By David Scheer
Bloomberg News
Thursday, September 6, 2007

The Securities and Exchange Commission, cracking down on scams targeting retirees, sued 26 people and companies for their roles in a $428 million fraud involving Mexican timeshare rentals, the agency said.

The ring duped thousands of people by promising stable income from timeshares in Cancun, the SEC said in the suit filed at federal court in Chicago yesterday. Operators instead used money from new clients to make purported rental payments to earlier investors, leaving victims with more than $310 million in losses when the system collapsed, the SEC said.

The suit "shows that the SEC will vigilantly pursue those who target older Americans, no matter what the obstacles," said Merri Jo Gillette, the SEC's regional director in Chicago. The agency "plans to aggressively seek recovery from the defendants to offset the huge losses they inflicted."

U.S. regulators are stepping up efforts to protect retirees as their share of U.S. wealth makes them "prime targets for scam artists and securities swindlers," the SEC's chairman, Christopher Cox, told a Senate committee yesterday. The effort has generated more than 40 enforcement actions in the past two years, he said.

The SEC's suit focuses on Michael E. Kelly, a former resident of Indiana, who was arrested in December and charged by federal prosecutors with engaging in a scheme to defraud. Kelly orchestrated the scam from 1999 until 2005 with help from a national sales network, the SEC said.

Operators sold investors timeshares in several hotels, which were supposed to be leased through an agent, generating fixed returns, the SEC said. When investors wanted out, the leasing agent would buy back their timeshares for the full amount.

The leasing agent, purported to be a large, independent company, was actually a small Panamanian travel agency controlled by Kelly, the SEC said. Brokers pushing the investments received $72 million in commissions, the agency said.

Kelly has pleaded not guilty in the criminal case, and a jury has not returned an indictment, said Jeffrey Steinback, his attorney in that matter.

"Mr. Kelly is very aware that there are a number of people who have voiced concerns about the losses they feel they have suffered," Steinback said. "Mr. Kelly has directed his attorneys to address the issue of restitution, and we are doing that in the context of the criminal matter."

A lawyer for Kelly in the SEC's case didn't immediately return a phone call seeking comment.