We Need an Institutional Mathon

There seems to be this “thing” going on in Mesa, Arizona that is causing quite a stir. Apparently a group of very prominent local real estate professionals are under serious investigation on all sorts of charges relating to investment funds they have raised.

A former Arizona attorney general who is representing a Mesa firm accused of violating state securities laws said he is trying to work out an agreement on how to recover money for investors who have millions of dollars at stake.

Grant Woods, attorney for Slade Williams & Associates, said he hopes to know today if a deal can be worked out with the Securities Division of the Arizona Corporation Commission on how to proceed with recovering money owed to investors in the Mathon Fund and Mathon Fund I.

Last week a Maricopa County Superior Court judge issued a temporary restraining order closing the investment firm and appointed a receiver to control its assets while the division continues its investigation. The division accused Slade Williams of operating a Ponzi scheme and violating eight provisions of the state securities act, including failing to fully inform investors of the risks they were taking.

According to the commission, the funds used $150 million in investors’ money to provide short-term, high-interest bridge loans to borrowers who needed quick cash but had sufficient collateral to cover the loans if the borrowers should default. The commission said most of the loans were in default and investors instead were paid from income from later investors — the classic Ponzi scheme.

Slade Williams denied the charges and said the vast majority of the investors are supporting the company and its activities. Woods said several key real estate transactions that served as collateral for loans are pending that would provide money to pay off investors. But those deals may be in jeopardy now that the state has moved against the company, he said.

The Mathon Funds and Slade Williams are in the business of “hard money” lending. This end of the lending market is specially tailored for desperate borrowers. The rates the lenders charge for money are extreme, but they also take quite a bit of risk and are willing to move very, very quickly. In a booming market (like Arizona real estate) opportunities sometimes spring into existence and fade over very short time horizons.

Normally a business like Mathon would consist of a small group of well-connected friends who put their personal money up for opportunistic real-estate deals that needed to be closed quickly. Mathon’s problem, it seems, is that they tried to grow beyond the typical small, opportunistic, enclave format and they actually tried to make this into a full-time business. They raised additional capital beyond their own, and they tried to create a steady flow of investment “opportunities.”

The business of opportunistic lending is a very valid one, but it usually takes place in small back room, not within the light of day. Anyone that has seen the fast pace of deals in a booming market knows that lenders who can turn on a dime really can be worth the exorbitant rates that they charge. So the difficulties faced by the Mathon / Slade Williams group isn’t in their primary line of business. Their lending practices (at very high rates) and their lending niche seem both to be reasonably sound.

Mathon / Slade Williams, however, got into trouble with the way that they raised money. They apparently made promises to investors that cause the state to believe that they violated securities laws. The charges, in fact, (see the state’s complaint here) all seem to relate to securities law, and not to the lending side of their business (the T.R.O. is here). The state cites investors who claim they were quoted annual returns of 36%, 75% and even 120% on their investment. Those types of promised returns, apparently, are in and of themselves grounds for securities law scrutiny.

The state, in seeking to minimize the damage associated with the Mathon / Slade Williams group, has shut down their business. They have closed the doors of Mathon and are seeking to liquidate the loans and other assets of the Mathon Funds. But shutting down a business like Mathon is a very tricky matter. It is a bit like a juggler who is juggling several fine-china plates being accused of a crime. If you just snatch the juggler and haul him off to jail, the plates will fall and are guaranteed to break. In this case, the complaint is (at least in part) that the investors (who gave the juggler their plates to juggle) are at risk of not getting their plates back. The state can assure that the investors loose by just shutting Mathon down. They cannot guarantee its success.

In my conversation with one of the principals of Mathon, he was convinced that the Mathon business model is sound and that Mathon can, in fact, produce the types of returns promised – if the state will just let them wind things down. The Mathon principals are very experienced real estate professionals, and they really do know the business of opportunistic lending. They seem to be saying, “Just let us work our magic, and everything will come out OK.”

I personally believe that the state does not have the current investors’ interests as their sole concern. They seem to want to prevent future investors (which they might call future “victims”) from suffering. Consequently, the state will sacrifice much of the salvage opportunity with the current Mathon investors by forcing the existing Mathon Funds to wind down in a disorderly fashion. These loses will cast a pall on the “opportunistic lending” business in general. I think that this is the unfortunate reality.

Experienced “boom” developers know the benefits of opportunistic lenders who can quickly assess risks and turn on a dime. I feel we need an institutional investor that knows the risks inherent in opportunistic lending that will come in and fill this niche. That institutional investor might even be willing to come in and take the position of the Mathon Funds, thereby "rescuing" the current investors. Absent this rescue, extraordinary losses are on the horizon.

The current Mathon investors and the professionals at Mathon may be the short-term loosers. The loss has been exacerbated by the state in its zeal to protect future victims. But, the long-term loser will be the boom-driven developers who have come to need these opportunistic lenders.