In the months leading up to the November 2018 general election in Colorado, Republican state treasurer nominee Brian Watson was actively committing securities fraud, according to the Securities and Exchange Commission.
In filing five securities fraud charges against Watson this week, the SEC said he and his Denver-based development firm, Northstar Commercial Partners, “deceived investors in real estate projects by falsely promising that they would invest their own money alongside that of other investors.”
An attorney for Northstar disputed the SEC’s framing of the matter.
“Northstar and Mr. Watson intend to vigorously defend this action,” Paul Vorndran of Jones & Keller told BusinessDen.
The SEC alleges that Watson, whose company has already been crippled by an ongoing lawsuit filed by Amazon, gave misleading information when it raised about $49.5 million from at least 350 investors to fund 10 separate projects through 11 securities offerings from April 2017 to August 2019.
The SEC alleges that Watson and his firm said they would put up 4 or 5 percent of the needed equity for the projects, which would correspond to about $2.8 million.
But that wasn’t the case, according to the SEC.
“Despite Defendants’ repeated representations that they would co-invest, they made no equity investment at all for eight of the Relevant Projects, and invested only a small fraction of the amount promised for two others,” the SEC wrote in court filings. “Investors incurred substantial losses in many of these projects — losses that Defendants avoided because they never invested the money they told investors they would contribute.”
The charges are civil, meaning Watson faces monetary penalties. He owns 100 percent of Northstar, according to disclosures made in connection with the Amazon litigation.
BusinessDen previously reported that Watson was being investigated by the SEC, and that charges were likely.
Northstar attorney Vorndran said in a statement to BusinessDen that Watson and his company have “a successful track record with over 150 real estate investment projects,” and that Watson made equity investments “in almost all of them” to the tune of $11.5 million in personal funds.
“The SEC instead cherry-picks 10 of these projects, even though the operative investment documents did not require that Mr. Watson or Northstar make equity investments. The SEC also fails to mention the many real estate investments and capital raising efforts where either Mr. Watson or Northstar did invest,” Vorndran said.
“Further, the SEC fails to mention that none of the 10 real estate developments resulted in investor losses occasioned by any lack of direct monetary co-investment,” Vorndran added. “And notably, the SEC does not allege that the investor funds raised were used for any improper purpose in any way.”
Attorneys Carrie Johnson and David Meschke of Brownstein Hyatt Farber Schreck are representing Watson himself in connection with the SEC charges.
The 2018 election didn’t go Watson’s way. He received about 45 percent of the vote, losing to Democrat Dave Young during a cycle in which Democrats took all statewide offices.
According to the SEC, the projects on which Watson misled investors between 2017 and 2019 included redeveloping a vacant office building in Lakewood, constructing a mixed-use development for veterans in Aurora and developing new warehouse space in Broomfield. Some of the projects were outside Colorado, including constructing multiple buildings for a day care operator in Illinois.
Amazon’s lawsuit against Northstar alleges the firm paid kickbacks to two Amazon employees, Carl Nelson and Casey Kirschner, in exchange for landing deals to develop multiple data centers in northern Virginia for the company. The FBI investigated the allegations, but no criminal charges have been filed.
The SEC charges are unrelated to the allegations made by Amazon. The data centers in northern Virginia are not among the projects listed.
In its complaint filed in federal court in Colorado, the SEC noted that investors often like to know those overseeing projects have money on the line too, and called the practice an “industry standard.”
“A co-investment from Defendants, who managed the projects, would create a significant monetary incentive for Defendants to maximize profits and avoid losses on each project that would align with investors’ own financial interest in the projects,” the SEC wrote.
The SEC claimed that Watson “has admitted that he only had a ‘hope to invest (his) personal capital’ and that a ‘myriad of factors’ would influence his ultimate decision to invest, including his ‘ability to access capital to invest.’”
The SEC is asking a federal court judge in Colorado to order Watson and his firm to give up “any and all ill-gotten gains” and to pay civil penalties in an amount to be determined. The commission’s litigation will be led by Terry Miller and supervised by Greg Kasper, Laura Metcalfe and Jason Burt.
Northstar had about 40 employees as of early 2020, nearly all of whom have since been laid off. Late last year, a receiver was appointed to oversee the finances of both Watson and his company; the pair have since clashed repeatedly over spending. Watson has sold both his private plane and his mansion in Cherry Hills Village, although he still owns a home in Grand County. In July, he filed for divorce from his second wife, whom he married in September 2019.
One bright spot for Watson came in June, when a judge in Delaware allowed a lawsuit filed by Watson against his former business partner in the Amazon data center development deals to proceed.