Welcome to the Tuesday Slot with Irene Parker, as this is breaking news and an important story, we go straight into her article and will catch up with Europe in Wednesdays publication.
Class Action Lawsuit Filed Against Diamond Resorts
This action alleges Defendant’s sold unregistered securities in violation of the Securities Act of 1933 that requires that any securities sold in the United States be registered with the United States Securities and Exchange Commission
Factual Allegations of False Representations
(i) DRI points appreciate in value
(ii) DRI points can be readily sold
(iii) DRI points are a hedge against inflation
(iv) DRI points constitute an appreciating asset that DRI members can pass along to heirs.
By Irene Parker
February 13, 2018
A class action lawsuit has been filed against Diamond Resorts. It’s not easy to make your way through a 43 page complaint, so after I digested it, I cut and pasted the complaint so I can understand it.
Inside Timeshare has received 292 Diamond Resorts complaints, 48 since the first of the year. Diamond has implemented a Diamond Resorts Consumer Advocacy Department to address member concerns, and has implemented a CLARITY™ program designed to promote “transparency, accountability, and respect for the customer.” Attorney General Mark Brnovich issued Diamond an Assurance of Discontinuance in 2017 after his office received hundreds of complaints from Diamond members accusing the company of violating the Arizona Consumer Fraud Act. The company did not admit wrongdoing.
To follow the progress of the case, Diamond members or industry observers are encouraged to join our member sponsored Diamond Resorts Owners Advocacy Facebook established February 17, 2017.
Case 2:18-cv-00247 filed February 9, 2018 in United States District Court, District of Nevada
Wolf Haldenstein Adler Freeman & Herz LLP
Albright, Stoddard Warnick & Albright
Plaintiffs: Joseph M Dropp, Mary E Dropp, Robert Levine, Susan Levine, and Kaarina Pakka, Individually and on Behalf of All others similarly situated
Diamond Resorts International, Inc.;
Diamond Resorts Holdings, LLC;
Diamond Resorts Corporation;
Diamond Resorts International Club, Inc., a/k/a “THE Club” Operating Company
Diamond Resorts U.S. Collection Development, LLC;
Diamond Resorts U.S. Collection Members Association
Diamond Resorts Hawaii Collection Development, LLC
Diamond Resorts Hawaii Collection Members Association
Apollo Management VIII, L.P.,
Apollo Global Management, LLC
Excerpts from the complaint:
The lawsuit alleges almost none of the Class members are aware that they have purchased an unregistered security under the Security Act of 1933.
- The arbitration clause does not apply
The entire Agreement – including the arbitration clause – is void and unenforceable under federal securities law. 10
Class Action Allegations
Common questions of law and fact include, without limitation, the following:
- Whether the points in a U.S. Collection Members Association, the Hawaii Collection and/or THE Club constitute securities under the Securities Act;
- Whether DRI violated the registration provision of the Securities Act;
- Whether a common practice of DRI employees and/or agents to potential investors was to make representations that “points” are investments that will appreciate in value due to the efforts of DRI as set forth herein; and
- The nature of relief that may be granted to Plaintiffs and the Class under the Securities Act.
Similarly situated persons:
All persons who purchased “points in THE Club and membership in a Diamond Resorts U.S. Collection Members Association or in the Diamond Resorts Hawaii Collection Members Association on or after three years prior to date filing of this complaint. Excluded from the Class are Defendants and any of their affiliate’s current and former employees, officers and directors.
- A “Pricing History and Location Growth for DRI” shows how the DRI points have increased and will increase in value over time. A recent version states that between January 26, 2013 and January 1, 2017, DRI points in the U.S. Collection: “15% Price per point increase in less than three years” with an “average” increase of 25%. Finally, the document states that points purchased “today” at $8.61 per point will be “worth” $10.76 per point in one year, and $13.45 in two years.
9. The Securities Act, passed in response to the stock market crash of 1929, was caused in part by issuers selling stock or other investments based on false representations, without disclosure of material information, and/or without and continuing reporting obligations.
10. Defendants are selling purchasers investment contracts, and hence securities, even if they are not explicitly described as such and even though the written contracts contradict in part the promises of the sales pitch.
The Dropp Plaintiffs, New York residents, were initially owners of an unrelated timeshare purchased in Virginia Beach, Virginia and Kill Devil, North Carolina, through Gold Key Resort, subsequently acquired by Diamond Resorts on or about August 4, 2016. At an “update meeting” the Dropps were told that failure to purchase DRI points would render the Dropp’s existing timeshare membership useless or worthless. The Dropp’s purchased points:
8,500 U.S. Collection points purchased for $25,710 in Virginia August 6, 2016
A few hours after this purchase, they received a phone call from DRI insisting they were required to schedule an “orientation” with DRI that would take place in Las Vegas.
50,000 additional U.S. Collection points purchased for $140,000 in Las Vegas November 9, 2016
According to the complaint, a DRI salesperson took Plaintiffs to a private office, and made, inter alia (among other things), the following representations if they purchased DRI points:
- He described DRI points as an investment.
