Local magnates squabble over ventures gone bad

• Part II: No place near Showplace

By Stuart R. Wahlin

Staff Writer

While Joseph James Partners (JJP), LLC, formed by brothers Matthew and Peter Provenzano, have found themselves on the defensive in one lawsuit (see “Part I: Bad blood in the old Gas & Electric Building” in the Aug. 26-Sept. 1, 2009, issue), they also stand as accusers in what appears to be an indirect counter suit for a separate development deal with the principals of The Buckley Companies, Paul S. Nicolosi and Gino Galluzzo.

In April, JJP filed a lawsuit against Nicolosi and Galluzzo, as well as their companies MF Cherry Valley Investors, LLC, Desert Creek Capital, LLC, Ganic, LLC and Nicolosi & Associates, LLC.

In December 2006, Nicolosi allegedly provided a private placement memorandum, subscription agreement and sample LLC operating agreement to prospective investors for a nearly 240-unit apartment complex on 29.5 acres, just east of Showplace 16, 8301 E. State St.

According to investor meeting minutes, the planned development consisted of 59 four-unit buildings. The minutes note no fire suppression is required for four-unit buildings, which would save the group money on construction costs.

Based on the significant net worth of its principals, JJP was among those solicited to invest. In April 2007, Nicolosi & Associates sent a letter requesting $105,004 from JJP for a 35 percent share in MF Cherry Valley Investors.

The letter represented Buckley Capital as investing $3,000 for the project, Michele Galluzzo for $90,000, and Ganic for $102,004. According to the lawsuit, JJP signed the subscription agreement and provided its $105,004. An operating agreement had yet to be signed, however, and the complaint states JJP never received any updates or additional information from MF Cherry Valley Investors.

The falling-out begins

Meantime, a lawsuit against JJP, relating to an alleged partnership freeze-out (see Part I), had been filed in August 2007, allegedly causing the parties to have even less contact, except through attorneys.

By early 2008, the complaint continues, an attorney for JJP started pushing for a status report and an operating agreement—at least six times, according to the complaint—but inquiries were allegedly not answered.

In May 2008, JJP received a notice regarding a meeting of the investors, but JJP did not attend, reportedly because there was still no operating agreement. After later reviewing the minutes from the investors’ meeting, JJP alleged its entire investment had been spent before any operating agreement had been put into place, and that The Buckley Companies had allegedly paid itself a $60,000 “development fee.”

JJP made notice to Nicolosi and Galluzzo May 21, 2008, it no longer wanted to be part of the development. The notice of rescission ordered the return of JJP’s $105,004 investment, leaving the remaining partners to pick up the slack. According to the minutes, none was eager to do so, and JJP received no offer to repurchase its 35 percent share in the venture.

According to the private placement memo, Nicolosi and Galluzzo’s companies were to provide architectural, development, construction, real estate brokerage, title and legal services for the group, and investors were to receive an investment summary annually. It was also outlined investors would need the consent of the manager to sell their interest.

Although JJP insisted there was no partnership, the minutes state, the remaining investors discussed terminating the contract with the property owner, Auxxi & Associates, Inc., and to take action to dissolve the partnership.

“The members acknowledged and understood that the earnest money would be forfeited to the seller, and that all contributed capital invested to date would be lost,” the minutes note.

According to the lawsuit, Desert Creek Capital—not MF Cherry Valley Investors—was party to the contract to purchase the real estate.

Nicolosi explained Desert Creek had entered into the contract to purchase land in anticipation of the MF Cherry Valley project.

Investment forfeited, JJP

alleges no other investors

Per the terms of the contract with Auxxi, Desert Creek was required to pay $130,000, regardless of whether the property sale was ever completed.

March 30, 2007, however, marked the end of the due diligence period during which earnest money could be returned to investors. JJP alleges, “Defendants did not disclose in their April 4 solicitation that the earnest money irrevocably belonged to the seller.

“If Joseph James had been informed that its contribution would be the only one, that MF Cherry Valley Investors, LLC had no rights in the underlying real estate, that $65,000 of the ‘capital call’ was already forfeited to the contract seller, all due diligence periods had expired, and that it would loan Nicolosi’s construction company money, Joseph James would never have purchased an interest in MF Cherry Valley Investors, LLC.”

But the defense responded, “The plaintiff’s own involvement in the development of the property in question belies the plaintiff’s feigned ignorance.”

Meantime, JJP had subpoenaed MF Cherry Valley Investors’ bank records.

The complaint alleges: “The Cherry Valley Investors bank records revealed that Joseph James was the only investor that had responded to the solicitation for a share of $300,000 (there was another deposit for $25,000 in the bank account which is unexplained) and found that all of its money had been spent within two months. Its money was paid to Paul Nicolosi and his controlled entities, including a $60,000 loan for operating expenses to The Buckley Companies. This was the first it knew of the many misrepresentations and omissions of the defendants.

“Buckley Companies paid itself and its architectural firm $41,515.75 two days after it got the money, and paid Nicolosi & Associates $7,801.85 the same day,” the plaintiffs also alleged.

