case 6:10-cv-06321-ho document 1 filed 10/04/10 page 1 of...

COMPLAINT (CLASS ACTION) ESLER, STEPHENS & BUCKLEY Attorneys at Law 888 S.W. Fifth Avenue, Suite 700 Portland, Oregon 97204-2021 Telephone: (503) 223-1510 Facsimile: (503) 294-3995

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Michael J. Esler, OSB No. 710560 [email protected] John W. Stephens, OSB No. 773583 [email protected] ESLER STEPHENS & BUCKLEY 888 S.W. Fifth Avenue, Suite 700 Portland, Oregon 97204-2021 Telephone: (503) 223-1510 Facsimile: (503) 294-3995 John Spencer Stewart, OSB No. 711648 [email protected] STEWART SOKOL & GRAY 2300 S.W. First Avenue, Suite 200 Portland, Oregon 97201 Telephone: (503) 221-0699 Facsimile: (503) 419-0281 Stephen S. Walters, OSB No. 801200 [email protected] ALLEN MATKINS ET AL. 3 Embarcadero Center, 12th Floor San Francisco, California 94111 Telephone: (415) 837-1515 Facsimile: (415) 837-1516 Of Attorneys for Plaintiffs Ken and Patricia Houghmaster et al.

IN THE UNITED STATES DISTRICT COURT

DISTRICT OF OREGON

(Eugene Division)

KEN and PATRICIA HOUGHMASTER, husband and wife; HOUGHMASTER’S CARNEGIE VILLAGE, LLC an Oregon limited liability company; JOHN E. and MARY JANE SEMASKSO, husband and wife and individually and as trustees of the Semasko Living Trust dated 1-31-95; SEMASKO’S CARNEGIE VILLAGE, LLC, Oregon limited liability Companies; DICK M. and B. JUNE CORKUM, husband and wife; and CORKUM’S 9TH & ROSE, LLC, an Oregon limited liability company; by and in their own

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Case No. COMPLAINT (CLASS ACTION) PARTICIPANT VIOLATION OF THE OREGON SECURITIES ACT JURY TRIAL DEMANDED

Case 6:10-cv-06321-HO Document 1 Filed 10/04/10 Page 1 of 24 Page ID#: 1

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Filed October 4, 2010

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10-6321-HO

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behalf and in behalf of everyone similarly situated, and MICHAEL GRASSMUECK, as Receiver in his capacity as Assignee of Sunwest Investor Claims, Plaintiffs, v. K&L GATES LLP, a Delaware limited liability partnership; and THOMPSON & KNIGHT, LLP, a Texas limited liability partnership, Defendants.

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COMPLAINT

1. This is a class action brought by the Plaintiffs on behalf of a class of investor

claimants (“Plaintiff Class”) who invested in a consolidated enterprise consisting of more than

400 affiliated businesses owned by or under the financial control of Jon M. Harder (“Harder”)

and Darryl E. Fisher (“Fisher”). The businesses were operated through a variety of affiliated and

interrelated individuals and entities, which have now been consolidated in SEC v. Sunwest

Management, Inc., et al, Case No. 09-CV-6056-HO (D. Or.) (“SEC v. Sunwest”) and are

involved in a pending bankruptcy proceeding, In re Stayton SW Assisted Living, LLC, Case No.

09-CV-6082-HO (D. Or.) (In re Stayton). Pursuant to Orders entered on March 10, 2009, and

May 27, 2009, in SEC v. Sunwest, Plaintiff Michael A. Grassmueck was appointed Receiver for

these businesses. The Receivership Entities include Sunwest Management, Inc. (“Sunwest”),

Canyon Creek Development, Inc. (“CCD”), Canyon Creek Financial, LLC (“CCF”), Fuse

Advertising, Inc., KDA Construction, Inc. (“KDA”), and numerous other affiliated, single-

purpose entities (“SPE”) created to own and operate various senior living facilities and real estate

developments, most of which are limited liability companies (collectively the “Receivership



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Entities”). Nearly all of the Receivership Entities are or were Oregon organizations having their

principal place of business in Salem, Oregon.

2. The Receivership Entities included a group of entities formed to provide services

to, and control of, the entities used to raise capital. Sunwest was primarily engaged in the

business of managing senior living facilities. CCD was primarily engaged in the business of

developing and purchasing new elder care facilities for Sunwest to manage, as well as acquiring

or developing other types of real estate projects. CCF was primarily engaged in the business of

overseeing the broker-dealers who funneled investors to provide equity for projects developed by

CCD. Fuse Advertising, Inc. is an assumed business name of Fuse Advertising Agency, Inc.,

previously known as Fuse Ad Agency, Inc. (collectively “Fuse”). Fuse was primarily engaged in

the business of advertising the senior living facilities operated by Sunwest. KDA was primarily

engaged in the business of doing construction work on new facilities and repair and improvement

work on existing facilities. Seneset Leasing Company (“Seneset”) was used to lease labor to the

companies in the Sunwest Enterprise.

