By Matthew Jones and Meghan Hoyer
Invest in real estate. Make money. Improve neighborhoods.
That was the pitch, and it usually started with a ride.
Cary McEntee would be at the wheel, steering his black Cadillac Escalade through some of Hampton Roads’ poorest neighborhoods. His brother, Jacques, usually rode shotgun.
Potential investors rode in the back, watching houses pass by in Norfolk, Portsmouth and Newport News as the brothers kept up a dizzying banter, finishing one another’s sentences, extolling the can’t-fail promise of a red-hot housing market.
The tour often included a stop at McEntee’s $1 million Church Point home in Virginia Beach, with its flat-screen televisions, swimming pool and garage full of high-end gym equipment, or at the condo he kept at the Oceanfront. Dinner at a swanky restaurant often sealed the deal.
Many of those wooed signed up and profited – at first.
But after six years, a business plan that once seemed too good to be true has turned out to be just that for many.
Several investors said that once they had provided the company two or three loans, McEntee began dragging his feet on paying them back, offering excuses and delays and reinvestment options instead of cash.
“By the end, you couldn’t get phone calls returned,” one investor said.
A Virginian-Pilot investigation in March found that of the more than 250 properties the group controlled throughout Hampton Roads, roughly half were vacant and in disrepair. McEntee and his company, CM Development, are now in bankruptcy court, where McEntee has testified to falsifying numerous loan documents. The FBI has begun looking into the company.
McEntee faces $1.5 million in claims from a handful of investors so far, and others say they’re owed millions more. Those amounts don’t include likely losses by banks and investors for properties facing foreclosure.
Several investors have filed for bankruptcy protection themselves, including people who invested none of their own money but allowed McEntee to use their credit to get loans.
“I trusted the fact that he was supposed to be renting them, rehabbing them and paying people back,” investor Dominic Still testified during his own bankruptcy hearing. “I didn’t know how out of control it was.”
Yet as the foundation crumbles, some hold out hope that CM Development can make good. McEntee in recent months has solicited investors to lend him more money, or join him in a new effort to build houses. Several have signed on.
“People don’t want to let go – they want to hold on to the promise,” said Bob Webster, spokesman for the North American Securities Administrators Association, an organization that helps combat fraud. “They keep holding out hope.”
In the 1920s, Carlo “Charles” Ponzi realized he could make lots of money if he lured investors into giving him short-term loans with the promise of high returns. He used the money from new targets to pay back his first round of lenders, who in turn spread the word about the marvelous investment they had made.
The scheme eventually collapsed under the financial weight of having to repay an increasing number of people. Yet Ponzi’s plan worked in the short term, providing the Boston man quick access to millions of dollars.
And it acted as inspiration for hundreds of similar plans, conducted worldwide, for years to come.
Financial records, experts’ analysis, investor interviews and McEntee’s own testimony show CM Development’s business model was a prime example of a Ponzi scheme.
McEntee offered investors a couple of ways in: He’d either borrow their cash for a short time at a generous interest rate or he’d pay a flat fee for using their names and their good credit to get bank loans. This money, he said, would be used to buy houses in low-income areas, renovate them and rent them out.
Yet the rental income on most properties couldn’t even cover the houses’ mortgages. And the company’s constant property sales – it sold houses repeatedly among its investors at ever higher prices to eke out every bit of equity – apparently didn’t generate enough to pay the bills.
The Virginian-Pilot obtained copies of settlement documents and analyzed 379 of the company’s property sales. After CM Development paid off a few early investors and bank loans, it appears the company made, on average, less than $3,000 per transaction.
Bringing in new investors became essential to paying back others and helping support McEntee’s lifestyle.
The targets were men and women, with personal wealth and without. They included a hairdresser, a teacher, two university professors, a convicted drug dealer, an engineer, a dentist. Only a handful of the nearly 40 investors had previous real estate experience. A number had never owned a house.
Some invested even after learning that Jacques McEntee and several of the company’s other associates had served prison time for housing fraud that took place in Hampton Roads in the mid-1990s.
By early 2007, the company had become dependent on the new credit lines and hundreds of thousands of dollars in cash that hopeful investors were lending the company, without any collateral.
“There was quite a few people who were doing that,” Cary McEntee said in his late November bankruptcy hearing. “We were in a constant need of cash because of all the expenses we had.”
The money was used to stave off angry investors and banks threatening foreclosure. It also went to pay McEntee’s brother and wife, and to make his monthly $15,000 mortgage and car payments.
