In 2017, John Kralik opened up a fund for investors to pump money into fix-and-flip homes, mostly in Southern California.
The play was simple: buy distressed homes for between $750,000 and $1.5 million, renovate and flip them for a profit.
The Newport Beach-based investor and his firm, JKV Capital, were seeking $10 million, with minimum investments of $25,000. They were tapping a rich vein through securities rules that allow firms to tap high net-worth individuals and solicit investments through online advertising.
Over the next six years, Kralik raised almost $17 million across five funds, with 35 investors. But that money allegedly never arrived at the properties.
The Securities and Exchange Commission charged Kralik this month for allegedly lying to investors and misappropriating investor money, according to a complaint filed with the U.S. District Court for the Central District of California.
From 2017 through this year, Kralik funneled more than $1.6 million of investor cash into a Mercedes-Benz, paying off his home mortgage and a vacation in Mexico, the SEC alleged in its complaint.
He also “improperly” used money from investors to pay off operating expenses for JKV Capital.
All of this was concealed, the SEC said, because Kralik and JKV Capital gave their investors false statements.
Kralik did not respond to a request for comment. He also did not give testimony to SEC staff during the agency’s investigation.
Never fixed, never flipped
Kralik’s second fund through JKV Capital, named an opportunities fund, had its sights set on the “supply constrained Southern California market.”
Acquire “starter workforce homes at deep discount prices,” reads a description on Cityvest, a crowdfunding platform JKV used for advertising.
After the purchase, JKV said it would renovate homes within a two-to-three-month time frame, and sell the properties a few months later. Kralik had experience, the pitch said, given he had “purchased, renovated and sold over 5,000 single-family rentals since 2009.”
JKV was shooting for a 20 percent internal rate of return, according to the listing, though noted fund returns and yields were not guaranteed.
The fund was a private placement, meaning Kralik and JKV could raise capital without having to register the securities with the SEC. Disclosures about the fund can be limited.
Kralik also relied on a securities rule called 506c — a provision that allows a firm to solicit investors through advertising. By doing this, Kralik could advertise his investment opportunities on social media, or on his website.
According to the SEC, Kralik never hit his target.
He raised $3.95 million through the second fund, from six investors and a feeder fund, an entity that pools funds for third-party investors.
That feeder fund, which was not named, had 68 individual investors, according to the SEC’s complaint.
The money never hit properties either. Kralik and JKV’s fix-and-flip pitch for the second fund was “materially false,” the SEC said.
In 2019, when JKV opened the fund, Kralik signed a form with the SEC saying “no gross proceeds were proposed to be used to pay any named executive officers,” including Kralik. That, according to the SEC, was false.
“He proceeded to use Fund II money for his personal expenses,” the SEC said, adding Kralik also “failed to safeguard Fund II investor proceeds in a segregated escrow account.”
Personal expenses
In April 2022, Kralik had to pay his mortgage on his personal home in Newport Beach.
According to the SEC, a bank account for JKV LLC had $9.88 on April 20. The next day, Kralik transferred $15,000 from a bank account for the second JKV fund into the LLC’s account. Kralik then made a mortgage payment of $13,358 from that LLC account.
A similar event happened in December 2022.
Kralik made a mortgage payment of $13,358 using funds from JKV LLC’s bank account, which caused the account to go into overdraft. To cure it, Kralik transferred $13,000 from another fund account, the SEC alleged.
It wasn’t just mortgage payments. Kralik paid off checks to a waterfront social club, a vacation in Cabo San Lucas and a nanny for his kids.
Investors, the SEC said, did not know.
“In deciding whether to invest in the JKV Funds, investors would have considered it important to know whether the Defendants would misappropriate fund money for Kralik’s own enrichment,” the SEC said in its complaint.
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