3. Harder and Fisher directly or indirectly were in financial control of each of the

Receivership Entities and directly, or through affiliates they controlled, had a right to the profits

of any of the projects that proved successful. SPEs that they owned or controlled typically had

long term leases (50 years) on projects’ real estate, thereby permitting Harder and Fisher to

control the property even if it was nominally in the name of the investors. Harder and Fisher

guaranteed much of the commercial debt. From a financial accounting standpoint, each of the

projects, and each of the other Receivership Entities, should have been consolidated on any

financial statements prepared for Harder, Fisher or Sunwest. (The business operations of the

Receivership Entities, Principals and other affiliates are referred to collectively as the “Sunwest



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Enterprise.”) The investments purchased by Plaintiff Class members were securities under

Oregon law and were sold by the Sunwest Enterprise in violation of Oregon securities law.

4. Defendants Thompson & Knight, LLP (“T&K”) and K&L Gates LLP (“KLG”)

(collectively “T&K and KLG”) participated in and/or materially aided the sale of the securities

sold to the Plaintiffs and the Plaintiff Class. Accordingly, Plaintiffs seek damages and other

appropriate relief against T&K and KLG pursuant to the Oregon Securities Act.

5. Plaintiffs bring this suit on their own behalf and on behalf of the Plaintiff Class

described below. Because the securities violations at issue in this case present common issues, a

class action, rather than hundreds of individual actions, provides the most appropriate and

efficient means to adjudicate these claims. It also provides the greatest assurance that these

issues will be resolved in a manner that is consistent, efficient and fair to all investors in the

Plaintiff Class.

THE PARTIES

6. Defendant KLG is a general partnership organized under and qualified as a

limited liability partnership pursuant to Delaware law and was formerly known as Kirkpatrick &

Lockhart Preston Gates Ellis LLP. It is the successor in interest to Preston Gates & Ellis LLP.

KLG has an office in Portland, Oregon, as well as Pittsburgh, Pennsylvania, where its principal

place of business is located. KLG, through its partners, agents and employees, participated and

materially aided in the sales of the above-described securities to the Plaintiff Class.

7. Defendant T&K is a Texas limited liability partnership with its principal place of

business in the State of Texas. T&K, through its partners, agents and employees, participated

and materially aided in the sales of the above-described securities to the Plaintiff Class.



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8. Plaintiffs John E. and Jane Semasko reside in the State of Washington. They are

co-trustees of the Semasko Living Trust, which is the member of Semasko’s Carnegie Village,

LLC, an Oregon limited liability company and an SPE formed by the Sunwest Enterprise for the

Semaskos to invest in the Sunwest Enterprise (collectively Plaintiff Semasko).

9. Plaintiff Semasko invested in a project known as Carnegie Village. The private

placement memorandum was reviewed by T&K and was dated October 26, 2006. The co-

owner/issuer who sold the interest in real property to the Semaskos was Belton Senior Living,

LLC, an Oregon limited liability company. The transaction was handled through CCF. The

Semaskos invested a total of $885,000 through the Semasko’s Living Trust. The cash portion of

their investment was $488,000, and the debt portion was $397,000. The transaction closed on or

about December 5, 2006. The property was then leased on a long-term lease to Belton Senior

Living Operator, LLC, another Oregon limited liability company, and an option to purchase the

property was given to Belton Senior Living Operator, LLC, a part of the Sunwest Enterprise and

under the control of Harder and Fisher, the Principals of the Sunwest Enterprise.

10. Plaintiff Houghmaster’s Carnegie Village, LLC, is an Oregon limited liability

company. Its member is plaintiff Patricia J. Houghmaster, who is a citizen and resident of

Alpena, Michigan (collectively these plaintiffs will be referred to as “Plaintiff Houghmaster”).

Plaintiff Houghmaster invested $674,238 in a tenancy in common interest (“TIC”) sold by

Belton Senior Living, LLC, a Sunwest affiliate and a part of the Sunwest Enterprise on January

29, 2008. Belton Senior Living, LLC was the owner of real estate on which the Sunwest

Enterprise intended to operate an assisted living facility known as Carnegie Village. T&K

reviewed the Private Placement Memorandum (“PPM”) issued by the Sunwest Enterprise

covering the offering and wrote a tax opinion that was used in connection with the offering.



