Center Point Group’s Vast Ponzi Scheme
13 December, 2012
Center Point Group’s Vast Ponzi Scheme
Center Point Group, the largest Georgian developer company, that mishandled USD 310 million, leaving 6200 families without promised apartments or reimbursement through an intricate financial pyramid largely known as a ‘Ponzi scheme’ by 2010, seems to be taken to responsibility as the power changed in the country.
Transparency International Georgia (TI Georgia), a non-governmental watchdog, has documented Georgia’s largest construction scandal involving former officials and their company Center Point Group (CPG) who mishandled with the money of nearly 6200 customers
paid for the construction of new houses. The status and connections in the former government of the United National Movement (UNM) raise concerns that these UNM connections helped the founders of CPG avoid personal liability for the damages inflicted on their customers.
CPG is a conglomeration of 70 companies, 55 Limited Liability Companies (LLC) and 15 individual partnerships, owned by the three well-known people in Georgia been close relatives at the same time: spouses Vakhtang and Maia Rchuelishvili, and Rusudan Kervalishvili – a sister of Maia Rchulishvili. Vakhtang Rcheulishvili and Rusudan Kervalishvili were MPs in parliaments of 1998 to 2004 and within 2008-2012 respectively. Both ran the office of Deputy Chairperson of Parliament. High level connections and lofty financial contributions made in the National’s party purse accruing to GEL 900 thousand during parliamentary and presidential elections of 2007-2008 are believed to be a reason ex-power turned a blind eye to outrageous Ponzi financial pyramid CPG has been practicing since 2007 up to this day without punishment: building houses for initial investors by funds of subsequent investors that means to pay for the ever-increasing deficit.
The enticing commercials at all national TV channels touting people to buy the to-be-built apartments at the largest developer in Georgia in flexible timetables of installment payment did a blinding effect and a lot of people rushed on the chance without prior perusal of contracts with lawyers. As a result often these people did not know that the contract was concluded with one of the CPG companies, with equity capital of GEL 200 rather than with the Group as a whole backed by its founders’ assets worth of millions of dollars.
This in practice meant that in case of any breach of the contract the CPG was beyond responsibilities and individual construction companies would have the legal liability to compensate their customers.
Soon, however, the Ponzi bubble burst and CPG became insolvent. As a result, 30 construction projects were suspended and thousands of people left empty-handed: neither apartments nor compensations were provided.
Dexus, a management company hired by CPG in fall of 2010 to solve the crisis and complete suspended projects in three years, turned out a follow up of the cheating scheme. It only worsened the initial conditions for the affected contractors and completed only eights projects out of 30 ultimately and is now implementing seven more projects. In addition, Dexus became involved in an allegedly illicit deal through which the founders of the CPG claimed a valuable property of the affected customers.
The most confusing terms offered by Dexus that bewildered customers was to add on the already cleared price the allegedly missing 18% of Value Added Tax (VAT) of the total cost of the contracted apartments as well as extra USD 100-150 per square meter. Otherwise Dexsus waives obligations to complete the projects, Merab Gabuchia, one of the sufferers of the Ponzi scheme, said in the interview to Georgian Journal.
That means to Gabuchia who paid USD 75 thousand completely fixed for a 134 square meter apartment bound to be completed by December of 2007 at prestigious district of Krtsanisi alley in Tbilisi, to add extra USD 27 thousand to get the long-awaited dwelling space but not in Krtsanisi as the contract states but at other less prestigious street in a barrack-style house where the market price is by approximately USD 360 lower per square meter than in Krtsanisi project.
“I have already faced about 30% of losses due to currency devaluation for the USD 75 thousand I paid in 2007 equals to USD 110-120 thousand today. And Dexsus has a cheek now to ask for adding extra money for a barrack that may not be built at all as Dexsus office term expires next September,” Gabuchia said.
As a result, he together with his 30 fellow-sufferers from Krtsanisi project filed a lawsuit at Prosecutors’ Office two weeks ago demanding from the contractor company either return the paid money back or do build the promised housing.
According to TI Georgia, dozens of other affected families lodged claims to the Court with similar requests but to no avail: the Court has partly approved the claims by obliging the responsible CPG companies to finish the construction projects or compensate them adequately but acknowledged the financial problems of the questioned companies and deferred the execution of the court decisions.
Beka Badrishvili, a lawyer of about 60 CPG affected customers, doubts that all the victims will get their money back as far as the contractor companies are simply insolvent. According to him, the only chance is to prove the criminal activity of the CPG founders through the Prosecutors’ office investigation that creates legal ground to ask compensations from Rcheulishvili-Kervalishvili’s assets.
“However the liabilities are so big and numbers of victims so large that even their property can be not sufficient to pay arrears completely,” Badrishvili said.
But the ex-power-controlled Prosecutor’s Office did not start investigation when claims against CPG were filed and sent then to civil court as non-criminal while civil court cannot require investigation leading to top cheaters.
“Prosecutors’ office did not take an interest in CPG case despite the strong evidences of corruption and embezzlement as well as high public interest - there were plenty of rallies and actions of affected customers,” Lasha Gogidze, a researcher-analyst at TI Georgia, told GJ. “CPG is the largest construction scandal involving former senior public officials.
On the other hand, TI Georgia found out that the Prosecutors’ office handled with another much less-scale case of unfulfilled construction obligations [the company name is confidential] and sentenced the culprit entrepreneur to 10 years of imprisonment for embezzlement GEL 800 thousand of 27 customers and deprived the person of the right to have a business while the convicted also cited Georgia-Russia war of 2008 as the main reason for the failure.
Prosecutors’ office of new government decided to set a special working group to research the CPG case and whether or not it will shuffle the Ponzi schemers is a matter of near future.
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