Meanwhile, hundreds of the company’s houses sat empty and decaying in low-income neighborhoods across the region.
CM Development clustered its purchases, often buying multiple houses in neighborhoods such as Norfolk’s Olde Huntersville and Portsmouth’s Brighton/Prentis Park. These areas were then held hostage as McEntee sold the houses repeatedly among his investors, draining their equity while making few improvements.
Hundreds of the company’s appraisals show the consequences of CM Development’s inaction. The photographs in them show that often, the longer the company held a property, the worse it looked.
McEntee’s success, while it lasted, came through his ability to tap into people’s desire to become real estate investors.
“You felt you were part of a good company on the brink of doing great things,” one investor said.
This investor, who began loaning money to CM Development several years ago, said McEntee’s loan terms were generous and that, early on, he was repaid promptly.
“Wow, that was simple,” the investor recalled thinking at the time. He and several other investors spoke on condition of anonymity because they said they are embarrassed about the situation and are still working in real estate.
Soon this investor was lending more money, tens of thousands of dollars at a time. Then the repayments started to slow down as McEntee’s excuses multiplied.
By this point, many investors had started letting McEntee use their names – and their good credit – to get mortgages on properties, with the understanding that McEntee would take care of the expenses. When the property was sold to another investor at some future date, McEntee assured them, they’d be bought out. But, for the time being, the investors held ultimate responsibility for the loans.
In his September bankruptcy hearing, investor Dominic Still testified that he was paid $2,500 each for the 10 properties he borrowed money on for CM Development. At the time of his bankruptcy, he held nearly $1.5 million in mortgages and loans on the houses, which are now either in foreclosure or being sold to other investors.
“For $2,500 you signed mortgage notes?” bankruptcy trustee Cecelia Ann Weschler asked him, incredulous.
“It looked good at the time,” Still replied. “I was taken advantage of a little bit. There’s a lot of debt I took on for them, and they didn’t do what they would say they’d do.”
All along the way, investors have said, McEntee was gauging their tolerance.
“If he knew you still had money, he would pay you back,” one investor said. “If you were broke, he knew you were over a barrel.”
“He knows how to push, how far to push, and what to push on.”
For instance, if someone loaned McEntee $50,000 in cash on a particular property, McEntee would repay the investor $10,000 instead and say he was spreading the remaining $40,000 debt across other properties.
Often, investors would get paid back only if they agreed to roll their money right into another property deal, with McEntee’s assurance that their money would be making money in the meantime.
This type of dealing was usually last-minute, with no notes to secure it and no room to negotiate, investors said. The understanding, tacit or explicit, was that the investor would get nothing otherwise.
McEntee has testified that people lent him hundreds of thousands of dollars without ever signing a document or recording a promissory note.
“Your back’s against the wall,” one investor said. “You’re a little puppet in his game.”
The longer investors stayed in – and the less capital they had left – the worse they were treated, they said.
McEntee’s ultimate tactic was to offer the investors their properties back. But most didn’t have the real estate experience or money to handle the houses, many of which had missing walls, broken windows and leaking roofs.
McEntee referred questions to his attorney, who did not respond to a request for comment.
Despite reservations, people continued putting money into CM Development, taking out more loans and lending more cash in the hope of recouping their initial investment.
And now that the business has disintegrated and the lawyers have moved in to arrange the pieces, some investors may try again.
For the past few months, McEntee has been soliciting new investors online and contacting former investors to join him in a new venture to build houses in Norfolk and Portsmouth. Some are biting, others are not. But even the ones who have declined his offer see the logic behind giving McEntee another chance.
“The only shot he’s going to have at paying anyone back is through some real estate transaction,” one investor said.
This thinking, experts say, is what perpetually refuels these types of enterprises.
“We see it time and again,” said Webster, of the North American Securities Administrators Association. “People throw good money after bad, in the hopes of holding on to the dream. No one wants to admit to themselves that they lost money.”
Tracy Coenen, a Wisconsin-based investigator who studies pyramid schemes, said: “It’s like gambling – people who keep losing stay at the tables. They feel they have a chance to get their money back. But most times, the house wins.”
Now the money appears to be gone. According to his bankruptcy filings, McEntee has no savings and is poised to lose his house and cars.
The real winners, at least for a time, were the brokers and institutional lenders. They heeded the clarion call from Wall Street to keep making risky loans that could be sold, packaged and traded in what one expert has called “the race to the bottom” of the now-collapsing subprime market.