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T&K also was a material participant in devising the structure (property owning entity and

operating entity) used in the Carnegie Village project. In rendering its tax opinion, T&K

reviewed and wrote parts of the PPM and reviewed transactional documents.

11. Plaintiff Corkum’s 9th & Rose, LLC is an Oregon limited liability company. Its

members and owners are plaintiffs Dick M. Corkum and B. June Corkum, co-trustees of the Dick

and June Corkum Joint Living trust, u/t/a dated July 18, 2005 (collectively referred to as

“Plaintiff Corkum”). Plaintiff Corkum invested $650,000 in cash and assumed $1,000 in debt

for a TIC interest in a project known as 9th & Rose. The date of the sale to Plaintiff Corkum was

February 27, 2008. The Sunwest entity that sold the interest was Blue Mountain Associates

Property, LLC (“Blue Mountain”).

12. KLG prepared or reviewed the PPM for the 9th & Rose offering, prepared a tax

opinion to be used in connection with the offering by Blue Mountain and reviewed various other

documents used in connection with the 9th & Rose offering.

13. Plaintiff Michael A. Grassmueck is the Court-appointed equity Receiver for the

Receivership Entities. This action is brought by him in his capacity as assignee of the claims of

Sunwest investors, including claims assigned pursuant to a Plan of Distribution approved by the

Court in SEC v. Sunwest on October 2, 2009.

14. Plaintiffs bring this lawsuit in their own behalf and in behalf of all similarly

situated individuals and entities that purchased securities in the Sunwest Enterprise pursuant to

sales in which T&K and/or KLG were participants or provided material aid to the sellers. The

securities were in the form of investor, noncommercial unsecured notes, tenancy-in-common

(“TIC”) interests, membership interests or preferred membership interests in one or more



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Sunwest Properties (collectively the “Sunwest Securities”). All of these investments were

securities under Oregon law.

15. KLG prepared or reviewed most of the written materials used in connection with

the sale of more than $70 million in Sunwest Securities (investment documents, disclosure

memoranda, and other documents) and participated in closing many of these investments. These

written materials, prepared or reviewed and then disseminated by KLG contained

misrepresentations and misleading statements made by Sunwest and make KLG directly and

non-derivatively liable under Oregon law to the Plaintiff Class, regardless of the liability of any

other person to any of the investors. These violations of Oregon securities law have resulted in

substantial financial injury to the Plaintiff Class.

16. T&K prepared or reviewed certain written materials used in connection with the

sale of about $100 million in Sunwest Securities (investment documents, disclosure memoranda,

and other documents). These written materials, prepared or reviewed by T&K contained

misrepresentations and misleading statements made by Sunwest and make T&K directly and

non-derivatively liable under Oregon law to the Plaintiff Class, regardless of the liability of any

other person to any of the investors. These violations of Oregon securities law have resulted in

substantial financial injury to the Plaintiff Class. Plaintiffs and members of the Plaintiff Class

have claims that are not asserted in this Complaint against persons and professionals, other than

T&K and KLG, who also participated or materially aided in the sale of Sunwest Securities.

17. Joinder of the individual entities that were a part of the Sunwest Enterprise as

parties in this action is not feasible because Harder has filed for bankruptcy, and thus is subject

to the automatic stay provision governing bankruptcy proceedings, and the Sunwest Entities are

in receivership and subject to a stay order. However, the Sunwest Entities, including Harder,



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have been found liable for violations of the securities laws as will more particularly be alleged

herein.

JURISDICTION

18. This Court has jurisdiction over this matter pursuant to 28 U.S.C. Section 1332.

This matter is brought as a class action, and the amount in controversy exceeds the sum or value

of $5,000,000, exclusive of interest and costs. More than two-thirds of the members of the

Plaintiff Class, including the named Plaintiffs, are citizens of a State different from T&K and

KLG, which were formed in the States of Texas and Delaware, respectively, and have their

principal places of business in Texas and Pennsylvania respectively.

19. Venue is proper in this District because KLG maintains offices in Oregon, it can

be served here through its partners, and the acts of T&K and KLG giving rise to the liability

occurred at least in part in Oregon. Almost all of the securities sold were sold to Oregon LLC

investors by Sunwest from its headquarters in Salem, Oregon.

THE SUNWEST ENTERPRISE

20. Sunwest, the first of the Receivership Entities, was founded in 1992. By 2001,

the Sunwest Enterprise included approximately 20 senior living facilities. Rapid growth

increased that number to over 270 facilities by 2008.

