12(a)(2) and 15 of the Securities Act of 1933. The complaint alleges that defendants made materially false and misleading statements and omissions of material fact regarding, among other things, investors’ expected rates of return on their investment.  In this action, plaintiff seeks, among other things, an award of rescission or rescissory damages and prejudgment interest.

An excerpt from the complaint, a downloaded PDF copy of which is posted at the bottom of this article:

B. Material Misstatements and Omissions in the Securities Offering Documents
1. Cardone Capital Misrepresented How Properties Would Be Financed

53. The offering statements represented that Cardone Capital would secure the necessary financing before obtaining properties on behalf of the Funds: “When the Company identifies a location or a potential property, it will secure the necessary financing, sign a contract and place an escrow deposit to be held with the designated escrow agent. The Company will take the time necessary to complete all its due diligence to the property including: site inspection, reviewing all leases, income and expenses, as well as securing a first mortgage on the property. After the due diligence process has been completed, the Company will determine whether the property is suitable or not.”

54. This statement was materially misleading because instead of obtaining loans to finance the acquisition of the properties from third parties, Grant Cardone personally, through entities that he owns and controls, purchased the properties from third parties before selling them to the Funds. Grant Cardone acknowledged his practice of buying properties personally and then selling them to investors in an April 21, 2020 interview: “I buy the deal. In the past at least, up until this moment right now, our current fund, I buy the deal with my money before I offer it to the public.”

55. As to Fund V, for example, mortgage documents show that Grant Cardone, signatory for Cardone Capital, on behalf of Cardone Delray Member, LLC (through the entity Atlantic Delray Beach, LLC) took out a $60,125,000 mortgage on the property on September 27, 2018. But Fund V investors did not acquire the property until January 1, 2019, when the Fund “immediately purchased an investment in Cardone Delray Member, LLC which owns, Atlantic Delray Beach, LLC (dba 10X Living at Delray).”

56. The operating statements further described that “the purchase price of any Property or real estate investment acquired from or sold to an affiliated party will be based upon the fair market value of the asset established by a third-party appraisal or fairness opinion that is dated within the last 120 days prior to the transaction.” This is materially misleading because, Cardone Capital did not obtain a third-party appraisal or fairness opinion for those real estate investments it sold to the equity funds. With the exception of one property, Grant Cardone has failed to disclose the acquisition price for any of the properties he sold to Funds. Cardone Capital has also failed to disclose whether Grant Cardone acquired the properties at a different acquisition price than that paid by investors in the Funds.

57. Not only did Grant Cardone purchase properties with his own money before selling them to the Funds, he stated that he was “loaning” the money to investors, and charged the Funds interest.

58. The April 21, 2020 Fund V SEC Form 1-K states that Grant Cardone loaned millions of dollars to the Fund to acquire the properties being sold to the Fund, and charged investors interest: “When each Cardone Member entity purchases a multifamily property, Grant Cardone contributes his equity and loans the balance needed to purchase the property to each Cardone Member entity. The aggregate principal balance loaned by Grant Cardone on behalf of the Company to the Cardone Member entities to acquire the investments amounted to approximately $42,159,000. Each loan pays 6% interest rate, is unsecured and is payable on demand. As of December 31, 2019, all loans had been repaid and the Company’s proportional share of interest paid totaled $216,266.”

59. Similarly, the April 21, 2020 Fund VI SEC Form 1-K states: “When each Cardone Member entity purchases a multifamily property, Grant Cardone contributes his equity and loans the balance needed to purchase the property to each Cardone Member entity. The aggregate principal balance loaned by Grant Cardone on behalf of the Company to the Cardone Member entities to acquire the investments during 2019 amounted to $10,126,000. Each loan pays 6% interest rate, is unsecured and is payable on demand. As of December 31, 2019, the Company’s proportional share of principal outstanding and interest incurred totaled to $5,877,743 and $50,487, respectively.”

60. Cardone Capital’s failure to disclose that Grant Cardone would charge investors interest on Cardone’s loans to acquire properties is a material omission because investors were contributing capital to provide the equity to acquire interests in properties. There was no apparent need for Grant Cardone to loan money that investors were providing to the Funds, and then to charge investors for the loan. Investors contributed their capital based on the fees expressly described in the offering statement. For example, Cardone Capital disclosed that investors would pay Grant Cardone an asset management fee, based on fees charged to Fund V and Fund VI for “the management of [their] investments” and an acquisition fee for fees “charged to the company as properties are acquired.” To the extent Cardone Capital intended to charge investors additional fees relating to acquiring the properties, the fees should have been disclosed.

61. Similarly, Cardone Capital failed to disclose that Grant Cardone had already acquired Cardone Delray Member LLC which owns Atlantic Delray Beach, LLC (dba 10X Living at Delray) at the time of the offering statement. In the offering statement, Cardone Capital claimed, “However, because as of the date of this Offering Circular, we have not identified the assets we expect to acquire and because our Members will be unable to evaluate the economic merit of assets before we invest in them, they will have to rely on the ability of our manager to select suitable and successful investment opportunities.” The offering statement was dated October 22, 2018. Cardone Capital acquired 10X Living at Delray on September 28, 2018. This statement is materially misleading because it implies that investors were paying Grant Cardone an acquisition fee for his ability to target properties for investment when, in fact, Cardone Capital was selling investors interests in Funds which for he already owned the properties. It is further misleading because, had Cardone Capital disclosed its acquisition of 10X Living at Delray, investors could have evaluated the merit of the property prior to investing in Fund V. Finally, the statement is misleading because Cardone charged investors interest for Cardone “contribut[ing] his equity and loaning the balance needed to purchase the property,” even though Cardone Capital had acquired 10X Living at Delray months before Fund V invested in the property.

