On December 4, 2017, the Woodbridge Group of Companies, LLC (“Woodbridge”) of Sherman Oaks, CA, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. As we have previously highlighted in a series of blog posts, Woodbridge has come under considerable regulatory scrutiny over the past year, both by the Securities and Exchange Commission (“SEC”), and various state securities regulators including officials in Arizona, Colorado, Idaho, Massachusetts, Michigan, Pennsylvania, and Texas. Further, according to bankruptcy filings, Woodbridge has received information requests from state securities regulators in approximately 25 states. The investigations conducted by securities regulators at both the federal and state level have centered on allegations of offering and selling unregistered securities that are not exempt from registration.
In addition, at the federal level, the SEC has raised allegations of possible misconduct by Woodbridge and its President, Robert Shapiro (“Shapiro”). On Friday, December 1, Mr. Shapiro resigned as Woodbridge’s CEO. As of Monday, December 4, according to bankruptcy proceeding filings, Woodbridge owes approximately $750 million to an estimated 8,998 noteholders who invested in various Woodbridge funds. Holders of these notes are entitled to a fixed rate of interest generally ranging from 4.5 – 13%, payable on a monthly basis, and repayment of principal upon maturity (typically within 12-20 months of issuance) of the note.
Woodbridge operates through a complex structure of interrelated companies (numbering about 250) which are owned either directly or indirectly by RS Protection Trust, an irrevocable Nevada trust, of which Mr. Shapiro is the trustee and his family members are the sole beneficiaries. Included among the various Woodbridge entities or mortgage funds are the following:
- WMF Management, LLC;
- Woodbridge Group of Companies, LLC;
- Woodbridge Mortgage Investment Fund 1, LLC;
- Woodbridge Mortgage Investment Fund 2, LLC;
- Woodbridge Mortgage Investment Fund 3, LLC;
- Woodbridge Mortgage Investment Fund 3A, LLC;
- Woodbridge Mortgage Investment Fund 4, LLC;
- Woodbridge Mortgage Investment Fund PA, LLC;
- Woodbridge Group of Companies, LLC (d/b/a Woodbridge Wealth).
As indicated in certain bankruptcy proceeding filings, “Due to the concerns expressed by federal and state securities regulators regarding the Woodbridge Group Enterprises’ fundraising activities, Mr. Shapiro has agreed to empower an independent management team to take control of [Woodbridge] during the pendency of the Chapter 11 Cases…” Thus, as part of the contemplated Chapter 11 restructuring process, Mr. Shapiro will cede control of his business enterprise to Beilinson Advisory Group, an independent financial restructuring and hospitality advisory group owned and controlled by Mr. Mark Beilinson.
At this stage, Woodbridge has indicated that its assets include a portfolio of some 138 properties ranging in value from about $50,000 – $150,000,000. These properties, in various stages of development or renovation, include some raw land parcels.
For investors in Woodbridge notes, sometimes referred to as First Position Commercial Mortgages (“FPCMs”), there is significant cause for concern. Specifically, Woodbridge has indicated in its bankruptcy petition that: “While the Debtors believe that the Noteholders’ liens on Third-Party Collateral are not properly perfected and are thus subject to avoidance, out of an abundance of caution, at this stage in the proceedings the Debtors are making available conditional adequate protection to the Noteholders… .”
While it is still too early to determine how investors in Woodbridge notes or FPCMs (“Noteholders”) will fare in the bankruptcy proceeding, it is already troubling that Woodbridge has indicated that Noteholders may not have perfected liens on the real estate assets underlying their investment(s). Thus, it is conceivable that Noteholders will suffer steep losses on their principal invested.
Financial advisors, and by extension their brokerage firm, have a duty to perform adequate due diligence on any investment recommended to customers, including private placement offerings pursuant to Regulation D. In addition, financial advisors have a duty to disclose the risks associated with any investment, and moreover, to conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and associated risk profile.
If you have invested in any of the Woodbridge Funds, or otherwise purchased a First Position Commercial Mortgage through investing in a Woodbridge promissory note, you may be able to recover investment losses in FINRA arbitration or through litigation. Investors may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.