21. The Sunwest Entities’ business plan was to grow through the development and

purchase of facilities and through other real estate projects, which would be owned by the

Principals and managed by Sunwest. In simplified terms, the business plan operated in the

following manner: to finance the development and purchase of new facilities, Sunwest would

form one or more affiliated SPE; these entities would obtain loans from banks and other lending

institutions (“Lenders”), as well as raise private funds from investors. After developing or



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purchasing a facility, Sunwest’s goal was to increase the occupancy rate to around 95%, which

was referred to as “stabilization,” and to increase the revenues and value of the facility. The

borrowing entity eventually would refinance its loan and use the proceeds of the refinancing to

buy out the private investors, leaving Sunwest’s Principals as the sole owner of the facility. The

investors typically would be rolled over into a new Sunwest project to repeat the cycle. With the

investors paid off and higher revenues from residents, the Receivership Facilities would have a

positive net operating income, which would add to the Sunwest Enterprise’s overall bottom line.

22. While Sunwest’s business strategy evolved over time, the SEC concluded (based

on its review of Sunwest’s records) that the enterprise’s “securities offerings to investors had

virtually identical structures.” SEC v. Sunwest Management, Inc., Case No. 6:09-cv-06056-HO

at ¶ 27 (Mar. 2, 2009).

23. Beginning in late 2006 and as a result of advice received from counsel, for every

facility that Sunwest developed or purchased, it created two Receivership Facilities, one to own

the facility (the “Property Company”) and one to operate it (the “Operating Company”). In order

to create the appearance of separate ownership from the Sunwest Enterprise, Sunwest “gave”

certain officers and key employees an interest in the Property Company that was subject to

Harder’s option to buy back that interest for $1. The key employees did not pay for the

ownership interests nor did they report the receipt as income in the year received. Sunwest

controlled the Property Companies. Belton Senior Living and Blue Mountain were Property

Companies. Each Operating Company (a) leased its facility from the Property Company and

TIC investors on a long-term lease (typically 50 years), and (b) subcontracted the work of

actually managing the facility to Sunwest. Other Sunwest affiliates would provide design,

engineering, construction, advertising, labor and other needed services. CCD took over the role



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of developing and purchasing new facilities in 2001. Starting in or about June 2006, CCF, an

NASD licensed broker-dealer, took over the role of overseeing broker-dealers who funneled new

investors to the new Sunwest Enterprise and distributed promotional materials to potential

investors.

24. Typically, commercial loans were obtained and coupled with investor funds to

finance the development and purchase of new facilities. The Property Company that was to own

the facility would obtain the loan, and it would be guaranteed by Harder and Fisher. In some

cases, the loan would be cross-collateralized over multiple projects, so that a default on the part

of any project would constitute a default on the part of all of the projects subject to a loan from

the same Lender. For any given project, the combined amount of the loan and the funds raised

from investors would exceed the amount needed to purchase the facility. Investors were told that

excess amounts would pay certain fees, and the balance would be held in reserve to pay

development costs and to provide reserves to ensure payment of the Receivership Facilities’

debts during the early operations until the cash flow reached break even, including to pay “rent”

to the investors.

25. The Sunwest Enterprise depended on an inter-entity loan component that was

critical to the success of the Sunwest Enterprise but was not disclosed to investors. Most

projects had negative cash flow issues in the first two to four years of operations and a negative

net worth due to various problems including: (a) occupancy rates below 95%; (b) longer delays

than projected by Sunwest to reach stabilization; (c) greater costs than projected by Sunwest; (d)

lower revenues than projected by Sunwest; and (e) an inability to refinance the original loan. By

early 2008, the average occupancy rate for all facilities was about 84%, which was substantially

below the occupancy level needed to breakeven on a cash flow basis, and the overall monthly



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cash flow from operations was millions of dollars short of a breakeven. Receivership Facilities

afflicted with those problems often had difficulty paying their debts, including the “rent” to

investors. In order to pay those debts, the Sunwest Enterprise pooled all cash from whatever

source and used a system of inter-entity “loans” whereby a cash-poor facility’s debts were paid

with funds loaned from other Sunwest Entities, including from other Receivership Facilities’

positive cash flow or reserves. Thus, even a Receivership Entity that was losing money might

have its reserves or construction funds used by other Receivership Entities that were losing

money. Cash-poor Receivership Entities were not the only recipients of the inter-entity loans.

Almost every Sunwest SPE frequently obtained loans from other Sunwest SPEs, whether to pay

pending bills or to serve as advances in financing new business operations or to pay the personal

expenses of Harder. Most inter-entity loans were reflected only in journal or general ledger

entries and never were properly documented with Promissory Notes or similar instruments. This

inter-entity lending took place daily based on the immediate cash needs of particular facilities

and the immediate cash status of others—the question asked was simply: “Who has cash that we

can move?” As observed above, this practice was not disclosed to investors, and violated the

terms of both the operating agreements of the Receivership Entities, the loan documents between

the Receivership Entities and the Lenders, and the disclosures made to investors.

