Three Carmel family members who sold $10.4 million in ownership interests in rental properties to elderly clients are accused by the Indiana Secretary of State’s Office of committing securities fraud.
The office’s securities division this month filed suit in Hamilton Circuit Court against attorney Charles Blackwelder, his son Chad Blackwelder and his daughter Cara Grumme. The three own CFS Inc., which also is named in the suit.
CFS, located in the Village of West Clay, is a licensed brokerage that has provided “real estate investment opportunities” since 1998, according to the company’s website.
The court appointed a receiver Feb. 20 to oversee CFS investor assets and issued a preliminary injunction barring the trio from selling securities pending the outcome of the lawsuit.
“The defendants’ actions show that they have and will continue to misappropriate investors’ funds,” the securities division argued in requesting the injunction.
The division wants the three to pay restitution to investors and civil penalties of $10,000 for each part of the Indiana Securities Act they are found to have violated.
According to the complaint, CFS did not register its securities offerings with the state, and Charles Blackwelder, who sold the securities, is not registered to sell them.
Their attorney, Mark Barnes, refuted the allegations by arguing that real estate is not considered a security under the law.
“There aren’t any securities present in this case,” he said. “What Chuck did was sell interest in real estate, and real estate isn’t a security.”
Former Indiana securities commissioner Mark Maddox, an Indianapolis attorney who has represented investors in disputes against investment firms for more than two decades, disagreed.
“Lots of real estate investments turn out to be securities,” said Maddox, who is not involved in the case. He cited real estate limited partnerships and real estate investment trusts as examples.
According to the lawsuit, CFS sold $10.4 million in ownership interests in rental properties to investors. The company’s portfolio contains 35 commercial and residential properties in the Indianapolis area valued at $7.1 million, the complaint says. It does not specify how much money investors have lost.
“That is screwing investors right out of the gate, to the tune of almost 50 percent, if I’m reading that correctly,” Maddox said.
Some clients last year began receiving foreclosure notices on at least six properties while several other homes in CFS’s portfolio became overleveraged because the entire equity in the properties had already been sold to previous investors, the suit says.
The building in West Clay that houses CFS’s office, for instance, has lost several major tenants, preventing it from paying mortgage payments and investors, Charles Blackwelder said in a November memo.
One of CFS’s commercial properties that is performing well is its building at 4905 E. 82nd St., whose tenant is the Ethan Allen Design Center, Blackwelder said.
On the residential side, CFS’s properties had a negative monthly cash flow of $7,106, he said in another memo in December.
“Because CFS has relied on accepting new purchasers and using the new funds to repurchase property units of deceased owners, CFS does not have the cash on hand to be able to liquidate everyone’s property units as originally planned,” Charles Blackwelder wrote to investors.
Barnes, his attorney, said CFS had been hit particularly hard by the downturn in the residential real estate market and is unable to pay investors.
“It may well be that they lose everything,” he said. “[My clients] are very sad that they cannot keep up with the debts. They have cooperated in every step with the securities division.”
Barnes said CFS offers a legitimate investment option for the elderly to invest some of their money to avoid Medicaid spend-down requirements.
The securities division declined to comment beyond its allegations in the complaint.
Besides being a lawyer, Charles Blackwelder is licensed as a real estate broker. Chad Blackwelder and Cara Grumme let their real estate agent licenses expire in July 2010, according to the complaint.