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Court docs: Riverlife developer CEO embroiled in $8.3M Colorado ripoff

in Investigations/News

By Shereen Siewert

WAUSAU — The CEO of the real estate development company overseeing a multi-million dollar riverfront development project is one of two men mired in a $8.3 million securities ripoff scheme in Colorado, a Wausau Pilot and Review investigation has found.

Court documents show that Jason Sharkey, who is heading up the Riverlife development team as CEO of Quantum Ventures, served a two-year diverted sentence in Denver, Colo. after accusations surfaced in 2006 that he and a business partner defrauded 21 Denver-area investors through a complicated real estate investment scheme. The case made past headlines in the Denver Post, which published a story of their own on Monday.

A review of court records shows Sharkey ultimately entered into a deal with prosecutors in the case, agreeing to repay nearly $900,000 in restitution and interest. A multi-million dollar civil lawsuit brought by seven investors ended when Sharkey’s partner, Hidai Freeman, declared bankruptcy.

According to the criminal complaint, Sharkey and Friedman were doing business through a company called Klyties Developments in which they lured investors by guaranteeing at least 10 percent annual returns with little or no risk, telling investors their money would be secured by a trust.

But prosecutors say that trust never existed, and the duo instead paid original investors with money from more recent investors.

Thomas Severino Jr. said he and his wife lost $40,000 in the Colorado investment scam and Sharkey continues to pay him about $15 a month of the restitution owed him. Hundreds of people were taken for millions of dollars in the fraudulent deal, Severino said.

When told that Sharkey is involved in the Wausau development he was incredulous.

“That’s insane. That’s just crazy that’s what that is,” Severino said. “He’s just full of lies, more lies than truth.”

He was critical of Wausau city officials who approved Sharkey’s involvement in their project.

“They are doing an injustice to their city. I would demand that they do a background check on everyone involved,” Severino said Friday. “He’s going to steal from them too. That’s what he does.”

Court documents show that Severino attempted to verify Klyties’ financial fitness by requesting a company audit before handing over his money. In response, court documents state, Severino received information later found to be falsified, including an email from a financial services group that contained what appeared to be a summary of a Klyties audit. Investigators say that email was a mock-up that came from a phony account from a man who appears not to exist.

After the fraud was discovered, Thomas Ritchie, a securities investigator with the Alberta Securities Commission, undertook an extensive review into Klyties business operation, including the properties Klyties claimed to own in their marketing materials. Ritchie’s investigation revealed that at least two of those properties did not exist, and a large shopping mall claimed on the asset list was in fact wholly owned by an unrelated Vancouver-based development company.

Pam Russell, spokeswoman for Colorado’s First Judicial District Attorney Peter Weir, said Sharkey’s restitution was transferred to civil court after he paid a tiny fraction of the $891,337 he owes to victims.

In the summer of 2009, midway through Sharkey’s sentence, a judge allowed him to move to Wisconsin, where he was monitored by Wisconsin probation officers, Russell said. He was obligated to pay $400 a month and 50 percent of any commission.

Judges routinely dismiss charges against defendants if paying restitution is the only obligation outstanding, Russell said. Defendants often have little or no means of paying the restitution, she explained.

Quantum Ventures is not the city’s first partner in the multi-phase project. City officials in February 2016 chose Frantz Community Investors to spearhead the development, which is meant to be Wausau’s crown jewel upon completion. Frantz had been competing with Mosinee-based S.C. Swiderski for the project.

In June 2016, the city council approved a $2.74 million aid package to support the project, which includes $500,000 in grants for the building foundations. All the funds will come from tax increment district financing.

Then in December 2017, members of the economic development committee unanimously approved a change in the financing structure when Barker Financial, which provided construction financing in the early stages of the project, withdrew from the plan. Barker was replaced by Quantum Ventures.

Mike Frantz, a principal in Frantz Community Investors, is the sole remaining partner still involved in the project.

Frantz described Sharkey to members of the economic development committee during a January meeting as an investor with “very deep pockets.”

The revelations raise questions about how city officials perform due diligence on economic development projects funded in part by taxpayer dollars.

Experts throughout the industry say that such agreements, especially in tax increment districts, should rely heavily on thorough investigation and should always include a  look at the credit rating, references, bank statements, resumes and financial statements of the key financial players in the project.

Wausau’s process involves examining the developer’s construction budget, the status of the organization and a “brief financial history,” according to Economic Development Director Chris Schock. The developer is also required to “provide a statement regarding any debarments, suspensions, bankruptcies and/or loan defaults,” Shock said.