26. Sunwest effectuated the scheme by funneling many inter-entity loans, as well as

funds used to repay those loans, through a bank account known as the “clearing account” before

distribution to the entities receiving the loans. The clearing account was also used to hold

investor funds; to make loans made from one Receivership Entity or Affiliate to another; to pay

Harder’s salary from the various Receivership Entities that employed him; to make loan

distributions or other disbursements to Harder; and to finance securing new projects. On a



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monthly basis, a Sunwest employee would transfer funds from the clearing account into Harder’s

personal account to pay for his family bills, and often funds were transferred to him or his family

on an ad hoc basis. The Principals had access to the clearing account, as did Harder’s wife.

Inter-entity loans also were funneled through various other bank accounts in addition to the

clearing account. Those accounts regularly included a commingled amount of operating and

investor funds of various Sunwest Entities. One of those accounts was an overdraft account with

Wells Fargo which was intended to be used solely to pay fees for the high number of overdrafts

that the Sunwest Entities experienced on their Wells Fargo accounts, and was also used to make

loans and other payments to various Sunwest Entities, including Receivership Facilities.

Another was a labor account to pay for facility employees. This commingling and misuse of

funds was not disclosed to investors and violated the terms of both the operating agreements of

the Receivership Facilities and the loan documents between the Receivership Facilities and the

Lenders.

27. Sunwest secured investments in a given Receivership Facility through a personal

single-purpose limited liability company (“TIC LLC”) organized in Oregon by Sunwest, which

then held a fractional tenant-in-common interest (“TIC”) in the real property of the limited

liability company or in both the real property and improvements. For each Receivership Facility,

there were multiple investors holding TIC Interests (up to a maximum of 35) through their

respective TIC LLCs. Each TIC LLC leased its interest in the property to the project’s Operating

Company (which also was known as the “Master Tenant”) in return for regular “rent” payments,

which flowed from Sunwest, the property manager, to the Master Tenant and then to the TIC

LLC to the investor. The Operating Company retained the right to buy out the TIC LLCs

through a purchase option agreement that each TIC LLC executed that capped the return the



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investor could get to 12% per annum. A similar procedure was followed by persons who

purchased “preferred memberships” in the Property Company. Many investors sought to engage

in like-kind exchanges under Section 1031 of the Internal Revenue Code, and the TIC structure

was designed to make investment in Sunwest attractive to those investors.

28. Because the financial performance of the Receivership Facilities was inadequate

to sustain them, the perpetuation and growth of the Sunwest Enterprise depended on attracting

new capital from Lenders and investors to pay off outstanding debts to existing Lenders,

investors, and other creditors. To keep the Sunwest Enterprise afloat, more than $450 million

was raised from over 2,175 investors and over $1.7 billion was collected from numerous

Lenders, more than $260 million of which was assumed by TIC LLCs as a way to leverage their

investments. Although the Receivership Entities had a negative net cash flow of $25 million in

2005, which increased in 2006 and 2007, the scheme was able to use new investor funds to pay

the monthly “rent” payments promised to all investors until June 2008. In this respect, the

scheme represented a Ponzi scheme. From June 2008 forward, there have been no payments to

investors. Numerous investor lawsuits have resulted, as well as numerous lawsuits and

foreclosure actions brought by Lenders and a bankruptcy filing by Harder. All of the investor

lawsuits have common allegations of fact and involve common issues of law.

29. To attract investors, CCD, CCF, and the Property and Operating Companies of

the facilities for which investment was sought had offering memoranda prepared or reviewed and

edited by outside counsel, many of which were prepared by either T&K or KLG, describing the

facilities, their finances, and the investment opportunities and risks. The materials prepared or

reviewed by T&K or KLG for a typical offering included, by way of example:



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a. Memoranda for the prospective investors that described the proposed purchase of

securities and told the investors about the economic returns and potential tax benefits related to

the purchase of these securities.

b. Disclosure memoranda for the investors that included the misrepresentations,

omissions, and misleading statements described herein.

c. The Tenancy in Common agreement between the seller LLC and the purchaser

LLC.

d. The Triple Net Lease or Master Lease between the Property Company and TIC

and the Operating Company pursuant to which the property was leased back to an affiliate of

Sunwest for a lengthy period in return for monthly payments to cover the loan and the investors’

monthly payments.

e. The Warranty Deed provided by the Property Company to the TIC investors.

f. The Operating Agreements for the Oregon Limited Liability Company that was

established to purchase the property and for the entity established to operate the facility.

g. The Real Property Purchase Agreement between the Property Company and the

TIC investors.

h. Escrow instructions to the title insurance company in behalf of the Property

Company and the investors.

i. Instructions to the investors on how to fill out the forms and to pay funds for

purchase of the securities to a title insurance company that acted as an escrow and to the title

insurance company regarding steps that it should then take, including disbursement of these

investors' funds to effectuate these sales and to pay defendants’ legal fees.



