Updated: June 8, 2013 6:22AM
CHICAGO — Two Dundee Township men along with two others from Joliet and Chicago have been sentenced to federal prison terms after admitting that their real estate investment business turned into a Ponzi scheme that defrauded 267 investors of more than $18 million.
According to court records, Michael Morawski, 56, of Sleepy Hollow was sentenced to 10 years in prison and Frank Constant, 59, of West Dundee, was sentenced to 7½ years. Both also were ordered to repay the almost 300 victims.
Morawski pleaded guilty to two counts of mail fraud in September 2012. Last Tuesday, he was sentenced to 10 years in prison by U.S. District Judge Gary Feinerman.
Constant pleaded guilty to one count of wire fraud and was sentenced to 90 months in prison by Judge Feinerman on Thursday.
Both men were ordered to pay $18,211,547 in restitution and to begin serving their sentences on July 15.
Between 2006 and 2010, Morawski and Constant obtained about $21 million and caused 267 investors to lose more than $18 million. After forming a real estate investment company named Michael Franks LLC in Palatine, and several related businesses, they misused the money they raised for their own benefit and to make Ponzi-type payments to earlier investors.
Prosecutors said Michael Franks offered investors passive ownership in multi-family residential properties, including apartment buildings in Illinois, Texas and Alabama.
Morawski and Constant offered two types of investments to the public, according to the government.
One was an investment in acquiring, improving and operating specific apartment complexes for three to five years, for which investors typically were told they would earn between 7 and 9 percent interest annually, and potentially more upon the sale of the property. The second was an investment in real estate-based “funds” that would provide an interest in various properties backed by promissory notes, often offering an annual interest payment of between 8 and 30 percent per year.
Prosecutors said certain real estate projects undertaken by Michael Franks performed poorly and failed to generate enough revenue to meet operating expenses. So the defendants began transferring funds from various investments to support poorly performing projects and to pay earlier investors, without disclosing this information.
At the same time, they misused investor funds to pay employees to make commission payments to individuals who raised new funds, and to pay themselves, as well as to make payments for Constant’s company car and country club payments, and to extend loans to friends of Morawski, who pocketed nearly $1 million for himself.
“Mr. Morawski must be punished for the lies and fraud he perpetrated and the way in which he conducted business when it became clear that things were not going well,” Feinerman said. “At the time when people get into situations when businesses go south, it is at that time there has to be the most deterrence.”
In sentencing Constant, the judge said: “The sentence should send a signal to people in positions of trust that truth has to be told in good time and bad. It’s important to investors to know when thing go well, but what Constant did was deprive the investors of full information to make an informed choice.”
The government was represented by Assistant U.S. Attorney Sunil Harjani. The investigation was conducted by the FBI.