In a paper published in the Missouri Municipal Review, Tom Kaleko, who has more than 20 years of local government experience in Kansas, Missouri, and Iowa, wrote that the best developer reviews are conducted through a combination of methods including written requests for information, reference checks, independent research, developer interviews and site visits.

“Hopefully, you wouldn’t go into a private venture using your personal nest egg without knowing your business partners; we owe our constituents the same protections as we enter into public-private partnerships using public funds,” Kaleko’s paper reads.

Kaleko, in a phone call on Friday, said he could not comment publicly on Wausau’s policies or situation because the city is a former client of his current employer, a public sector advisor firm called Springstead.

When reached for comment about Sharkey’s past misconduct, Schock said he had not known about the case. Still, Schock said, he is not concerned.

Sharkey is “one of a team of people” brought in by the developer, who ultimately has to secure the financing to finish the project, Schock said. The project’s success will be based on its marketability, he added.

“If the project doesn’t come together the city would be in a position to choose another developer,” Schock said. “I’m quite confident in the marketability of the project.”

Schock said he does not envision potential changes to the way the city vets partners for future developments.

During a Feb. 6 meeting, Economic Development Chair Tom Neal said the city’s protection is “quite clear” because Wausau’s investment in the project is contingent upon “stages” being met.

To date, the city has funded $372,462 toward the project as part of a pre-development loan, according to Finance Director Maryanne Groat. The bulk of that number, $290,078.50, was paid to Mudrovich Architects of Wausau for design and engineering costs, Groat said. The remainder was split between Baker Tilly and Ayers & Associates.

Groat said that before any additional funds are disbursed, the developer must provide a wealth of information to the city. That includes a certified project cost breakdown, a detailed completion schedule, proof that a third-party loan has closed and is available for disbursement and proof that they have funds sufficient to complete the project, among other requirements.

Sharkey is not the first partner in the project to come under scrutiny. Paul Pappageorge, who is listed as chief financial officer in Frantz’s original proposal for the city, also has a troubled financial history, including being personally named in a $127 million 2011 FDIC lawsuit in connection with the failed Mutual Bank of Harvey. The bank’s failure was one of the largest in the U.S., according to the FDIC.

It is not clear if city leaders were given the information about Pappageorge’s background before choosing Frantz Community Investors for the project.

Mike Frantz himself is entangled in several Wisconsin lawsuits. A Florida company claims Frantz owes the company more than $153,000 after a check paying for design services at Green Bay’s Hotel Northland bounced in January, according to court documents. Frantz Community Investors is also named in the suit, which was filed Feb. 3 in Brown County Circuit Court. In a separate case, a mortgage foreclosure filed against Frantz in Walworth County was dismissed Feb. 28.

During a Feb. 6 meeting of the economic development committee, Schock said the city’s risk is mitigated because Wausau only acts as a gap financer for the project. Schock said Quantum is working with a “couple of different parties” for financing.

But at that meeting, Frantz claimed that Quantum already has a commitment letter from a senior lender, and has invested “close to $1 million” in the project to date. It is not clear if members of the ED committee have seen such a letter or even if one exists. Such a document was not included in the committee’s packet prior to the meeting or in a Quantum Ventures FAQ sheet given to committee members, but not publicly shared.

Clay Dougherty, the third principal partner in Quantum Ventures, responded on Sunday to a request for comment with a full statement from Sharkey regarding the matter. In his statement, Sharkey claims that he, too, was a victim of the scheme and that Friedman duped him into believing Klytie’s was a legitimate company.

Sharkey said he never knowingly lied to anyone about the fund, and was just as surprised as anyone when the full extent of the fraud was revealed. All potential investors and lenders are aware of what occurred, Sharkey wrote, describing himself as an “unwitting investor and employee of Klytie’s.”

“We are still in discussion with potential equity partners and lenders and plan to have permanent financing for Riverlife secured in the weeks ahead,” Sharkey’s statement reads.

The statement, in its entirety, is embedded below, as is the federal complaint that describes the allegations in detail.

The first Riverlife phase will be followed by additional phases to add more housing and other mixed-use buildings, officials said. The total project could cost between $80 million and $100 million to build, according to city documents.

An update on the Riverlife project is on the agenda for Tuesday’s meeting of the economic development committee. The meeting will be held at 5:15 p.m. in Council Chambers at Wausau City Hall.

Sharkey Complaint

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