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30. The offering memoranda for each offering of TIC and membership interests were

virtually identical except for details about the specific project, like its location, type of project,

costs, and projections. Each offering memorandum prepared or reviewed by T&K or KLG

contained numerous, common misstatements and omissions of material fact which rendered

statements made misleading. Among other things, the offering memoranda falsely told investors

that they would own a share of a single facility or project that would stand or fall on its own

merits, with its own set of books kept in accordance with generally accepted accounting

standards, leading investors to reasonably believe that the money invested or borrowed or earned

by the facility in which they invested would remain in that facility or project. The offering

memoranda in which T&K or KLG participated failed to properly disclose at least the following

elements of the enterprise:

a. that investor funds would be loaned to Sunwest Entities other than the Property

and Operating companies of the specific project in which the investors had an interest;

b. that the funds from other investors had in the past been commingled with and

used by Sunwest Entities other than the Property and Operating Companies of the facilities in

which those investors had an interest, including to make distributions to pre-existing investors;

c. that these investors’ funds would be commingled with funds of Sunwest Entities

other than the Property and Operating Companies of the facilities in which the investors’ TIC

LLCs had an interest, just as had been done in the past;

d. that Jeffrey D. Kraus, a former Sunwest Chief Financial Officer, had revealed that

funds as facilities owned, operated or managed by Jon Harder had been improperly commingled

and used for improper purposes;



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e. that a United States District Court had found that the evidence from the former

Sunwest Chief Financial Officer was sufficient “to raise serious questions about the Defendants’

[in the Kraus action] performance of their fiduciary duties,” improper transfer of funds and

deliberate concealment of these activities;

f. that Harder and Fisher had personally guaranteed most of the major loans made to

the Receivership Entities (which totaled more than $2 billion by the time of the collapse), and

that if Harder and Fisher were called on to perform on even a small part of these guarantees, they

would be unable to do so;

g. that the commingling and inter-entity lending violated the operating agreements

of the Receivership Facilities;

h. that the commingling and inter-entity lending violated the terms of the loan

agreements between the Lenders and the Receivership Facilities;

i. that numerous Receivership Entities were in default or near-default of various

obligations they owed totaling hundreds of millions of dollars, which would render continued

payment of rent to investors nearly impossible;

j. that the true net worth of the Receivership Entities was significantly negative;

k. that it was likely that the Sunwest Enterprise would be consolidated and the

individual ownership interest of investors would be lost;

l. that the success of any particular Receivership Facility depended not on the

independent ability of that Facility to achieve positive net operating income, as represented in the

offering memoranda, but rather on the ability of the Sunwest Entities to obtain additional

financing from new Lenders and investors in ever-increasing amounts to support the Ponzi-like

plan; and,



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m. that the overall, monthly operating results of the Receivership Entities was

significantly negative, and without the continuous and increasing infusion of new investments

from new investors, the enterprise would collapse.

31. On October 2, 2009, the Court in SEC v. Sunwest entered its Findings of Fact and

Conclusions of Law (Document No. 874) after notice and an opportunity to be heard. These

Findings and Conclusions are incorporated herein by this reference. In particular, certain

findings are relevant to the claims of the TIC and other securities investors. The Court found

that “there is substantial evidence of the Sunwest Enterprise procuring and using funds in a

commingled manner without the prior knowledge or consent of investors and creditors, and in a

manner inconsistent with the representations to investors and creditors.” Findings and

Conclusions at para. 15.

32. The Court also found:

In Fact, the evidence is overwhelming that the Sunwest Enterprise has been conducted as a unitary enterprise. The Court believes that, subject to the specific exceptions in the Distribution Plan, it would be inequitable for an investor or creditor to have its claim allowed or receive a distribution based on the existing value of any specific facility given the evidence that funds were taken from one property for use on another regardless of whether the funding property had positive or negative cash flow or value. 33. After considering the evidence present in opposition to the then pending motion to

adopt a plan of consolidation, the Court stated:

The declarations and testimony in court of the witnesses proffered by Certain Coordinating Lenders do not credibly refute the evidence presented throughout this case by the SEC, the Receiver, and the CRO, and the evidence specifically presented in connection with the Approval Hearing, that misrepresentations were made to investors concerning the use of invested funds, that invested funds were commingled among the Receivership Entities, the Defendants, and the Relief Defendants, and that certain investment proceeds were used to make distributions to prior investors. Findings and Conclusion at para. 16.



