The now-defunct Capital Solutions Monthly Income Fund, LP (formerly known as Hennessey Financial Monthly Income Fund, LP) has caused investors around the country devastating losses in the count of millions. And although the fund was pitched to investors around the country as a low-risk, conservative investment that would generate a constant source of income, it is now evident that Capital Solutions was anything but a conservative, low-risk investment.
An investigation conducted by the law firm of Vernon Litigation Group and the law offices of Eric Norstedt has revealed that Capital Solutions (Hennessey) was a complicated, high-risk investment with a flawed structure and high degree of speculation. Unfortunately, the high degree of speculation and the high risk for losses were either downplayed or omitted and disguised by an alleged twelve percent (12%) return. The structure of the fund was set up in such a questionable way that it caught the attention of the Securities and Exchange Commission (SEC), which subsequently filed a lawsuit against the fund and its principals. The Capital Solutions Fund allegedly operated in the following way.
When investors bought into the Capital Solutions Fund, the fund, in turn, allegedly loaned the money to a third-party mezzanine real estate lender at a high rate of interest (as much as 18% or greater). Then, the mezzanine real estate lender re-loaned the money (at an even higher rate) to real estate developer companies. The real estate developers would then allegedly use the funds (i.e., the funds are given indirectly by Capital Solutions) to acquire and develop raw land. Upon completing improvements to the land and after obtaining government entitlements, the developers would sell the land and use the proceeds to repay the third-party real estate lender, which would, in turn, repay Capital Solutions.
Shockingly, both the third-party mezzanine lender and the real estate development companies (i.e., the companies that were receiving the money directly from the Capital Solutions Fund) were owned by the same person. The structure of the investment was so precarious and the investors’ protections were so limited that, in most instances, Capital Solutions’ interest in any real estate assets was subordinate to that of senior lienholders.
In essence, the Capital Solutions fund investors were providing millions of dollars to a handful of individuals (sometimes one individual) with the hope of receiving the proceeds resulting from the stipulated interest and, subsequently, the amount of the loan. According to the investigation conducted by the law firm of Vernon Litigation Group and the law offices of Eric Norstedt, it appears that the process described above was never explained to investors.
Initially, investors began receiving the promised twelve (12%) percent return just as the investment was described to them. What investors were not aware of is that most of the capital they began receiving was a return on their investment. Several months later, by early 2007, numerous third-party entities that Capital Solutions was providing financing to experienced severe financial difficulties, and foreclosures began to occur.
According to a federal court opinion and order (that resulted from a lawsuit filed by the SEC against Capital Solutions), NFP Securities (the broker-dealer that sold most of the investment in Capital Solutions) did not conduct an independent due diligence report on Capital Solutions until December of 2008. Two months later, NFP Securities ceased offering Capital Solutions to its customers. Despite the due diligence report conducted by NFP Securities, according to the federal court opinion, NFP Securities did not forbid its brokers from continuing to recommend the fund to retail investors. The court opinion also states that some NFP Securities’ advisors even went as far as representing that Capital Solutions represented a good investment opportunity “for investors who may be seeking a distressed loan investment.”
As it turns out, the fund’s structure described above proved to be unsustainable. Consequently, the Capital Solutions Fund cut its distributions by half to six (6%) percent in March of 2009. Three months later (June of 2009), Capital Solutions stopped making distributions altogether. Regrettably, in November of 2009, Capital Solution investors once again stopped receiving the already crippled distributions; those distributions never resumed and investors appear to have lost their entire investment.
The law firm of Vernon Litigation Group and the law offices of Eric Norstedt are currently representing investors who suffered devastating losses from investing in the Capital Solutions Fund. The pleading filed by the law firms with the Financial Industry Regulatory Authority (FINRA) claims that both NFP Securities and its brokers failed to adequately disclose the high risks associated with this investment and that it never informed its investors that they could lose their entire investment.