- He stated the Dropps would own an interest in real property.
- He said that these additional points in DRI, plus the 8,500 points already owned, would be worth approximately $700,000 of “equity.”
- He said that the value of the points would increase over time due to the improvements and updates that DRI continuously made to their properties.
- He indicated that the points (and the “properties”) should be added to the the Dropp’s wills and could be bequeathed to their children and grandchildren.
- He stated that the points could be sold for a profit in the future.
- He informed the Dropps that they could use their DRI credit card for purchases and earn (wholly separate) points, which could be applied to their maintenance fees. Contrary to the DRI salesperson’s representations, in no way do purchases made on the DRI credit card offset or absolve the Dropp’s obligation to pay their annual maintenance fees.
The Levine Plaintiffs, California residents
The Levines had acquired 35,000 US Collection points by 2016.
Purchased 35,000 Hawaii Collection points for $84,650 in Kona, Hawaii October 25, 2016
A DRI sales agent represented to the Levine Plaintiffs that:
- They should convert all of Susan Levine’s points in the U.S. Collection to the Hawaii Collection because points in the Hawaii Collection would appreciate faster than points in the U.S. Collection due to the fact that there is limited real estate in Hawaii, causing real estate values to continue to rise.
- Their points could be passed down to heirs and heirs could sell points at a profit.
- They would have to purchase more points to convert their U.S. Collection points to Hawaii Collection points.
- If they purchased points in the Hawaii Collection immediately, they would purchase at a “low price” because the price per point was steadily increasing.
Purchased 25,000 U.S. Collection points for $71,250 in Miami May 11, 2017
A DRI sales agent represented to them:
- Points in the U.S. Collection are actually more valuable than points in the Hawaii Collection because the U.S. Collection requires the payment of lower maintenance fees.
- Points purchased in the U.S. Collection are steadily increasing in value and could be sold at a profit in the future.
- However, in order to convert their points in the Hawaii Collection to points in the U.S. Collection, they would need to purchase additional points in the U.S. Collection.
Purchased 50,000 U.S. Collection points for $144,000 in Las Vegas at Polo Towers July 11, 2017
A DRI sales agent represented to them:
- DRI was implementing a new “Legacy Program” designed to operate as an estate planning device beginning January 2018. Through the Legacy Program, DRI itself would sell up to 20,000 of the Levine’s points at a price of $8.79 per point, generating a total sale price of $176,000, minus an estimated escrow fee. The profit would be passed along to the Levines, and they would not have to do anything other than contact DRI to commence the selling of points. However, in order to participate in the Legacy Program, the Levines would have to purchase 50,000 additional appoints in the U.S. Collection.
- If the Levines or their heirs wished to sell all of their points in the future, DRI would “handle” the sale and sell the points at a price of $8.79 per point for a total amount of $1,230,000 minus closing costs.
- Additionally, if the Levines purchased 50,000 additional points in the U.S. Collections that day, they could covert up to 80,000 of the DRI points to a credit on this Diamond credit card and could use that credit to pay their annual maintenance fees.
- Again, the Levines were told that prices per point in the U.S. Collection were constantly increasing and they had to purchase points that day in order to reap the benefits of this investment.
When the Levines attempted to sell points, they were informed that no such program existed, and that DRI would not make any attempts to sell points. In addition, no program existed by which the Levines could convert some of their points to a credit card and sue that credit to pay their maintenance fees.
The Pakka Plaintiff, original Sunterra owners, converted to 30,000 U.S. Collection points.
Purchased 50,000 Hawaii points for $175,356 in Maui on November 16, 2016
A DRI salesperson represented to Plaintiff Pakka that:
- DRI points were an “investment” that would increase in value over time. Plaintiff Pakka was provided with a “Pricing History and Location Growth for Diamond Resorts International” document which projects how much value the points will gain over time.
- The value of her points “can only go up.”
- She would have “no problem” selling her points.
- Diamond is in the business of selling “points”, which are marketed to prospective purchasers as an investment which will appreciate in value and can be easily resold. Diamond sells points to new point purchasers, as well as existing owners, in person, at sales centers in several Diamond resorts throughout the United States.
- Prior to the 60 to 90 minutes sales presentation, no contract or other official DRI document describing the terms of the point investment is provided to the prospective purchasers until the time of closing.
- Vacation counselors’ sales presentation exceed 90 minutes and often last five to six hours in length or longer. Moreover, DRI tells prospective purchasers that they will forfeit their benefits if they leave the sales presentation before the respective sales people agree that the presentation is over. Prospective purchaser are not permitted to take any contract, information sheets, Purchase and Security Agreements, Credit Sales Contracts, notes, or other written materials with them off premises prior to closing, nor are prospective purchasers given time to consult with their own advisors, attorney, or any other person during the sales presentation.