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34. The Court also found that:

The Court agrees and hereby finds that the control and use of cash inconsistent with the legal restrictions and separateness that were contained in the TIC documents did deprive the TIC investors of the benefits of real property ownership to which they were entitled. Findings and Conclusions at para. 17.

35. In the SEC v. Sunwest case, on December 9, 2009, the Court granted the SEC’s

motion for summary judgment that Harder violated the securities laws. (Document No. 997 (the

Summary Judgment Findings)). The Summary Judgment Findings are incorporated herein by

this reference.

T&K’S AND KLG’S ROLES IN THE SECURITIES LAW VIOLATIONS

36. Defendants participated in and materially aided the sales of securities sold to the

Plaintiff Class. As described above, T&K and KLG prepared or reviewed written materials

containing the misrepresentations and misleading statements which were then given to Plaintiffs

and other members of the Plaintiff Class. As a result, T&K and KLG participated in and

materially aided the sales of the securities described herein by the Sunwest Enterprise to the

Plaintiff Class. These activities constitute participation and material aid in connection with the

sales of securities under applicable Oregon law. Anderson v. Carden, 146 Or. App. 675 (1997).

CLASS ACTION ALLEGATIONS

37. The Court should certify a single plaintiff class. The Plaintiff Class represented in

this case consists of a) all individuals and entities that purchased investments in the Sunwest

Enterprise, including those who did so in transactions where offering materials prepared or

reviewed by T&K or KLG were utilized, and b) Plaintiff Receiver as assignee of the claims or

interests of any such individuals or entities. A related class action has been filed against the law

firm of Davis Wright Tremaine LLP that includes allegations that firm similar to the allegations



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against defendants here: DeVaney et al. v. Davis Wright Tremaine LLP, United States District

Court, District of Oregon, Eugene Division, Case Number 10-CV-6134-HO. Plaintiffs may

propose that the two actions be coordinated or consolidated and that the classes described in the

two actions be treated as a single class comprised of investors in the Sunwest Enterprise since

January 1, 2002 and the Receiver as assignee of the claims or interests of any such investors.

38. There are more than 500 hundred limited liability companies that are within the

Plaintiff Class, almost all of which are Oregon LLCs. Although the exact number of such

entities is unknown to Plaintiffs at this time, the records of each defendant (as well as the records

of Sunwest) contain information regarding the identity and location of each of these Class

members. Because of the large number of entities in the Plaintiff Class, joinder of all Class

members is impracticable.

39. There are questions of law and fact common to the Plaintiff Class. The SEC’s

review of Sunwest’s records and transactions concluded that Sunwest’s “securities offerings to

investors had virtually identical structures,” and its offering memoranda “included similar

language concerning how investor returns, in the form of ‘rent’ would be paid” and emphasized

that returns were “dependent on the financial performance of the specific facility.” SEC v.

Sunwest Management, Inc., Case No. 6:09-cv-06056-HO (Mar. 2, 2009).

40. The common issues presented by this case include:

a. Issues relating to the nature of the scheme involving investments in the Sunwest

Properties that was being implemented by Sunwest.

b. Issues relating to the participation and material aid provided by defendants in the

sales to members of the Plaintiff Class.



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c. Issues relating to the true financial conditions of the Sunwest Enterprise, the

Receivership Entities and Harder and Fisher.

d. The failure to disclose to investors that each specific investment was dependent

on the financial condition of the Sunwest Enterprise and the Receivership Entities.

e. The failure to disclose to investors that funds from these investments in specific

projects were being used by other, less profitable projects and by the Sunwest Entities.

f. The failure to disclose Harder’s and Fisher’s financial commitments and

economic position and the potential risks this created that they would not perform on their

personal guarantees for the mortgage loans.

g. The failure to disclose information from Jeffrey R. Krauss, the former Sunwest

Chief Financial Officer.

h. The failure to disclose Sunwest’s purported plan to increase occupancy rates.

i. The failure to show the weaknesses in the tax opinions.

j. Whether the defendants can show that it did not know and, in the exercise of

reasonable care, could not have learned the facts on which the liability of the sellers is based.

k. The value of any recovery on the security in the Receivership.

