Investors allegedly lost more than $4 million in Ponzi scheme.
SOMERVILLE -- Nine people have filed a lawsuit in Somerset County Superior Court claiming the owner of a title agency ran what they characterize as a Ponzi scheme that cost them millions of dollars and the loss of their retirement savings.
The lawsuit, filed on Sept. 1, alleges that David Hay of Milford, owner of the Cortes and Hay, fraudulently solicited investors to purchase a commercial real estate building located at Post Office Plaza in Somerville.
The scheme collapsed, it is claimed in the lawsuit, in August 2016 when an $8.5 million, 10-year loan from CitiGroup matured and the plaintiffs had to pay it off after realizing Hay had cashed out on the property.
The plaintiffs in the lawsuit are Sandra Maxwell of Pittstown, Robert Fulper of Lambertville, Cynthia Epstein, Ruby Huttner, Frances Mannino and Martin Strassman of Flemington, David Miller of Frenchtown and Herman and Diana Holmes of Mooresville, North Carolina.
The plaintiffs claim they lost at least $4 million collectively and hundreds of thousands more in potential profits through the "clandestine and self-serving transactions" conducted by David Hay and his adult son, Mark, it is alleged in the lawsuit.
"My clients just want justice," said Montclair-based attorney Jonathan Guldin, who represents the plaintiff. "They feel they've been taken advantage of."
Lebanon-based Victor Rotolo, who represents David Hay, called the allegations "baseless and meritless."
"I've been a lawyer for 34 years and anybody can file a lawsuit against anybody," said Rotolo. "All they need to do is pay the filing fee. I've known David Hay for 30 years both personally and professionally and he's a man of the highest caliber and character.
"Unfortunately, these investors got involved in a commercial real estate investment in what became a down market and didn't get the return they wanted."
The alleged scheme primarily involved David Hay selling his ownership shares of the property, taking out a second mortgage and securing various loans all without informing the other investors. He would then distribute some of those funds to the investors, who unwittingly believed they were getting returns on their investment.
No criminal charges have been filed against David Hay or Mark Hay, according to court documents. The Attorney General's Office isn't involved in the case, a spokesman said.
Cop sues department for retaliationIn 2006, David Hay solicited the investors to purchase the property for $13.325 million, plus another $301,426.40 in settlement charges, according to the lawsuit. Hay reportedly invested $1.2 million into the purchase, but claimed a 33.7-percent ownership share that should've cost him $1.7 million, it is stated in the suit.
Maxwell and Fulper each invested $1 million, but were given only an 18.90-percent ownership share, it is alleged in the lawsuit.
While soliciting investors, David Hay promised the "Original Six" investors at least a 10-percent return on their investment and projected they could reap a return of as much as 19- to 24-percent, according to the lawsuit.
In April of 2006, shortly after the closing, David Hay began secretly selling off percentages of his ownership share, including 4.75-percent to Strassman and 7.6-percent to Alan Epstein for $250,000 and $400,000, respectively, and depositing the money into his personal account, according to the lawsuit.
By June of 2007, David Hay allegedly had sold off all of his investment in the property, it is stated in the lawsuit. All of the transactions were done in violation of the mortgage and without notifying CitiGroup, the mortgage lender, it is alleged.
In December of 2007, David Hay took out a $365,000 loan from Team Capital Bank, granting them a second mortgage on the property, immediately after which $113,000 was withdrawn on David Hay's behalf, according to the lawsuit.
Over the years, David Hay used the Tenancy in Common Account - an account tenants deposited funds in to pay rents and fees - for his personal gain, according to the lawsuit.
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As the only one with access to the account, David Hay allegedly took out money for his personal use, paid bills and made distributions to plaintiffs "in a time and manner to cover up his wrongdoing and fulfill the various misrepresentations he made to each plaintiff, according to the suit.
In 2015, for example, a sheriff's levy of $32,795.02 was taken from the tenants' account to pay for a civil judgement against David Hay, according to the lawsuit.
During this time, Mark Hay was managing the property and being paid from the tenants' account, it is alleged in the lawsuit. At one point, he terminated the landscaping and snow removal contractor servicing the property and started his own business. He also started a janitorial business that serviced the property, according to the lawsuit.
From 2013 through early 2016, no distributions were paid to the plaintiffs. In early 2016, the plaintiffs began asking David Hay and Mark Hay for information and records, it was stated in the lawsuit.
Those request were first ignored, and then fulfilled with conflicting, incomplete and inconsistent information, it is alleged in the lawsuit.
In March, with the CitiGroup loan about to mature, David Hay suggested that the plaintiffs refinance the property, but they would need need $800,000 in up-front money to do so, according to the lawsuit. At that time, he told allegedly the plaintiffs that he was the only one who "made money on this deal" and was not at risk to lose his entire investment.
On April 12, days from when the remaining $7.9 million balance on the CitiGroup loan was due, David Hay and Mark Hay retained counsel, according to Guldin and information from the lawsuit.
Through contacts, the plaintiffs learned that Anthony DeSapio, who owned several buildings in the market, expressed an interest in the property. DeSapio paid off the loan, and the plaintiffs had to relinquish 51 percent ownership in the property to him, according to the the lawsuit.
Although the plaintiffs were able to retain 49 percent of their equity in the property, it will be virtually worthless for years until the millions paid out over the years has been recouped through income generated from rental fees, according to the lawsuit.
In addition to David and Mark Hay, other defendants include Cortes & Hay Title Agency, Sterling Management Services, Turnbull Real Estate, Provident Financial Services, Team Capital Bank and George Dilts.
Anthony DeSapio and George Dilts didn't return a phone call seeking comment.
Dave Hutchinson may be reached at dhutchinson@njadvancemedia.com. Follow him on Twitter @DHutch_SL. Find NJ.com on Facebook.