Real Development partners Dave Lundberg and Michael Elzufon told state securities officials that they thought the life settlement policies pledged as collateral on a bank loan were legitimate.
Lundberg and Elzufon now have doubts about those policies, saying in a weekend news release that they "may have been defrauded" by a tenant in one of their downtown Wichita buildings when they bought interests in the policies. Those policies have landed the downtown Wichita developers in hot water with the state, thrown the future of their Wichita buildings into doubt and left their other projects across the country in limbo.
They are victims, Lundberg said, not participants in a scheme to defraud a Topeka bank.
"We didn't do anything wrong," Lundberg said Monday.
Lundberg and Elzufon -- known locally as the Minnesota Guys -- and Real Development are named in a cease-and-desist order issued Nov. 7 by Kansas Securities Commissioner Aaron Jack, along with the alleged seller of the policies, Hybrid Asset Management of Wichita, and two other companies, Sutton MN LLC and Churchill Capital Strategies. Other individuals named in the order are Hybrid officials Jeffrey K. Williams, Sherrilynn L. Frierson and Mark Nordyke, along with Wichita businessman Gordon Schultz, the former superintendent of Word of Life Traditional School.
The order alleges that Real Development, Hybrid Asset Management, Sutton MN and Churchill Capital Strategies violated the Kansas Uniform Securities Act by "attempting to deliver interests in fraudulent life settlement policies to a Topeka bank and unknown investors," according to a news release from Jack's office.
An investigation continues, and state officials have not ruled out criminal charges in the case.
Lundberg said Monday that one policy under state scrutiny, a life insurance policy Lundberg owned an interest in that covered an unnamed New York City resident, was "absolutely something I thought was a legitimate policy" when Williams offered it to the Kaw Valley Bank of Topeka as collateral on a bank loan on Sutton Place, one of Real Development's downtown Wichita properties.
"Yes, I absolutely thought we had legitimate policies, but yes, if the state thinks they're fraudulent, then I can see why they included us in the order," Lundberg said. "In their mind, they (state officials) felt the policies were fraudulent and maybe when they filed the complaint they suspected we knew they were fraudulent."
Elzufon and Lundberg said in the Saturday news release that they've learned "they may have been defrauded by Hybrid Asset Management and its principals via their purchase of certain life insurance policies from them."
The Real Development release claims that the policy covering the New Yorker matured in September 2012, but proceeds from that settlement were never transferred to Real Development, Elzufon or Lundberg.
" ... they have subsequently lost their entire investment in the policy," the Real Development news release reads. "Real Development has reason to believe that other policies acquired from Hybrid Asset Management may also be invalid."
Lundberg said on Monday his group is considering a civil lawsuit against Hybrid over the policies.
The Eagle contacted Williams, the general manager of Hybrid, on Monday for a response to Lundberg's allegations. Williams did not return calls seeking comment.
Lundberg and Jeff Kruske, general counsel for Jack, described Friday's meeting as cordial and productive.
Lundberg said he continues to believe his company and partner will be dropped from the order.
"We asked them to, and they weren't quite ready to," he said. "I think we did have quite good conversations ... and I think this will be resolved soon."
Kruske declined to comment on the status of the investigation and on Lundberg's claims that his company and partner will be dropped from the order.
Real Development still has a major deal with the city in the works, the $65 million conversion of the Exchange Place building at Douglas and Broadway into a series of apartments.
Elzufon told The Eagle two weeks ago that deal still was on the front burner, as Real Development waits for approval of a $30 million HUD loan guarantee that was set to trigger $11 million in city incentives, based on a development agreement with the city.
But city officials, unhappy with Real Development's lack of performance on its Wichita projects, told The Eagle two weeks ago that the Exchange Place deal has been voided by Real Development's two-plus years of inaction on the project. Any future proposals from the group will have to go in front of the city's downtown projects review board for vetting before they can be resubmitted to the council.
Lundberg and Elzufon say the state's order has jeopardized the Wichita project, and others they're pursuing in Kingsland, Ga., Elmira, N.Y. and Minneapolis.
"Up to this point, we're still trying to do the deal," Lundberg said about the Exchange Place project. "We have a written development agreement with the city and we expect them to honor it."
Lundberg said Wichita city officials are assuming "we are absolutely guilty" in the wake of the media coverage surrounding the state's order.
"We've got the same thing in Elmira, Kingsland and Minneapolis," Lundberg said. "Every deal I'm working on is on hold."
Reach Bill Wilson at 316-268-6290 or firstname.lastname@example.org.
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