Equity Based Services Owners Admit to Federal Wire-Fraud Conspiracy in Self-Storage Investments

Update 1/11/16 – Howard Kaplan and his two sons were sentenced last week by U.S. District Judge Cathy Ann Bencivengo for their roles in the Equity Based Services (EBS) self-storage wire-fraud conspiracy. Howard Kaplan was sentenced to six months in prison and another six months in home detention. Stephen Kaplan received a year of home detention, and Eric Kaplan received five years of probation, according to the source.

The sentences were less than what federal prosecutors had sought. The government wanted prison time for all three, including 27 months for Howard, 15 months for Stephen and eight months for Eric, according to court records.

Investors affected by the scheme spoke about the Kaplans during court proceedings. Investor Jack London said he believed Howard Kaplan ran a good business for many years before making bad decisions in an effort to save it. Investor Troy Downing disagreed, calling EBS a “predatory organization,” according to the source. “We all take investment risk,” he said. “We don’t expect to be stolen from.”

The size of the fraud is undetermined. Some investors placed the amount at $60 million, but the government conceded that figure wasn’t accurate, the source reported.

3/17/15 – The father and two sons who ran Equity Based Services (EBS), a San Diego-based private real estate company specializing in the acquisition and management of self-storage properties, pleaded guilty this week to federal wire-fraud conspiracy charges. Howard Kaplan, 70, and sons Stephen, 51, and Eric, 43, signed plea agreements and appeared in federal court in front of a handful of investors who complained they had been defrauded, according to the source.

The Kaplans were accused of imposing excessive fees, commingling funds between different storage projects, and raising more money than necessary for acquisitions. At its height, EBS acquired 77 self-storage businesses, marketing them as separate syndication deals to investors. The company promised guaranteed returns of as much as 8 percent, according to court documents.

Although EBS regularly paid returns between 2002 and 2010, Howard Kaplan began shifting funds from some self-storage syndications in 2006 to pay preferred returns promised to investors who had bought into underperforming ventures, the source reported.

Howard Kaplan used fees collected by EBS when a new syndicate was created to pay off investors in pre-existing deals, according to the plea agreements. The Kaplans also admitted to occasionally raising more money than necessary to acquire assets and then using the excess funds to pay investor returns, the source reported.

Eric and Stephen Kaplan became aware of their father’s actions in early 2010 but didn’t disclose the information to investors and continued to sell new self-storage syndicates, according to court records.

The plea agreements indicate Howard Kaplan made $400,000 from the fees, while the sons each pocketed at least $120,000 after they learned what their father was doing. Some investors have argued the loss in principal was much higher, the source reported.

All three Kaplans are scheduled to be sentenced on June 19 in federal court. The wire-fraud charge carries a maximum sentence of five years, but none are expected to receive a maximum term, according to the source.

2/12/14 – Equity Based Services (EBS), a San Diego-based private real estate company specializing in the acquisition and management of self-storage properties, has been accused by some of its investors of mismanagement and fraud, according to a report by “The San Diego Union-Tribune.” EBS, along with chairman Howard Kaplan and his son Stephen Kaplan, CEO, have been named in several lawsuits during the last few years, alleging excessive fees, commingled funds between different storage projects and the raising of more money than necessary for acquisitions.

Some investors have accused EBS of being set up like a Ponzi scheme, alleging the excess capital was used to pay off investors involved in other projects who were told they would receive a preferred rate of return, according to the report.

Several suits have been settled out of court, some with confidentiality agreements prohibiting plaintiffs from speaking about their settlements, the Union-Tribune reported. Former investor Scott Rogers filed suit in 2010 alleging fraud and telling prosecutors he believed investor losses could exceed $100 million. Rogers and his family reportedly invested $5 million and lost 80 percent of it. He reached a confidential settlement, according to the source.

Attorney Michael Lipman, who represents both Kaplans, told the Union-Tribune the complaints were from a small group of disgruntled investors who are trying to gain control of EBS. According to Lipman, EBS is not a Ponzi scheme because the money was invested in actual businesses.

The company’s self-storage portfolio did well for investors until the real estate collapse and Great Recession, Lipman said, adding that excess capital raised was used to cover costs beyond the purchase price and was disclosed in investment documents. “All fees were disclosed up front,” he said. “And that’s what the money was used for.”

EBS began acquiring self-storage properties in 1995, reaching a height of about 70 facilities in a dozen states operating as American Mini Storage. The Kaplans would like to create a publicly traded real estate investment trust with the remaining properties that would give investors company shares in exchange for their existing interests, but struggle for control of the company has delayed that plan, Lipman said.