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Two Utah County men have been accused in federal court of running a Ponzi scheme that netted an estimated $27.5 million over a five-year period.

Michael P. Watson, 41, of Mapleton, and Joshua F. Escobedo, 36, of Spanish Fork, posed as brokers at a Provo-based business called Mike Watson Capital, according to a complaint filed Wednesday by the Securities and Exchange Commission seeking civil penalties, an injunction and remuneration.

The two issued promissory notes through real estate investment education seminars to more than 120 investors in 21 states from October 2004 to February 2009, the complaint states. Watson allegedly pretended to be a successful real estate investor and developer, and promised paid annual returns of 8 percent to 20 percent.

Watson and Escobedo then duped investors into believing their money would be safe by touting the company's "sizable real estate equity, positive cash flow from operations and successful track record," the complaint said.

The company instead allegedly operated as a Ponzi scheme: Investors' returns were paid with money from new investors. The two used the real estate seminars as a venue to sell promissory notes, the complaint states.

The company hyped its performance through false claims in materials to investors, according to the complaint. For example, the company stated that Watson had "never lost an investment dollar and has done well over 1,000 closings," according to the complaint.

The promissory notes generally ranged from $2,500 to $450,000, according to the complaint. Most had a one-year term. Investors who purchased notes of $100,000 or more were promised they could get collateral in the form of a deed of trust for some of Mike Watson Capital's property, the complaint states. When the notes came due, the company persuaded investors to roll over their investments for another term at a negotiated rate.

The SEC also alleged the two were unregistered broker-dealers. Watson worked as a real estate agent, real estate investor and lecturer on real estate investing before founding Mike Watson Capital, according to the complaint. Escobedo worked for Watson since 2003. As an employee at Watson's company, he was in charge of raising capital from investors and selling promissory notes, the complaint states.

The company collapsed around May 2008. In February 2009, Watson told selected investors during a webinar that the company couldn't meet its monthly interest obligations, couldn't redeem maturing promissory notes and couldn't make its payments on commercial mortgages, according to the complaint.

Watson told investors that the downturn in the national real estate market was responsible.

The company owes more than $19 million in unpaid principal and interest on its promissory notes to investors, the complaint states. The company's real estate portfolio has tanked. Commercial banks have foreclosed on at least nine properties, it said.

Watson and Escobedo could not be reached for comment on Thursday.

Brent Baker, an attorney representing Escobedo, said his client wasn't aware that Watson was running a Ponzi scheme. Escobedo has cooperated with the SEC in its investigation, Baker said.

He "is looking forward to putting this behind him," Baker said. —