WASHINGTON – Individuals and entities that the Securities and Exchange Commission alleged fraudulently participated in a senior housing bond scheme are arguing they did not commingle the facilities' funds or participate in fraud.
Dwayne Edwards, the primary defendant, is requesting a jury trial and has also asked that New Jersey District Court Judge Steven Mannion approve his request to transfer the case to the U.S. District Court for the Middle District of Georgia in Macon.
The SEC's complaint against Edwards, who has more than 35 years of experience in operating nursing facilities, alleges that he improperly commingled funds from nine different conduit municipal bond offerings totaling nearly $62 million as well as the revenues of the facilities financed by the offerings. The bond proceeds were supposed to be used to finance assisted living or memory care facilities in Georgia and Alabama. Edwards argues he properly handled the funds.
Eight of the offerings in the case against Edwards involved purchases of facilities from Christopher Brogdon, who was forced to repay $86 million to investors after a judge found him guilty of commingling investor funds in senior living projects.
The case also names nine "borrower defendants" that are companies Edwards and his business partner Todd Barker set up to manage the facilities projects. It additionally names several "relief defendants," which include companies that were said to be offering management support services and had the bank accounts that were used to commingle the funds, according to the SEC. Edwards' wife and Sharon Nunamaker, who owns a design company, are also named in the complaint.
Barker agreed to a bifurcated settlement with the SEC that includes monetary sanctions to be determined at a later date. The SEC said Edwards handled the bond financings and signed the offering documents while Barker was primarily responsible for operating the facilities.
The SEC has already obtained an asset freeze against Edwards and is also seeking a final judgment ordering the defendants to disgorge their ill-gotten gains along with prejudgment interest as well as pay civil penalties. The court has also appointed a receiver to manage the facilities and funds previously controlled by Edwards and Barker.
The SEC found that, between July 2014 and September 2015, Edwards, along with Barker and the companies they set up to serve as the borrowers, raised their money through the conduit offerings. The documents for each of the offerings said that the bond proceeds would be used to purchase and renovate a particular facility and that the revenues the facility generated would be used to make the interest and principal payments to the investors, the SEC said.
The documents also said that the offering proceeds would be used for things like working capital for the facility and a debt service reserve fund (DSRF) that would be used only if the facility couldn't otherwise make interest payments, the SEC said. The documents said the funds would only be used for the specific facility, according to the SEC.
Edwards, who denied that he and the entities he controlled improperly commingled, misused or misappropriated any funds, disputed the SEC's findings in his answer to the complaint. He argued that there was no language in any of the offering documents that prohibited transfers from one entity to another. Edwards added that the transactions he made from one entity to another were treated as loans to be repaid and were analyzed while outside accountants balanced the various entities' financial books.
He also describes the centralized management and banking system the facilities used, where the cash from facility-level accounts was "swept up" into a common management account and then used for accounts payable for all participating entities. Edwards said such a system is "a common mechanism for managing multi-facility senior living facilities" and is the same type of system the court-appointed receiver is using.
Edwards denied that he improperly used the funds for personal expenses and his wife Susan denies she used any business funds for loan or credit card payments. Nunamaker contended that the money she received was for nothing other than "legitimate renovation and decorating work related to the facilities."
Edwards' separate motion to transfer the case argues that a change of venue to Georgia from New Jersey would be most convenient and cost-effective for the parties involved in the case. While two of the nine bond offerings were underwritten by a New Jersey-based underwriter, the case does not involve any facilities that are in the New Jersey court's jurisdiction and many of Edwards' witnesses are located near Georgia.
Edwards also brought up a concern that if the case is not transferred, most witnesses that would be crucial to his defense would be too far away from New Jersey for the current court to exercise subpoena power. He added that the asset freeze he is currently facing means he "will simply be unable to defend himself because he cannot afford" to travel to New Jersey for the case.
Lee Greenwood, an SEC lawyer handling the case, argued in a letter that the court should deny Edwards' request. He noted that Edwards does not argue the New Jersey court is improper, only that the Georgia court is more convenient. He also argued that under the securities laws, the New Jersey court would have a nationwide reach to compel witnesses to participate.