“The Buckley Companies, LLC and/or its related entities…received $344,265 of the $376,247.90 deposited into MF Cherry Valley Investors, LLC’s bank account,” the complaint continues. “The Buckley Companies paid itself a $60,000 development fee when no development improvement ever occurred.”

Nicolosi, however, cited the $376,247.90 in deposits as alleged proof of other investors.

The lawsuit refers to the investors’ meeting as “an alleged meeting of the members of the never-formed LLC at which a table of contributions and expenses was set out, allegedly demonstrating that the LLC had no money.”

Defendants accused of fraud

Count I of the lawsuit alleges securities fraud on the basis that Nicolosi and Galluzzo, through their companies Buckley Capital and Nicolosi & Associates, are in the business of selling securities as defined by law. The complaint alleges the defendants violated the Illinois Securities Act by way of alleged misrepresentations and omissions.

Count II alleges fraud perpetrated by Nicolosi, Desert Creek and Ganic, a combination of the names Galluzzo and Nicolosi.

The lawsuit seeks to secure the return of JJP’s investment, plus interest and legal costs, “and a sum of punitive damages designed to punish Defendants for their wrongful acts, and to dissuade them from ever doing anything similar again.”

An affidavit by Matthew Provenzano, who declined an interview for this series, noted that contact with MF Cherry Valley Investors representatives had been extremely limited, even before the filing of the lawsuit profiled in last week’s issue.

“After the lawsuits, there was no contact, except for requests by Joseph James counsel for information about the Cherry Valley investments, to which the defendants never responded,” Provenzano stated. “It is very important in the real estate development business to know the status of any negotiations for a particular piece of property.

“I did not know,” Provenzano added, “when we were asked to make a $105,000 contribution, that the underlying contract had ‘gone hard,’ and that there was to be an inevitable loss of $130,000 no matter what happened. I would not have made an investment under those circumstances. I did not know the earnest money had gone hard before April 4, 2007, until it was revealed over a year later.”

In a motion to dismiss both counts, it was argued attorneys—like Nicolosi and Galluzzo—are not subject to the state’s securities act, or the claim of fraud, and that JJP actively participated in the management and control of the LLC, despite Provenzano’s assertion to the contrary.

“Matthew Provenzano…acted on behalf of Joseph James Partners, and actively participated in the management and control of MF Cherry Valley Investors, LLC, particularly with regard to financing and feasibility of the venture,” Nicolosi argued. “Mr. Provenzano…was intimately involved in the planning and contracting for the development project to be undertaken.”

In a response to the motion for dismissal, the plaintiffs alleged Nicolosi was not acting in his capacity as an attorney, but as an MF Cherry Valley principal. According to the private placement memo, JJP alleges, Nicolosi and Galluzzo were to have a 34 percent ownership share.

“Paul Nicolosi and his law firm were acting as at least sales persons, if not dealers, solicitors, or the controlling person,” stated the response. “It is clear that Mr. Nicolosi is acting as businessman, and not as a lawyer in this transaction.”

The defense, however, alleged, “Neither Paul Nicolosi nor Gino Galluzzo, directly or indirectly, have the requisite ownership interest in defendant MF Cherry Valley…to qualify as controlling persons.”

In his affidavit, Nicolosi acknowledged ownership interest in Desert Creek (also known as Buckley Capital), Ganic and Nicolosi & Associates, but described his stake in MF Cherry Valley as minority interest as a member of Desert Creek, which represented a 1 percent share in the venture.

“At no time did I personally own or control 25 percent of the membership interest of MF Cherry Valley Investors, LLC, nor did I own or control sufficient interest in said company to enable me to elect a majority of the board of such company,” Nicolosi stated, asserting the same applies to Galluzzo.

He also noted the private placement memo specifically stated interests being offered were not to be considered securities.

JJP’s response to the motion alleged the private placement memo noted investors would have no role in operations or decision-making, and that Buckley Capital was to be the sole manager of MF Cherry Valley. The response also alleges Nicolosi and Galluzzo, owners of Buckley Capital, were to be members of MF Cherry Valley Investors.

“None of the money paid the payables listed in the April 4 letter. Thus, of the ‘capital call,’ almost half of the money was loaned to the principals’ affiliated company,” plaintiff documents allege. “It is naïve to say that Paul Nicolosi has no personal liability. He is the principal of all the organizations, this entity, which never got fully formed with an operating agreement, who received by himself or through his companies, almost all the money that passed through the Cherry Valley Investors bank account, and orchestrated all the events.”

The defense’s motion to dismiss Count II argues there is no evidence of fraud, and strongly disagrees with Provenzano’s assertion JJP was the sole investor. The motion points to bank deposits as proof of other investors, who allegedly contributed $235,847.90.

Additionally, the defense noted, the subscription agreement stated the LLC would not be registered under the Illinois Securities Act.

The motion added that earnest money “always bears a risk of being non-refundable, and the risk of losing money in participating in this venture was disclosed in the documents provided to plaintiff.”

Nicolosi asserted Desert Creek paid half of the earnest money, and that, “No representation was made to any party that said funds, or any other contribution, would be refundable.”

Litigation in the case is ongoing.

From the September 2-8, 2009 issue