Feds catch up with James Webb

Federal authorities have stepped in to do what dozens of disenchanted investors in North Carolina, Florida and California have been unable to accomplish over the last five years: force James Webb to give them their money back.

The self-styled Raleigh real estate entrepreneur who relocated to Florida after state regulators and private investors began questioning his business practices here three years ago is the subject of a 26-page complaint filed by the U.S. Securities and Exchange Commission on Nov. 15. The SEC’s suit accuses Webb, personally and through his many corporate entities, of engaging in a “real estate-based fraudulent investment scheme that raised at least $8.4 million from more than 80 investors.”

Labeled a “Ponzi scheme” by some whose losses have topped six digits, Webb’s business model claimed to use investors’ money to buy and renovate run-down houses in low-income neighborhoods in eastern North Carolina, Virginia, Tennessee, and later, Florida. Webb claimed to be able to sell the refurbished houses at enormous profits.

Investors from all over the country were swayed by his promises of returns of greater than 100 percent, his espousal of altruistic motives such as creating affordable housing in distressed neighborhoods, and his connectionsincluding support from the once-respected but now disgraced former U.S. Attorney Sam Currin, who last year pleaded guilty to federal charges in an unrelated money-laundering case.

The SEC’s complaint lays out many variations and details of Webb’s scheme, first profiled in an Independent investigation (see “Smooth Operator: Why do people keep giving James Webb their money?,” Dec. 8, 2004).

On Nov. 26, a federal judge gave the SEC permission to freeze Webb’s personal and corporate assets, including 50 accounts in 10 banks in North Carolina and Florida, as well as real estate holdings. Webb operated under multiple business entities, including the Raleigh-based Webb Builders and Alpine Properties. He also used the name Citirise and Progressive Redevelopment LLC.

The move by federal authorities preserves the possibility that once the litigation is resolvedwhich could take up to two yearsthere would be a chance for defrauded investors to recoup some of their losses, said David Williams, one of the attorneys handling the case for the government.

“To the extent that we are able to gather assets, we then have a process by which people can be made whole, as best we can. It’s never 100 cents on the dollar,” Williams said, noting that it’s too soon to speculate about how much of investors’ money remains intact. “We’re still trying to get our arms around what’s out there.”

At a Nov. 26 hearing, Webb appeared in federal court with his wife, Sharon Sloan-Webbbut without an attorney. He asked the court to unfreeze some assets so that he could pay for legal representation, but because the SEC objected, that request was not decided, Williams said. The government did agree to unfreeze monies earned by Sloan-Webb, a registered nurse. The couple uses those funds to pay household bills, Williams said.

Because Webb was not represented by a lawyer, Williams and his co-counsel spoke directly with the elusive entrepreneur “for an extended period” as they attempted to hammer out an agreement, Williams said. Webb’s renowned charmoften cited by investors as a major factor in deciding to cut him large checkswas obvious in the courtroom, Williams said.

“He’s a very personable guy,” he said. “You read the facts of this case, and it’s hard to understand how this could happen, but you meet him and you start to see how people would give him money.”

Since setting up shop in Raleigh about five years ago, Webb has attracted investors with that charm, backed by polished presentations and advertised through lots of word-of-mouth networking, including church social circles. Some investors ponied up the minimum of $40,000 to refurbish one house, but others went in for as much as $2 million at a time, according to private civil lawsuits pending in North Carolina and Florida.

Instead of using investors’ funds for their advertised and contracted purposes, the SEC is alleging Webb often redirected them toward paying off other investorsthe definition of a Ponzi schemeand for personal use. Of the $8.4 million in other people’s money that federal investigators identified as passing through Webb’s hands since 2002, Webb converted at least $1.2 million for his own use by cashing checks or diverting it to personal accounts, including those in the names of his two young children.

Webb’s wife is named as a “relief defendant” in the legal action, which means that the SEC is not alleging wrongdoing on her part, but believes she controls assets pertinent to the case, Williams said. The couple, now believed to be living in Weston, Fla., used some of the money for exotic vacations and luxury vehicles, according to the SEC suit.

In the federal lawsuit, the SEC is requesting that the court force Webb to “disgorge all ill-gotten gains,” including interest, and to pay unspecified civil monetary penalties. Even so, it’s unlikely there will be full refunds for anyone, SEC lawyers say.

“A lot of times, in these cases, investors are never made whole because the money’s just not there,” said SEC attorney Dean Conway.

Florida attorney Brad Coren is hoping, for his client’s sake, there is something left of Webb’s assets. Coren represents Webb investor Andres Rabinovich, one of the many convinced by Webb’s sales pitch. In a private civil suit in Broward County, Florida, Coren obtained a judgment of $97,266 against Webb in March of this year. To date, his client hasn’t seen a dime; the debt is accruing at 11 percent.

“We’re not getting anywhere,” Coren said by phone from his Florida office. “So I’m in favorand so is my clientof putting some pressure on him. We’re doing a Kabuki dance, essentially.”

While real estate and corporations regulators in California and North Carolina have issued injunctions and “cease and desist” orders that prevent Webb from operating his scheme in those two states, individual investors are having just as much trouble as Rabinovich in recouping losses incurred dealing with Webb.

A $2 million civil suit filed in Wake County by Charlotte pharmacist John Sink and his wife in January 2006 has ground on for nearly two years without resolution.

That case will likely go to trial in 2008, after many delays caused by Webb’s lack of response to requests for documents and other information, says James Jorgensen, the plaintiff’s attorney.

News of the federal suit came as no surprise to Jorgensen, who also represents other Webb investors.

“This SEC action is certainly consistent with what we’ve been experiencing,” Jorgensen said.