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.