41. The claims of the representative Plaintiffs are typical of the claims of the Plaintiff

Class they seek to represent. Each of the representative Plaintiffs purchased securities in

connection with the scheme described above or is the assignee of claims from persons who

purchased such securities; the sales of those securities were made by, and on behalf of, Sunwest

in the manner described above. The sales were accomplished by means of the untrue statements

and misleading statements described above. Liability on the part of some or all of the sellers has



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been established, and each of the representative Plaintiffs or their assignors has suffered injury in

the same manner described for the Class each plaintiff seeks to represent.

42. Plaintiffs will fairly and adequately protect the interests of the Plaintiff Class they

seek to represent. Plaintiffs have retained counsel competent and experienced in class and

securities litigation and have no conflict of interest with other Class members or other clients of

Class Counsel that would interfere with the maintenance of this class action. Plaintiff Class’s

interests are antagonistic to the interests of the defendants and Plaintiffs will vigorously pursue

the claims of the Class.

43. A class action is superior to other available methods for the fair and efficient

adjudication of the controversy. The number of class members makes joinder of each class

member impractical. Moreover, prosecution of separate actions by individual members of the

Class creates a risk of inconsistent or varying adjudications with respect to other members of the

Class. Separate adjudications with respect to members of the Class could also substantially

impair or impede the ability of other members of the Class who are not parties to the

adjudications to protect their interests or recover from the defendants. As described above, there

are numerous and significant common issues of fact and law presented; these common issues

predominate over the individualized issues presented by the case. Moreover, because Sunwest

was controlled and operated in the State of Oregon; all of the securities were sold by Oregon

companies; and most of the securities were purchased by Oregon companies, there is a strong

interest in concentrating this litigation in a class proceeding in the State of Oregon. By

proceeding as a class action, this case allows the significant issues presented by this case to be

resolved in a single forum, minimizes the risk of inconsistent adjudications, and assures that all



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members of the Plaintiff Class will have notice of the proceeding and a full opportunity to

protect their rights and interests and be treated equally.

44. The written offering materials prepared or reviewed by T&K and KLG contained

common statements to the Plaintiff Class, that were made in connection with the sale of

securities that misrepresented the same facts or that omitted to state the same material facts

necessary in order to make the statements made, in the light of the circumstances under which

they were made, not misleading, as described above.

45. Materiality of the omitted facts is a common question because the test is whether

there was a substantial likelihood that a reasonable investor would consider the omitted facts

important. Among other things, the omitted facts pertained to the true nature of the securities

being invested in (i.e., that the investment in a specific property was dependent on the success of

the entire Sunwest enterprise), the financial risks associated with that investment, the terms on

which the mortgage loans could be defaulted, the ability of Harder and Fisher to perform on

guarantees, and other matters described above that were highly material to the risks associated

with these investments.

46. By reason of the foregoing, the Sunwest Enterprise violated ORS 59.115(1) in

connection with the sale of securities to members of the Plaintiff Class pursuant to ORS 59.115

and ORS 59.115(2), Plaintiffs and members of the Plaintiff Class they represent are entitled to

recover the following damages from defendants:

(a) the consideration paid for the security; and,

(b) interest on that amount at the rate of 12% per annum (or the rate specified in the

security, if different) from the date of the investment until paid less any amounts received on the

security.



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47. Plaintiffs and members of the Class they represent are entitled to their reasonable

attorneys' fees incurred herein pursuant to ORS 59.115(10), ORCP 32(M) and Fed.R.Civ.P.

32(h).

48. Plaintiffs and Class Members have lost their investment interests in the Sunwest

Enterprise as a result of the Court’s Orders in SEC v. Sunwest. Plaintiffs and the Class members

may also be required to transfer or assign either the claims made against either defendant herein

to the Receiver appointed in SEC v. Sunwest, or the rights to the proceeds of such claims to a

litigation trust established in that case. As a result of the taking in SEC v. Sunwest, Plaintiffs and

most of the Class members will not be able to tender their securities to defendants. The value of

the securities at the time taken by the Receiver should be determined and defendants should be

given credit against damages in that amount, plus interest at the rate of 9% per annum from the

date received.

WHEREFORE, Plaintiffs, in their individual behalf and on behalf of the Plaintiff Class

they represent, respectfully demand judgment over T&K and KLG, respectively, for equitable

relief, damages and attorneys fees and costs as set forth above.

Plaintiff Class demands a jury trial.

DATED this 4th day of October 2010.

/s/ Michael J. Esler

Michael J. Esler [email protected] John W. Stephens [email protected] Esler Stephens & Buckley 700 Pioneer Tower 888 SW Fifth Avenue

Portland, Oregon 97204





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Phone: (503) 223-1510 Fax: (503) 294-3995

Counsel for Plaintiffs and the Putative Classes

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