Top Execs Then Help CEO Conceal Theft.

[ by Howard Haykin ]

The SEC on Monday charged the founder of a Detroit-based investment adviser with stealing over $3 million from the pension fund that his firm manages for the city's police officers and firefighters.  The money allegedly was diverted and used to buy 2 strip malls in California. Four other top officials at the firm were charged with helping him try and cover up the theft.

Profiles of Defendants.   (1)  Mayfield Gentry Realty Advisors, LLC ("MGRA"), based in Detroit, has been an SEC-RIA since 4/29/04. MGRA formerly had about $750 million in assets under management ("AUM"). Before May 2012, MGRA provided advisory services to the Police and Fire Retirement System of the City of Detroit (the "PFRS") pursuant to a real estate investment advisory agreement, which expressly acknowledged MGRA’s role as an investment adviser. In May 2012, after discovering the conduct described herein, the PFRS terminated its advisory agreement with MGRA for cause. MGRA is currently winding down its business. MGRA is a defendant in the Commission’s separate enforcement action SEC v. Kilpatrick, et al., Case No. 12-cv-12109 (E.D. Mich.), which is currently pending.

(2) Chauncey Mayfield, age 57, resides in Ft Lauderdale, FL, and is the founder, President, and CEO of MGRA,.  He owns 71% of MGRA’s stock.  Mayfield is a defendant in the Commission’s separate enforcement action SEC v. Kilpatrick, et al., Case No. 12-cv-12109 (E.D. Mich.), which is currently pending.  On 2/7/13 - based on the alleged misconduct at the heart of the SEC v. Kilpatrick case – Mayfield pled guilty to 1 count of Conspiracy to Influence or Reward Local Public Officials in violation of Title 18 U.S. Code, Sections 371 and 666(a), before the U.S. District Court for the Eastern District of Michigan, in U.S. v. Jeffrey Beasley, et al., Crim. No. 12-20030.

(3) Blair Ackman, age 42, resides in Livonia, MI, is a CPA.   From October 2006 through June 2012, he was the CFO of MGRA.  Ackman owns 5% of MGRA’s stock.

(4) Marsha Bass, age 59, resides in Bloomfield Hills, MI.  From January 2004 through present, she's been the COO of MGRA.  Bass owns 8% of MGRA’s stock.

(4) Emery Matthews, age 40, resides in Detroit, MI.  From September 2006 through May 2012, he was the CIO of MGRA. Matthews owns 8% of MGRA’s stock.

(5) Alicia Diaz, age 50, resides in Grosse Point, MI.  From January 2004 through May 2012, she was the General Counsel, EVP, and CCO of MGRA.  Diaz owns 8% of MGRA’s stock. Diaz is licensed to practice law in Michigan.

SEC Findings and Allegations.    Founder, President and CEO Chauncey Mayfield allegedly took money from the PFRS without obtaining permission.  He used it to purchase the shopping properties and title them in the name of a MayfieldGentry affiliate. Other MGRA executives gradually became aware that Mayfield had siphoned money away from the firm's biggest client.

Yet, rather than come clean about the theft and risk losing the sizeable business, firm officials instead allegedly devised a plan to secretly repay the pension fund by cutting costs at the firm and selling the strip malls. Their plan ultimately failed when MayfieldGentry could not raise enough capital to put the stolen amount back into the pension fund.  Mayfield and his firm agreed to settle the charges by paying back the stolen amount.

According to the SEC's complaint filed in federal court in Detroit, Mayfield took the money from a trust account for the pension fund in 2008. The stolen money was the equivalent of a year of benefits for more than 100 retired police officers, firefighters, and surviving spouses and children. Shortly thereafter, Mayfield told Ackman about the misappropriation, and by May 2011 the other principals at MayfieldGentry were aware of the misdeed. They proceeded to hide the theft by affirmatively misleading the pension fund.

The SEC alleges that during a critical budget meeting with fund trustees in 2011, Diaz stressed MayfieldGentry's success in generating a cash return for the pension fund. He stated that "the cash we deliver at the end of the day is the ultimate testimony in terms of what we do." Diaz touted a projection that MayfieldGentry would remit $4.96 million to the pension fund in 2012. Diaz never told the pension fund trustees that the cash remittance would be reduced by more than 60 percent once the stolen money was taken into account. At the same meeting, Matthews claimed that MayfieldGentry had achieved a benchmark-beating 6.8% return for the pension fund. He didn't explain that the 6.8% return would be materially impacted by the $3.1 million theft.

Pay-to-Play Scheme Comes Into Picture.   According to the SEC's complaint, MayfieldGentry and its executives continued to cover up the theft until they finally informed the pension fund on the evening before the SEC filed a complaint against Mayfield and his firm in May 2012 for their participation in a "pay-to-play" scheme involving the former mayor and treasurer of Detroit. Upon learning of the theft, the pension fund promptly terminated its relationship with MayfieldGentry.

SEC Violations Charged.    The SEC's complaint alleges that MayfieldGentry and Chauncey Mayfield violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Ackman, Bass, Matthews, and Diaz aided and abetted those violations.

Mayfield and his firm agreed to pay nearly $3.1mn in disgorgement and be permanently enjoined from violating Sections 206(1) and 206(2) of the Advisers Act. They neither admit nor deny the allegations in the settlement, which is subject to court approval.

In a parallel criminal matter, Mayfield is awaiting sentencing in connection with his guilty plea for participation in the pay-to-play scheme.

SEC Staff Credits.   Investigation jointly by:  Chicago Reg'l Office, Enforcement Asset Management Unit, and Municipal Securities and Public Pensions Unit:  Brian Fagel, Eric Celauro, Peter Chan, John Sikora, Jr.  SEC litigation against the remaining 4 defendants will be led by Timothy Leiman.

For further details, go to:   [ SEC OR 13-106, 6/10/13 ] and [ SEC Complaint ].