By Andrew P. Doup and Loriann E. Fuhrer

For the first time, securities regulators have brought criminal charges against a qualified opportunity fund (QOF) manager. On November 15, 2021, the Securities and Exchange Commission (SEC) charged Joshua Burrell and his firm, Activated Capital, LLC, with securities fraud in connection with a $6.3 million raise for Activated Capital Opportunity Zone Fund II, LLC and Activated Tax Advantaged Opportunity Zone Fund, LLC (the “Activated OZ Funds”). Burrell faces a maximum sentence of 20 years in prison. To better manage securities liability risk associated with the offer and sale of QOF interests, QOF managers should discuss with their securities counsel these allegations.

QOF manager accused of defrauding Opportunity Zone investors

The SEC alleges that from February 2019 through February 2021, Burrell, through Activated, engaged in a scheme to defraud OZ investors by engaging in Ponzi-like activity, lying to investors, fabricating documents, and misappropriating investor funds. The SEC’s detailed allegations are as follows:

1. Payment of Distributions. In his offering documents and communications to investors, Burrell promised to deliver an 8% preferred return to investors from net cash flow. However, Burrell instead delivered the 8% preferred return with loan proceeds and investor equity rather than from distributions of net cash flow. The SEC alleges this conduct constitutes “Ponzi-like” activity.

2. Lying to Investors.  Burrell’s actual conduct was inconsistent with his offering documents, and these inconsistencies constitute material misrepresentations to investors. For example:

a. Burrell allegedly promised that opportunity zone business property would be purchased in the name of Activated OZ Funds. In fact, Burrell instead used investor capital to purchase properties in the name of entities that were not owned by Activated OZ Funds.

b. Burrell allegedly promised investors that Activated OZ Funds would have an outside custodian and that Activated’s principals had made significant investments in Activated OZ Funds. In fact, Activated OZ Funds had no outside custodian and Activated’s principals had not made significant investments in Activated OZ Funds.

c. To induce investors, Burrell allegedly lied about the amount he had raised. On one occasion, an investor contributed $3 million after being told that Activated OZ Funds had raised $7 million when in fact it had raised only $1 million. On another occasion, an investor contributed $250,000 after being told that Activated OZ Funds had raised $20 million when in fact it had raised less than $6 million from investors.

3. Fabricating Documents.  To attract additional investment capital for Activated OZ Funds, Burrell sought to partner with a boutique investment bank headquartered in Manhattan. Burrell is accused of having delivered fabricated financials to make it appear that the Activated OZ Funds were more successful, owned more properties, and were in better financial condition than was actually the case:

a. Burrell allegedly fabricated bank statements of Activated OZ Funds to falsely inflate monthly balances. In fact, actual account balance was 5% of what Burrell had fabricated.

b. Burrell allegedly fabricated “Final Buyer's Statements” purporting to show the purchase of nine properties in Detroit, Michigan by an entity affiliated with Activated Capital. In fact, none of these transactions took place, and neither Activated Capital nor its affiliates owned any of the nine properties.

4. Misappropriation of Investor Funds.  Burrell allegedly misappropriated more than $100,000 of Activated OZ Funds for his personal benefit. For example, in 2019, Burrell caused the withdrawal of at least approximately $55,000 from the Activated OZ Funds in eleven equal installments of $5,000 each, to pay personal expenses, including rent for his apartment in Manhattan. After an accounting professional engaged by Activated Capital asked for more detail regarding the purpose of these and other withdrawals, Burrell revised the Activated OZ Funds’ books and records to falsely describe the withdrawals as reimbursements for property improvement expenses. In fact, no property improvements had taken place.

The offering and sale of QOF interests can lead to serious civil and criminal liability

The SEC also filed a civil suit seeking to enjoin Burrell and Activated from violating securities laws, disgorgement of ill-gotten gains, and civil monetary penalties. The matters pending against Burrell are merely allegations unless and until proven.

Under federal and state securities laws, the offer and sale of QOF interests can lead to serious civil and criminal liability. Even if a QOF manager has organized a securities offering in reliance upon an exemption from SEC registration and delivered a private placement memorandum to investors, the conduct of QOF management remains subject to anti-fraud provisions of the securities laws.

Although the prospect of securities liability is onerous, the reality is that entrepreneurs and investors come together to create sums greater than their individual parts every day. QOF managers should discuss with their securities counsel the allegations and best practices for managing their securities liability risk (hint: full disclosures and investor approvals). Ultimately, the SEC and QOF managers alike are working towards the same goals:  protecting investors; maintaining fair, orderly, and efficient opportunity zone markets; and facilitating capital formation for opportunity zone ventures.


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