Cay Clubs Resorts and Marinas Ponzi Scheme Case: The Leaseback the Lender Wasn’t Told About

The Cay Clubs Resorts and Marinas Ponzi scheme case concerned a resort investment that, the SEC alleged, raised more than $300 million from nearly 1,400 investors while using new deposits to pay earlier buyers. The SEC alleged that executives paid themselves more than $30 million in salaries and commissions from that investor money. For someone who handled sales, closings or accounts, the revealing connections were between the payment promised to the buyer, the paperwork sent to the lender and the money that actually funded the return.

This page follows Cay Clubs’ resort offering, insider sales and lender paperwork through the SEC’s allegations and the Justice Department’s criminal-case accounts. Our broader comparison of real estate Ponzi schemes follows the property and payment promises across other businesses.

Vacation Units Sold With an Income Promise

Cay Clubs sold the prospect of a renovated resort and an income stream alongside the vacation unit. The SEC alleged that investors were promised an immediate 15% return and future income through a rental program managed by Cay Clubs. Hundreds of sales agents, marketing seminars and podcasts carried the pitch to investors nationwide.

The Justice Department’s account of the criminal guilty pleas describes a business operating from 2004 through 2008, with offices in the Florida Keys and Clearwater. It marketed vacation rental units at 17 locations in Florida, Las Vegas and the Caribbean to investors throughout the United States.

The SEC’s allegations make the development promise concrete: buyers were told to expect at least $30,000 in upgrades to their units, along with instant equity in supposedly undervalued properties. A property employee would recognize the gap between an upgrade package sold to buyers and the work actually performed. The Justice Department’s account of the superseding indictment alleged that Cay Clubs never made the promised improvements.

The Leaseback Missing From Lender Paperwork

The leaseback was an upfront payment promised to the investor at closing, amounting to 15% to 20% of the unit’s sale price. The Justice Department described that arrangement in its announcement that Cay Clubs’ former sales director and director of investor relations pleaded guilty to conspiring to commit bank fraud. The purchase price set the promised return.

According to the guilty-plea announcement, Cay Clubs arranged the closing and lender financing after the investor agreed to buy. The paperwork submitted to lending institutions left out the leaseback payment and other financial inducements offered to borrowers.

For a closing employee or loan processor, the useful knowledge is specific: what the seller promised the buyer, and what reached the lender. We connect the sales terms, financing paperwork and payment records to the people who prepared or approved them. A leaseback large enough to help sell the unit had disappeared from the lender’s paperwork.

The guilty-plea announcement credits IRS Criminal Investigation, U.S. Immigration and Customs Enforcement’s Homeland Security Investigations, and the Federal Housing Finance Agency’s Office of Inspector General with the criminal investigation. The SEC’s Miami Regional Office assisted them.

Insider Sales Presented as Property Appreciation

Cay Clubs’ apparent price growth also depended on information left out of the sales story. The SEC alleged that purported triple-digit returns came from undisclosed insider transactions, which made the units appear to appreciate rapidly. The relationship between buyer and seller was part of the value story investors never received.

The Justice Department’s guilty-plea announcement describes the sales director, investor-relations director and other insiders buying units without disclosing their connection to Cay Clubs. Their purchase prices then appeared in marketing materials as evidence that the units were rapidly increasing in price. The same account describes false and misleading marketing that concealed Cay Clubs’ failure to turn dilapidated properties into luxury resorts.

The investor-relations director created a sales script and presentation called Retire Rich and Young in Paradise, according to the plea announcement. The script reached investors and was available on the internet. We call that a sales pitch writing its own success story.

New Buyers Funded Earlier Leaseback Payments

The money behind the leaseback was central to the Ponzi scheme allegation. According to the Justice Department’s account, the superseding indictment charged that by at least 2006 Cay Clubs lacked enough money both to improve properties and to make the leaseback payments promised to earlier investors. It charged that proceeds from sales to new investors funded incremental payments to earlier buyers, and the operation depended on more loan proceeds from new sales.

That account makes the financing integral to the alleged payment cycle. In the indictment’s account, a new unit sale brought loan proceeds into the business, and some went back out as an earlier buyer’s leaseback payment. For an accountant handling those transfers, the relevant comparison is the cash source against the explanation given to the recipient.

The SEC also alleged that investor money bought airplanes and boats. It described diversions into a distillery producing Pirate’s Choice Rum even as Cay Clubs kept soliciting investors despite its deteriorating finances.

The same need to identify the payer appears in the SEC’s Woodbridge Group of Companies allegations. The SEC alleged that Woodbridge promised returns from supposedly independent borrowers, but most borrowers were controlled by the operator and lacked the income to pay. New investor money funded earlier investors, the agency said. Cay Clubs’ leasebacks and Woodbridge’s loan returns offered different property stories, with the alleged payments depending on the next investor’s money.

Resort Locations and Bank Accounts Told Different Stories

The locations in the Cay Clubs story had different jobs: offices ran the business, resort locations supported the pitch, and bank accounts moved the money. The SEC alleged that the chief executive, a manager and the chief accounting officer misappropriated investor funds through numerous accounts they controlled.

The Justice Department’s superseding-indictment account also alleged that the chief executive and manager transferred money to an account they controlled in Honduras to prevent the SEC from learning its location and control. For someone handling account instructions, the connection is between the person directing the transfer, the destination account and the business purpose given for it. A resort location in a brochure answers a different question from the destination on a transfer instruction.

The SEC alleged that Cay Clubs kept advertising itself as profitable before abandoning operations and that many investors’ properties went into foreclosure. The insider who saw unfinished work, missing leasebacks or transfers to unrelated ventures could know a part of that story the next buyer did not.

What an Insider’s Records Can Show

The strongest securities fraud evidence connects the promise with the transaction it describes. For the Cay Clubs conduct described by the agencies, those connections run from the upgrade promise to construction work, from an insider purchase to the price used in marketing, and from a new buyer’s financing to an earlier buyer’s payment.

The 2018 Journal of Forensic & Investigative Accounting paper The Significance of Whistleblowing as an Anti-Fraud Measure explains why that partial view can matter. Its discussion distinguishes seeing the act itself from recognizing the documentary or accounting signs it leaves:

In its occupational-fraud sample, the study found that whistleblower detection became more likely as more people participated in a scheme. We take an insider’s partial view seriously: a closing employee may know why a payment was left off a form without knowing where every dollar ultimately went.

Whistleblower Rewards and the Evidence You Hold

The SEC whistleblower award program can pay eligible whistleblowers a combined 10% to 30% of qualifying sanctions collected in actions with sanctions exceeding $1 million. We assess the opportunity around what your information reveals about the offering, the payments and the decisions inside the business.

Fraud involving claims for government money raises a separate False Claims Act question. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work through which program fits the conduct you know and the evidence behind it.

You Know What Reached the Lender

If you saw a promised payment disappear from closing paperwork or a new buyer’s money cover an earlier investor’s return, speak with our whistleblower experts about what reached the lender. We build a strategy for your strongest securities fraud whistleblower case and bring in securities fraud whistleblower lawyers who understand real estate offerings and financing. We stay beside you as the sales story is tested against the contracts, accounts and people who made the decisions.