62. Cardone Capital also represented that its strategy would be to buy multi-family apartment communities at “below-market prices.” This statement is materially misleading because, upon information and belief, Cardone Capital did not acquire multi-family apartment communities at “below-market prices,” which raised the costs to investors.

Based upon the allegations, it seems Cardone Capital’s equity funds may be nothing more than captive entities that can only purchase properties from Grant Cardone. As Cardone is both the seller and the buyer, this is an inherent conflict of interest. Cardone has long claimed that there is no middle man in his deals. However, to the extent he purchases properties and then resells them to his captive entities, he himself becomes the middle man and makes money as such.

In this Facebook post below of June 10, 2018 Grant Cardone is misleading. He is correct in stating that he raised Reg A money directly and did not use broker-dealers as middlemen. However, this begs the question: What commission rate was Cardone paying his inside salespeople who sold Equity Funds V and VI? Cardone has made it abundantly clear in his videos that only closers remain in his employment as salespeople.

Further, did Cardone’s Reg A investors know that Cardone purchased properties himself, “loaned” the funds his money at 6% interest to purchase his properties, and therefore effectively acted as a middleman? Not according to the lawsuit.

In addition to paying himself 6% for loaning his funds money, Cardone, as the manager of the funds, took a 1% acquisition fee when the fund purchased his property. That money came right out of investor money and thus reduced their net investment by what Cardone paid himself up front.

For example, Cardone’s payday for spending the $360 million he raised to buy apartments was a 1% acquisition fee of $3.6 million. This is over and above the 6% interest he on loaning his own money to his own fund. This type of slippery conduct is why Cardone Capital LLC and Grant Cardone as an individual are being sued.

The Complaint:

5 replies »

  1. As has been discussed on this blog before, scientology has built a byzantine corporate structure in order to escape any and all accountability. It would appear that Grant was listening but perhaps not well enough. If he wants to claim that he had invested his own (wink, wink) money he may have a serious problem: He has no corporate veil to shroud himself with and becomes personally reliable. And I’m sure that the Court will not want to hear the “But money is my religion” (true enough) argument and grant him religious exemptions.

    But it appears to me that the business model he offered his investors (unaccredited, no less) is fundamentally self-contradictory. On one hand, he promised them that they would buy properties BELOW their actual value–who wouldn’t want to do that. However, then the same model calls for an independent appraisal of properties in escrow and the sale of the properties to the funds/investors AT appraised value. So which is it?

    And this is where the self-dealing aspect becomes critical. First off, who get to choose the appraiser? (This is beginning to sound a lot like scientology religious arbitration tech).

    But even among truly impartial appraisers opinions usually vary, sometimes by quite a lot. This can easily enough amount to give or take a couple of millions on any given 8 figure project. Now the TRUE value of any commodity is established when a buyer and a seller meet to transact a non-coerced exchange. Which is precisely what is NOT happening here.

    It appears that the business model is really more like this: Grant will buy below market, flip to the investors at market and then take marked up interest for the marked up property. And charge an extra 1% acquisitions fee for all of this trouble.

    And that’s only the beginning: Now he bears 0% of the risk but gets to collect a management fee every month, whether the property makes money or not. Another point where there may be a conflict of interest between him an his “partners.”

    Finally, he alone gets to decide when it’s time to sell. Again a time where his interests may conflict with those of the fund holders. Like a license to print money–for him, anyway.

  2. Yours in an excellent analysis Todd. Grant Cardone talks like all the debt is on him when, in fact, he has no exposure whatsoever after he sells the deal to his funds.

  3. Jeff, would you say this is the beginning of the end for Cordone or is it possible that he can survive this?

  4. These lawsuits are not good for Grant Cardone for many reasons:

    1. Grant Cardone will have to come clean on any self-dealing, the total extent of which is unknown at present.

    2. Cardone needs to publicly disclose his use of ten year loans in which the first five years are interest only. He has to explain what he does when his loans balloon at five years and how he plans to manage the enormous increase in monthly debt service on >$1.1 billion in debt.

    2A. In a previous article we documented how Cardone’s yearly interest-only payments on a $1 billion loan @3.75 interest jumps from $37.5 million per year (years 1 to 5) to $219.6 million per year when principle and interest comes due in years 6-10. We showed how Cardone’s rental income does not allow him to service this debt.

    Cardone’s one billion dollars in loans balloon massively. The monthly payment skyrockets from:

    * $3.125 million interest only, to:

    * $18.3 million per month in principal and interest.

    3. Cardone needs to disclose the fact that has been charging investors 6% on his money. In our view, this is greedy, excessive, and unnecessary on his part. We see the interest charge as bad faith. Why does Cardone take the 6% while pretending to be so magnanimous and wanting to help the little guy? The 6% makes Grant look like a phony when interest rates are so much lower.

    4. The provenance and locations of some of Cardone’s money is of interest to us. We have opened an investigation into this.

    5. What role, if any, did attorney Jillian Sidoti play in Cardone’s alleged Reg A securities fraud?

    6. Is there a possibility that Grant Cardone has crossed the line into criminal securities fraud? This is a crucial question and goes to Cardone’s survival.

    7. Grant Cardone needs to stop the lies. For example, he owns his own home. It is a $8.5 million luxury condo in Miami. Cardone rents his home from himself through an entity he owns called GC Expansion LLC. Cardone owns his own home while telling his investors that owning a home is the worst investment ever. Meet Kevin exposes Cardone’s home ownership and the revolving line of credit on his home:

  5. Thanks Jeff. $ci seems to attract more than it’s fair share charatans. Then again it was founded by one.

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