Real estate firm that raised money through IBDs blows up

iCap Enterprises Inc., a real estate investor and manager that raised $245 million from investors by selling through independent broker-dealers, declared bankruptcy near the end of September, and now clients who bought the high-risk securities are suing those firms.

Based in Bellevue, Washington, iCap was founded in 2007 by Chris Christensen, according to court papers that are part of the Chapter 11 bankruptcy, which iCap filed Sept. 29 in U.S. Bankruptcy Court for the Eastern District of Washington.

Starting in 2014, iCap grew quickly, raising $245 million and “deploying” that money toward real estate investments, according to a court filing. The company had 35 employees at the time it declared bankruptcy. iCap owned or controlled at least 13 real estate properties, according to court filings, and had investments and interests in others. About 1,800 investors bought iCap securities.

Christensen resigned from iCap on Sept. 28. He did not return a call to comment about the matter on Wednesday. Paladin, a third-party management group, has taken over the management of the properties.

The bankruptcy comes at a time when the commercial real estate market is hurting from rising interest rates, which make it more expensive for developers to do business, as well as from workers not returning to the office.

iCap created investment vehicles that were private placements and at least one publicly registered security, according to attorneys familiar with the matter. Private placements are illiquid, carry high risk and typically charge investors 7% commissions.

It’s not clear how many broker-dealers were involved in the sale of the iCap securities.

“In the iCap cases I have, brokers said, ‘We know the CEO personally,’” said Kristian Kraszewski, a plaintiff’s attorney. “Christensen’s story was, he started from nothing and has been wildly successful.”

The iCap investments offered yields of 10%, had short durations and would roll over into new iCap funds after a couple years, according to Kraszewski.

Two of his clients, Bertrand and Diana Poirier, who are 80 and 74, respectively, have filed an arbitration claim against the broker-dealer, Somerset Securities Inc. of Portland. In the claim, they allege that Somerset Securities’ actions in the investment constitute a breach of fiduciary duty, negligence, fraud and other claims. Their total principal is $355,000, according to a copy of the statement of claim filed in September with the Financial Industry Regulatory Authority Inc.

“The iCap investments typically renewed on a yearly basis, earning [Somerset Securities] and the financial advisor a healthy commission stream on [the Poiriers’] retirement savings,” according to the couple’s claim. “In March 2023, the financial advisor again recommended that [the Poiriers] renew their iCap investments.”

Days later, iCap would announce that it was suspending all dividend payments because of the risks that rising interest rates posed to iCap’s investments, according to the claim.

Somerset Securities is facing three investor claims, including the one cited above, stemming from sales of private placements, according to its BrokerCheck report. Those claims were filed with Finra in September and October.

Thomas Hamlin, the owner and CEO of Somerset Securities, did not return a phone call Wednesday to comment. ,

iCap invested in two categories of real estate across two divisions known as the portfolio business and the vault business, according to a court filing. The former is the oldest of the iCap business lines, and operates as iCap Equity and various subsidiaries. It focused on development opportunities for multifamily real estate projects or apartment buildings.

The vault business was started in 2018 for the purpose of investing in stand-alone real estate investments that have the potential to be or already were cash-flow positive, according to a court filing. It operates as iCap Vault and various subsidiaries. including iCap Vault 1, which is registered with the Securities and Exchange Commission.

Another plaintiff’s attorney, Alan Rosca, estimated that investors may be able to recover 25% of their money, before various fees to attorneys and other parties, like Paladin.

Another twist to the iCap bankruptcy is that the firm marketed and sold securities to Chinese nationals, some of whom may have invested hoping for U.S. EB-5 visas, Rosca said.

“Christensen opened an office in China,” Rosca said. “He may have been looking for investors who wanted visas or who wanted to place money away from Chinese Communist Party. More than a quarter of investor names in iCap are Chinese in the Seattle area or China.”

Related Topics: iCap Enterprises Inc., Private Placements