It seemed like the normal course of business last year when asset manager Arena Investors provided an up and coming Orange County businessman with a $10 million loan to help grow his escrow and real estate brokerage.
But unbeknownst to Arena, the businessman, Max McDermott, was under federal investigation.
Four months after he took out the loan, McDermott and his company, Secured Income Group, were charged by the Securities and Exchange Commission with defrauding investors.
New York-based Arena is now suing McDermott, his wife, Tonya, two of his other companies and his adult children in New York state court to recoup the balance of the loan plus interest, which comes to $13.7 million. It is also looking to restrain McDermott from disposing of his assets.
The lawsuit is the latest action against McDermott, who consented to a judgment from the SEC last fall. It also sheds light on how McDermott sought to keep his embattled Secured Income Group afloat as investors sought to get their money back.
Arena provided the $10 million loan to McDermott last May for his companies Arbor One Escrow and Realty Masters & Associates. The loan was guaranteed by McDermott and his wife, and included additional covenants that required McDermott to provide financial information to Arena.
But Arena alleges McDermott defaulted on the loan later that year and failed to hand over financial information. When Arena’s representatives went to visit McDermott’s office, they were denied access, according to the complaint.
McDermott finally came clean to Arena in October, admitting to moving $10 million in funds advanced by the lender to his personal trust and then using the money to pay Secured Income Group. McDermott also acknowledged to Arena that he and Secured Income Group were under investigation by the SEC for alleged financial misconduct.
“We are in active discussions to resolve all matters with Arena,” said Tony Buchignani, an attorney representing Arbor One Escrow. “It is our hope those discussions will be successful, and that all Arena litigation will be dismissed.”
The SEC accused Secured Income Group and McDermott of telling investors that their money would be pooled together to make real estate loans secured by first lien positions and that their investments would be secured by real estate.
While Secured Income Group did originate the loans, it also sold off tens of millions of dollars in loans and security interests, which resulted in the principal value of its real estate loan collateral being worth much less than what was owed to its investors.
Without admitting or denying the SEC’s allegations, Secured Income Group and McDermott consented to the entry of judgments last year.
In addition to the money that went to Secured Income Group, McDermott also transferred funds from the $10 million loan to other companies tied to him, including about $65,000 to My Mountain Movers, a company allegedly owned by his daughters.
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Arena further alleges that after the McDermotts became aware that it intended to sue them, they sold their home at 6712 East Sycamore Glen Drive in Orange, California. Online listings indicate that the 4,800-square-foot home sold in January, with an asking price of $2.7 million.
Arena is suing the McDermotts and their affiliates for breach of contract, fraudulent inducement and fraudulent misrepresentations.
The McDermotts could not be reached for comment. Arena Investors declined to comment.