- DRI pitches its points as an investment that will appreciate in value due to continuing improvements made by Diamond in the quality and number of its resort and hotel properties, the general appreciation of real estate in the future and the managerial skill that DRI provides in operating the properties. The unwitting targets are told that by purchasing points “now” the purchasers will receive a discounted purchase price that is only available on the day of the sales presentation; they are investing in their future; their points will increase in value; they can use points to pay annual maintenance fees, they can bequeath the points to their heirs as an inheritance and they can sell their points – at a profit – at any time. Thus, these points are actually investment contracts and therefore securities, under the United States securities laws.
- Once the purchasers agrees to purchase points, they are individually shepherded to a sales center “quality control” person, whose job it is to obtain the purchaser’s signature on a lengthy, densely worded sales contract (the PSA) and to instruct the purchaser to initial numerous items on a lengthy information sheet. (Often the initials are generated electronically by the sales people for the purchasers’ “convenience”). The closing documents contradict parts of what the prospective purchasers are told and/or shown during the sales presentations.
- Points can cost hundreds of thousands of dollars, and the purchases are often financed by DRI at credit card interest rates. Maintenance fees have risen at a rate far higher and faster than ordinary inflation despite the economies of scale that DRI has in place to manage its properties. Existing point purchasers are often induced to purchase additional points in order to reach “preferred” thresholds. DRI tells these point purchaser or members that if they buy more points, the DRI member will no longer be required to pay “maintenance” fees. By way of example, DRI investors are told that by becoming platinum members (50,000 point owners) the investors may redeem their points at the rate of 30 cents each to pay for maintenance fees. Since maintenance fees are currently approximately 18 cents each, the DRI investor is told that he or she can actually profit “off the spread” by purchasing more points. However, when DRI investors try to redeem points, they discover that there is no such program in place.
- Sales pitches regarding the investment value of the points are false. DRI points do not increase in value, there is no viable secondary market for them, and DRI severely restricts the resale of points. Moreover, DRI contracts or PSA last in perpetuity.
The amount in controversy exceeds the sum or value of $5,000,000, excluding interest and costs.
VOI Vacation Ownership Interest Points
DRI does not refer to itself as a timeshare company
Nevada law protects timeshare owners of traditional timeshare that were fixed weeks, by prohibiting timeshare companies from selling more than 365 use-days in any particular property in any particular year.
- Investor-members purchasing points in Nevada are provided a form stating that the DRI salesperson is licensed real estate agent who has a fiduciary duty to disclose all facts material to the transaction, DRI points are in no way tied to the value of any real estate.
- The Convoluted Relationship between DRI, the Club, and the U.S. and Hawaii Collections
- The investor-member has no direct ownership interest in any real property. The real property is owned by or held by the trust, for the benefit of a Home Owners Association, in which the investor is a member solely by virtue of his or her ownership of points.
- DRI controls the votes electing the boards of directors for each Association. The board of every Association has hired DRI to provide management services for the Association – services for which DRI receives substantial fees.
III Points have no Intrinsic Value
IV The Onerous, Ongoing Cost of DRI Points and its Relationship to DRI’s Business Model
- DRI collects a property “management fee” of 10-15% per year of the costs of operating any resort in a Diamond Collection.
- Between January 1, 2011 and December 31, 2015, DRI financed 74.5% of all its Membership sales. According to the restated financial statements, in the DRI 10k, DRI sold $624,283,000 of vacation interests in 2015.
- DRI relies upon a $100 million loan sale facility with Quorum Federal Credit Union. “In the past, we have sold or securitized a substantial portion of the consumer loans we originated from our consumers.”4
- Unlike an interest rate for a home mortgage, affordability measures like debt to income ratios do not apply.
- In 2015 DRI sent IRS Form 1098 to investors setting forth the amount of mortgage interest (which is generally deductible) paid in a particular year.
IV The High-Pressure Sales Process
- 61 sales centers around the world, with a full in-house sales and marketing team at 49 locations, including Polo Towers.
- “Mini Vacation” packages lure prospective investors. If the target fails to attend the sales presentation, or leaves before the presentation has completed, the individual is told that he or she is responsible for paying the cost of the entire package.
- Points are being sold to them at a discount, so that they will have “equity” because they own interests that are worth more than the purchase price.
B DRI Salespeople State that there is a market for points, and DRI will help investor-members find buyers for their points.
- DRI salespeople represent that they will help an investor-member sell their points which contradicts THE Club “Legal Documents” which state that “THE Club Operating Company has no obligation to assist a Member with the resale, lease or rental of his or her Qualifying Interest.”
- Timeshare Exit companies advise investor-members to simply stop making payments on their maintenance fees and/or loan. DRI then terminates the membership, recaptures the points (as recycled inventory) and then resells to new purchasers. The net result is that the purchasers lose their entire investment.
V Terms of the DRI Purchase and Security Agreements
A. The Member-Investor’s Right to Rescind the Agreement is Illusory
Click on the PDF file below to see the full document:
This is certainly a major story and Irene will be keeping us posted on any further news and developments.