Preet Bharara, the United States Attorney for the Southern District of New York, Philip Bartlett, the Inspector-in-Charge of the New York Division of the U.S. Postal Inspection Service, (“USPIS”), and Shantelle P. Kitchen, Special Agent-in-Charge of the New York Field Office of the Internal Revenue Service’s Criminal Investigation Division (“IRS”), announced today that CARLTON P. CABOT and TIMOTHY J. KROLL – the former Chief Executive Officer and Chief Operating Officer of Cabot Investment Properties LLC (“CIP”), respectively – were arrested for participating in a scheme to defraud investors in numerous CIP-sponsored real estate investments by misappropriating over $17 million to pay for personal and business expenses and covering up their fraud with manipulated financial statements. CABOT and KROLL are expected to be presented and arraigned before U.S. Magistrate Judge Henry B. Pitman later this afternoon.
Manhattan U.S. Attorney Preet Bharara said: “As alleged, Carlton Cabot and Timothy Kroll conspired to defraud investors out of millions of dollars by misappropriating investor funds, in part to pay for personal luxuries, and they falsified financial statements in an attempt to cover their tracks. The investigative work of the Postal Inspection Service and the IRS put an end to the alleged scheme.”
USPIS Investigator-in-Charge Philip Bartlett said: “This is a classic case of greed overcoming honest business practices. These defendants allegedly carried out a scheme to steal from their investors and investor funded properties all to fund a well-heeled lifestyle. Postal Inspectors and their law enforcement partners have no tolerance for this behavior and will spare no resource to bring these criminals to justice.”
IRS Special Agent-in-Charge Shantelle P. Kitchen said: “The investing public should take notice that the cooperation among federal law enforcement agencies, including IRS Criminal Investigation, the Postal Inspection Service and the U.S. Attorney’s Office, offers an assurance that investment fraud schemes will be uncovered and thoroughly investigated, and that the scammers will be prosecuted.”
According to the allegations contained in the criminal complaint unsealed today in Manhattan federal court*:
From 2003 through 2012, CIP – which was controlled by CABOT and KROLL – sponsored and oversaw approximately 18 so-called tenants-in-common (“TIC”) securities offerings to investors located all over the United States (collectively, the “TIC Investments” and the “TIC Investors”). A TIC investment is a real estate investment in which investors collectively own a piece of commercial real estate and are entitled to receive a portion of the rental income from the property.
From 2008 through 2012, CABOT and KROLL engaged in a scheme to defraud the TIC Investors by misappropriating funds belonging to the TIC Investments and concealing their misappropriations by providing false and misleading financial reports and other information to the TIC Investors.
According to the representations in the offering prospectuses for the TIC Investments, CIP was only allowed to collect “excess” rental income from the TIC Investments – i.e., any additional money left over after the TIC Investments had paid the operating expenses for the properties and the disbursements due to the TIC Investors. Despite these representations, CABOT and KROLL repeatedly transferred money out of bank accounts belonging to the TIC Investments and into CIP bank accounts that they controlled (the “CIP Operating Accounts”) before the TIC Investments could use the funds to pay for operating expenses and disbursements to the TIC Investors. CABOT and KROLL then used these funds to pay for the following three unauthorized purposes, without the knowledge or authorization of the TIC Investors:
First, CABOT and KROLL caused millions of dollars to be transferred from the CIP Operating Accounts to the bank accounts of TIC Investments that had no available funds to cover their operating expenses and investor distributions. In this way, CABOT and KROLL were able to perpetuate the fraud scheme by propping up failing TIC Investments using funds belonging to other TIC Investments.
Second, CABOT and KROLL used the funds in the CIP Operating Accounts belonging to the TIC Investments to pay for millions of dollars of personal expenses, including expensive cars and rental apartments and private school tuitions.
Third, CABOT and KROLL used the funds in the CIP Operating Accounts belonging to the TIC Investments to pay for CIP business expenses, including an approximately $1,125,651 civil settlement to certain TIC Investors who had sued CABOT, KROLL, CIP, and a CIP subsidiary.
To conceal their misappropriation of TIC Investment funds from the TIC Investors, CABOT and KROLL provided false and misleading financial reports to the TIC Investors that intentionally hid the fact that CIP owed large sums of money to the TIC Investments. KROLL also gave false and misleading information to the TIC Investors about how the TIC Investment funds were managed in order to prevent the TIC Investors from learning the true financial status of their investment.
By in or about the end of 2012, when CIP ceased its day-to-day operations, CIP and its principals, CABOT and KROLL, owed approximately $17 million to the TIC Investments, which has never been repaid.
***
For this conduct, CABOT and KROLL are each charged with the following offenses, which carry the maximum prison terms listed below:
Count
Charge
Maximum Prison Term
Count One
Conspiracy to commit securities fraud
Five years
Count Two
Conspiracy to commit wire fraud
20 years
Count Three
Conspiracy to commit money laundering
20 years
Count Four
Securities fraud
20 years
Count Five
Wire fraud
20 years
Count Six
Money laundering
20 years
Count Seven
Illegal monetary transactions
10 years
The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.
CABOT, 52, of Stamford, Connecticut, and KROLL, 44, of New Hope, Pennsylvania, were arrested earlier this morning at their residences.
Mr. Bharara praised the investigative work of the USPIS and the IRS.
The prosecution of this case is being overseen by the Office’s Complex Frauds and Cybercrime Unit. Assistant U.S. Attorney Christian R. Everdell is in charge of the prosecution.
*The charges contained in the complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
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