Small investors accused a prominent California real estate brokerage and a former Orange County businessman in a lawsuit Wednesday of taking part in an elaborate scam that fleeced individual investors out of millions of dollars in recent years.
The lawsuit, filed in federal court in San Jose, alleges that brokers at Marcus & Millichap allegedly took part in a conspiracy to buy small commercial properties, artificially inflate their values and sell them to unsuspecting investors.
The lawsuit was filed as a class action on behalf of 16 investors, mostly Californians, who bought 22 properties in four states. The suit seeks as much as $70 million in compensatory damages and up to $200 million altogether with punitive damages and treble damages under the Racketeer Influenced and Corrupt Organizations law.
Also named as defendants were Paul A. Morabito, 45, a former Laguna Beach businessman and state official who now resides in Nevada, and Florida businessman Jack Waelti.
Representatives at Marcus & Millichap, based in Encino, said they wouldn’t be able to comment until they had reviewed the lawsuit. Morabito and Waelti could not be reached for comment.
“This scheme was employed with nearly mathematical precision and demonstrates a formula of fraud,” said plaintiffs’ attorney David J. George, a partner in the San Diego law firm Coughlin Stoia Geller Rudman & Robbins.
The lawsuit alleges that Morabito and Waelti bought small franchises of Jiffy Lube and Church’s Chicken, among others, and the real estate where the businesses were located.
They then sold the properties to a subsidiary of Marcus & Millichap and leased them back at rents well above standard market rates, the suit contends. Based on those rents, the brokerage sold the properties to investors at inflated prices, the suit alleges. Morabito and other tenants then closed the businesses, leaving the investors with greatly devalued real estate, according to the suit.
“All of a sudden we go from making 6,700 bucks a month from this property to losing money every month,” said Michael Wiley of Running Springs, who with his wife bought a property in New York with a Jiffy Lube franchise on it.
“It’s extremely trying. We are living on savings,” said Wiley, who had expected his investment to provide retirement income.
The suit alleges that the defendants assembled a portfolio of overpriced properties and then marketed them to buyers they intended to deceive.
Morabito, a longtime entrepreneur, was once referred to by a newspaper in his native Canada as a “whiz kid” who was rising fast in the world of real estate and finance. In the early 1990s he ran pharmacies in San Francisco and was an emerging figure in Democratic party politics, according to the San Francisco Business Times.
More recently he was chairman of Berry-Hinckley Industries, a Nevada fuel supplier. He also was on the governing board of the California High Speed Rail Authority and served as chairman of the California Coastal Conservancy, a state agency dedicated to preserving the coast.