"Homesource Partners Inc." Owner Sentenced to 96 Months Prison
$14 Million Investment Fraud Scheme
DENVER – Karen Lynn McClaflin, age 59, of Colorado Springs, Colorado, and owner of “Homesource Partners Inc.” was sentenced today by U.S. District Court Judge Christine M. Arguello to serve 96 months in prison, followed by 3 years of supervised release, restitution in the amount of $14,528,206.39, and a $200 mandatory special assessment, U.S. Attorney Bob Troyer, FBI Special Agent in Charge Calvin Shivers and IRS Criminal Investigation Special Agent in Charge Steven Osborne announced. On June 21, 2017, Ms. McClaflin pled guilty to one count of wire fraud and one count of engaging in a monetary transaction in property derived from wire fraud.
According to the stipulated facts contained in the plea agreement, in December 2005, McClaflin and a partner started Trademark Properties and Trademark Reality (“Trademark”) in Colorado Springs. Trademark’s business was to use investor money to purchase and renovate distressed houses in order to resell those houses at a profit. By 2011, Trademark had accumulated so much debt that McClaflin’s partner declared bankruptcy, and their partnership was terminated. Rather than declare bankruptcy herself, McClaflin transitioned to another company with the same “fix and flip” business model as Trademark.
In late 2010, McClaflin started Homesource Partners Inc. (“Homesource”), and McClaflin rolled many of her investors from Trademark into Homesource. From late 2010 through early March 2017, McClaflin owned and operated Homesource in Colorado Springs, Colorado. In seeking investors for Homesource between March 2011 and early 2017, McClaflin told investors that Homesource was seeking loans from investors to finance Homesource’s “fix and flip” business because Homesource was not able to use traditional bank loans. McClaflin represented that traditional bank loans took too long and some of the distressed homes might not qualify as collateral for such loans.
Through marketing materials and verbal statements, McClaflin told investors that Homesource had access to distressed houses that were deeply discounted, which Homesource could purchase for no more than 80% of the “as is” value of the house. McClaflin further represented that Homesource then had exit strategies to profit from the distressed houses, including selling them within 30 days for an immediate profit, “fixing and flipping” the houses for sale within 31-90 days, or fixing the houses and renting them if the houses failed to sell within 90 days.
McClaflin represented that Homesource had a team of contractors who would fix and upgrade the properties so Homesource could resell the properties for a profit. McClaflin further represented that each property would be financed by an individual investor whose investment would be secured by a Deed of Trust in first position on that property, which McClaflin would record for the investor. Occasionally, McClaflin told the investor their Deed of Trust would be in second position. McClaflin further represented that investors would receive an interest rate of 6% to 15%.
However, starting in late March 2011, McClaflin knowingly and intentionally began having multiple investors “invest” in the same property and began placing multiple Deeds of Trust on the same properties, such that the amount of the investments purporting to be secured by the Deeds of Trust exceeded the value of the property. Additionally, starting in late March or April 2011, McClaflin intentionally did not record all of the investors’ Deeds of Trust as promised. Nonetheless, McClaflin continued to falsely represent that investors would receive a first Deed of Trust and that McClaflin would record that Deed of Trust for the investor. McClaflin also sometimes forged the signature of an investor, without the investor’s knowledge or consent, on a release so McClaflin could remove that investor’s Deed of Trust from a property. McClaflin sometimes did not inform investors when “their” property sold and did not return the investor’s principal upon that sale as promised.
Additionally, starting in at least the beginning of 2013, Homesource’s debt had grown too high and the interest payments owed to investors far exceeded the gross profits earned by Homesource. By at least January 2013, McClaflin was aware of this problem and intentionally continued seeking additional investments so that she could keep making the interest payments owed to earlier investors.
Unbeknownst to the individual investors, the amount of investment funds, which were supposed to be secured by real property, far exceeded the value of the encumbered property and Homesource’s business assets. An analysis of Homesource’s finances shows that the influx of investor funds kept Homesource operating, particularly in its latter years. Without the additional investor funding, Homesource would have failed years earlier.
“For a lot of years, the defendant lied a lot of people out of millions of dollars,” said U.S. Attorney Bob Troyer. “I am proud of the dogged and sophisticated work our prosecution team – including the FBI and IRS CI -- did to put a stop to it.”
"Karen McClaflin took advantage of innocent investors by knowingly and wittingly creating a deceptive home investment scheme for personal gain," said FBI Denver Special Agent in Charge Calvin Shivers. "Investigations of those who commit fraud schemes to mislead innocent investors is a felony and those who do will face the consequences of their actions."
“Financial fraud schemes are often described as a house of cards,” says IRS Criminal Investigation, Denver Field Office, Special Agent In Charge Steven Osborne. “The underlying structure can fall apart at any time and expose the individuals responsible. IRS Criminal Investigation is proud to bring our forensic accounting skills to this joint venture and help put a stop to this and other types of white collar crime."
This case was investigated by the Federal Bureau of Investigation and IRS Criminal Investigation. The defendant is being prosecuted by Assistant U.S. Attorney Pegeen Rhyne with Assistant U.S. Attorney Laura Hurd handling the asset forfeiture.
CASE NUMBER: 17-CR-00168