Perpetrator of $37M Real Estate Fraud Sentenced to 19 Years

Mar 30

Derek A. Nelson’s Garland-based real-estate investment program promised huge profits, with little risk, from the business of buying and renovating distressed properties.

Distress, yes: Investors poured approximately $37 million into the promissory notes Nelson sold to purportedly fund his business, and lost almost every cent in what turned out to be a Ponzi scheme. Nelson on March 29 was sentenced to 19 years in prison in Collin County State District Court, one day after being convicted of securities fraud.

Nelson sold promissory notes in the U.S. and Canada through Capital Mountain Holding Corp. of Garland and various limited liability corporations. Most of the U.S. victims lived in the Dallas-Fort Worth area, including Collin County.

Nelson told investors he would use the proceeds from the sale of the promissory notes to buy distressed properties and renovate them for rent or sale, generating enough money to pay the rates of return he promised investors.

Instead, Nelson used at least $20 million of investors’ money to prop up his Ponzi scheme, paying investors their promised returns with money from other investors. Nelson also used $2.7 million of investor funds to pay for personal expenses and to contribute to his church.

Depending on when they were issued, the notes were supposed to pay improbably high rates of return. One series of promissory notes promised returns of 10% per month for three months. Others were supposed to pay an annualized return of 18% for two years and 21% for five years.

A Collin County grand jury in 2014 indicted Nelson on charges of securities fraud, theft, and money laundering. Nelson was prosecuted in cooperation with the Collin County District Attorney’s Office, which appointed Texas State Securities Board enforcement attorneys as special prosecutors in the case.

Nelson falsely represented to investors that their investments were secured by first liens on the properties he acquired. In fact, the first liens, and in some cases additional second liens, belonged to the banks that held mortgages on the properties.

Nelson’s scheme collapsed in 2009, when he was unable to continue the Ponzi scheme by making payments to certain investors.

The Securities and Exchange Commission in 2009 sued Nelson and his business entities for fraud. Judge Royal Furgeson of the U.S. District Court for the Northern District of Texas ruled that Nelson violated the anti-fraud provisions of federal securities laws and appointed a receiver to try to untangle Nelson’s businesses torecover funds for investors.

The receivership was closed in 2013 with investors receiving 3 cents on the dollar.