The Securities and Exchange Commission charged a Bellevue, Washington company and its principal with defrauding investors on Wednesday, Sept. 9, by making false and misleading statements about a failing real estate investment project.
The SEC’s complaint alleges that, in the midst of the economic oil boom and high oil prices, Kirk Sperry and Sperry and Sons Capital Investments, LLC defrauded Williston investors in connection with a multi-million dollar residential real estate project called Fendee Estates Phase II located north of Williston’s downtown.
The project was expected to provide the city with 703 single-family units including town homes, duplexes and single-family houses. The subdivision was to have all of the amenities available to a rural community while keeping the city of Williston’s standards with curbs, gutters, paved streets, rural water and an on-site sewer treatment facility.
At the end of September 2015 and beginning of November 2015, Kirk Sperry reached out to two unidentified investors to persuade them to invest in the project and provided them with a prospectus detailing the investment. Sperry promised that the investment would be secured by a first position mortgage on the Fendee II property and that there were already purchase agreements in place for twin home lots that would infuse capital into the project, thus generating high returns for investors. In reality, an earlier investor already had the sole first position mortgage on the Fendee II collateral and the purchase agreements had been cancelled at the end of August 2015.
“Investors are entitled to full and complete disclosure of the material risks associated with their investments so that they can make informed decisions,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office. “As we allege, Sperry and Sons mislead investors in order to raise money rather than honestly inform its investors about the status of its real estate project.”
After Kirk Sperry made the alleged misrepresentations and material omissions, these two investors invested a combined $125,000 between October and November 2015. Despite the claims made in the Fendee II prospectus that the investors’ funds would be used for Fendee II project costs, Sperry and Sons, with Kirk Sperry’s authorization, actually used a significant portion of the investors’ funds to pay investors in other projects. Sperry and Sons was never able to raise sufficient funds to complete the Fendee II project and never returned the investors’ money.
The named defendants in the matter are Kirk Sperry, 44, of Issaquah, Washington, who is the principal and one-third owner of Sperry and Sons and Sperry and Sons Capital Investments, LLC, which is a Nevada limited liability company with its former principal place of business in Bellevue, Washington.
According to the complaint, between 2012 and 2018, Sperry and Sons was a hard money lending business that pooled investor money to make short-term secured loans to real estate developers. Sperry and Sons is no longer in operation, but still has an active corporate registration with the Nevada Secretary of State.
THE FENDEE II PROJECT
At the beginning of 2015, Sperry and Sons partnered with a developer to raise funds and develop Fendee II, its largest ever investment project. Fendee II was a multi-million dollar residential project located in Williston, North Dakota. Williston had experienced an economic boom due to the oil extraction industry and high oil prices. At the time, Kirk Sperry managed Sperry and Sons full time and he led the efforts to raise funds for Fendee II and to prepare written materials for investor outreach on Sperry and Sons’ behalf.
Within a few months of beginning to fundraise, Sperry and Sons allegedly faced challenges with the project. By August 2015, Sperry and Sons still had not raised the approximately $8.3 million in funds needed for the Fendee II project. On or about August 5, 2015, a Sperry and Sons email to investors, including Investor A and copying Kirk Sperry, reported that the company had only raised $3.2 million. Sperry and Sons had failed to even raise the money needed to purchase the land for the Fendee II project.
Sperry and Sons was facing a looming deadline to close escrow on the land by the end of August 2015, according to the complaint. According to Kirk Sperry, the developer was under pressure to pay off his existing debt on the land; otherwise, they risked losing the non-refundable deposits, totaling no less than $2.4 million, and the land.
Around August 14, 2015, Kirk Sperry met with others involved in the Fendee II project in Big Sky, Montana. During this Big Sky meeting, another investor (“Investor C”) —a business partner of Sperry and Sons and an existing investor in Fendee II—agreed to provide $1.5 million as a loan to help purchase the Fendee II land. Kirk Sperry was involved in the negotiation of the loan and its terms. The $1.5 million loan accrued monthly interest at a rate of ten percent, and the entire unpaid principal balance plus any unpaid interest was due in one year.
Notably, in return for the loan, Sperry and Sons gave Investor C sole first position on the Fendee II collateral. This meant that, contrary to the representations made in the Fendee II prospectus, no other investors could be in first position.
The Fendee II project then suffered another significant setback. About August 27, 2015, Kirk Sperry was informed that the purchase agreements for the Fendee II twin home lots touted in the Fendee II prospectus were cancelled by the developers. As a result, Sperry and Sons was left without the anticipated $2.7 million in proceeds from these purchase agreements.
The SEC’s complaint, filed in the U.S. District Court for the Western District of Washington, charges Sperry and Sons with violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Kirk Sperry with violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and liability for aiding and abetting Sperry and Sons’ violations of Section 17(a)(2) of the Securities Act. The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties.
The SEC’s investigation was conducted by Silvana Quintanilla and Ellen Chen, and supervised by Jason H. Lee and Monique C. Winkler of the SEC’s San Francisco Regional Office. The SEC’s litigation will be led by Sheila O’Callaghan and Ms. Quintanilla.
A full version of the SEC complaint can be found at sec.gov by searching for complaint 24889.