Parent of The Falls Event Center files for bankruptcy

Parent of The Falls Event Center files for bankruptcy

The parent company behind Gilbert’s The Falls Event Center has filed for bankruptcy and recently settled with the SEC over allegations that its former CEO defrauded investors.

The Falls Event Center LLC filed for Chapter 11 bankruptcy protection on July 11 in U.S. Bankruptcy Court for the District of Utah.

The Utah-based company operates eight event centers in five states and plans to continue operations while it restructures the organization, according to a statement released by the company.

It is unclear how the bankruptcy will affect The Falls Event Center in Gilbert. The facility, located at 4635 E. Baseline Road, along the Mesa-Gilbert border, hosts corporate and personal events.

The parent company, which court documents revealed had planned at one point to expand to 200 locations by 2022, will reposition undeveloped properties and assets “that do not currently contribute enterprise value,” according to the statement.

There is no mention of which assets that refers to.

The bankruptcy filing revealed that several of the company’s unsecured investors are Arizona residents, including seven that live in Gilbert, Chandler, Mesa and Tempe.

One of the company’s top 20 largest unsecured creditors, a Tempe resident, has a claim over $2 million.

The bankruptcy comes on the heels of a Securities and Exchange Commission investigation into The Falls and former CEO Steven Down for allegedly misleading investors about the profitability of the company’s event centers.

The company brought in Brooks Pickering in June to assess the company’s situation and he recently took over as CEO.

The day before The Falls filed for bankruptcy, the company and Down settled with the SEC without admitting or denying the allegations. The settlement prohibits the company from violating the Securities Act of 1933 by using false or misleading information to sell securities.

Down must also pay a civil penalty of $150,000.

According to the SEC, “Since 2011, The Falls and Down raised approximately $120 million from more than 300 investors from the offer and sale of, among other things, convertible secured promissory notes.”

The SEC complaint alleges that Down solicited investments from attendees at education seminars for dentists that he sponsored. At the events, Down told potential investors that most or all of The Falls event center locations were profitable.

However, the SEC contended this was a false claim.

The SEC alleged that Down used internal modified profit-and-loss statements based on bookings in his presentations rather than industry-standard statements generated by the company’s QuickBooks accounting software.

“The Falls’ own accounting records indicate that, from inception through September 2017, the event centers have never been profitable on the basis of generally accepted accounting principles (“GAAP”),” reads the complaint.

According to the SEC, Down told investors that each center would bring in $1 million in gross earnings annually and produce 35 percent profit.

The bankruptcy filing also sheds some light on the parent company’s precarious financial situation.

In addition to being told by the company’s CFO to stop telling potential investors that event centers were making a profit, Down was also warned by his executive team that The Falls business model was unsustainable due to large mortgage debts incurred by the company, according to the complaint.

The complaint further states that the company financed the purchase and construction of its centers through hard money loans from private investors with interest rates between 10 and 14 percent “because it was not able to obtain traditional bank financing at lower interest rates.”

The principal amount of the loans was $33.5 million as of September 2017, according to the SEC.

(6) comments

begmar21

@Truth13 - I've been looking at the docket for this case, but I honestly have no clue what any of it means. Can you explain any of it?

Truth13

Good summary article on the situation. Steve Down and The Falls Event Center (TFEC) actually settled with SEC on May 11, 2017 in court and Down agreed to it in December of 2017. Steve has to pay the $150,000 fine starting with $50,000 first payment in August of 2017 and it is unclear if Down has the ability to pay the fine personally as required by the SEC. TFEC bankruptcy was filled in July of 2017 and according to Mr. Pickering TFEC would have had to close it's doors that day without the filing (TFEC could not met payroll and other basic bills) In addition, in May of 2018 Steve Down personally, according to the bankruptcy fillings, sold forward most of this years gross revenues (almost $2 million) of not only TFEC but also Even Steven for $1.3 million in cash and it is unclear where the cash went (investors where not told at the time). Also according to Mr. Pickering all the future deposit for events at TFEC have been spend and all deposits are assets of the company which means if TFEC is converted to a chapter 7 - liquidation, all deposits are likely lost. While Mr Pickering states that the centers are cash flow positive (same as Down told his investors) that is not the findings of the SEC and my guess does not include the payment of Property taxes which are severally past due allow with other payments (there are millions in past due property taxes- look at county records). In bankruptcy court they only received enough money through August 1st and did not get funds for some past due obligations and payroll taxes. The majority of TFEC, about 50% comes from the Water Park in Oregon and most of the cash disappears in September when the Water Park reduces hours for the school year. If creditors and shareholders, especially the factoring companies, file objections by July 30th it is likely that the bankruptcy will be converted to a chapter 7, liquidation and Mr Pickering will likely be replace by someone that represents creditors not Steve Downs management that has remained in place collecting paychecks. Bottom line is people depositing money for future and current events need to be aware there is a good change they will lose all their money if converted to chapter 7 liquidation which in my opinion is very likely. Complicating this is that Downs other companies such as Even Steven, Financially Fit and Steve's Hotels appear to be hemorrhaging cash and are cross collateralize with debt and equity with TFEC. As you may be aware Even Stevens was locked out of a site last week in Tuscon AZ. Without an infusion of cash, investors in Even Stevens have been told it will also close its doors. The house of cards is likely to fall quickly so people making deposits need to be aware the real risk of TFEC closing it doors within week. It is not a pretty situation.

begmar21

@Truth13...When and how can someone find out if the bankruptcy is converted to Chapter 7?

Truth13

The U.S Bankruptcy Court has an online system called Pacer where you can follow each individual case and see all the filings(This is case #2:18-bk-25116). You can see the basics online, but to see the details you need to create an account (you need to use a credit card for this but the cost is very low). With this you can see all the filings and listen to the audios of the court hearings. Right now TFEC has been given access to limited cash until August 1st when they have another hearing on if they get access to more cash and to hear from any creditors that may object ( TFEC was also given enough money at the first hearing to put each individual center in bankruptcy so expect new cases - however, the Elk Grove center in US California Bankruptcy Court was dismissed because it was not a viable company - not a good sign for the whole). The creditors have until July 30th to object this go round and my guess they will on that day (all of this is on the Audio). The first hearing is generally friendly but should be more lively at the next one when the creditors have their chance and as the US Trustee is brought up to speed on the information and by the team of SEC and FBI agents who have been actively investigating The Down Companies. The Pacer System will tell you when it is converted to a Chapter 7 - full liquidation. The majority of chapter 11 reorganization fail and are converted to 7's . Combine this with the fraud and the cross collateral with the other cash starved companies like Even Stevens, Financially fit and Steves Hotel chapter 7 is just a matter of time in my opinion.

begmar21

Thank you for that information. We have an upcoming event and are worried it may not happen due to this bankruptcy.

begmar21

@Truth13 - I've been looking at the docket for this case, but I honestly have no clue what any of it means. Can you explain any of it?

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