Guest Post: An Inside Story of Utah Fraud

Editor’s Note: This is a guest post by a person whose father was convicted of securities fraud in Utah.  All identifying information has been removed to protect the author’s identity.  The opinions in this post belong solely to the author.

 

It’s no secret tarrest-manhat securities fraud is a mounting problem in Utah, where the faith and trust of LDS congregations is second to none. Possibly a picturesque place to raise a family, but it’s also a bright, shining beacon for any good con man looking to take advantage and make a few (million) easy bucks. I should know, my father was one.

As a child, I had little to no idea what my father’s line of work was. We were always told he was “a consultant.” What matters might he consult on? We had no idea. “Something with computers” was the usual answer, since the internet boom was in its infancy and not many people would have the know-how to question it. (That’s a tell-tale sign of a con: vague descriptions, few specifics, and an air of “Oh you wouldn’t know about it…”) Continue reading “Guest Post: An Inside Story of Utah Fraud”

Utah Division of Securities Releases Top Investor Threats for 2013

SALT LAKE CITY, Utah – Keith Woodwell, Director of the Utah Division of Securities, announced today that the Division has released a new list of Top Investor Threats facing consumers with its partner, the North American Securities Administrators Association (NASAA). The 2013 list examines offers, practices, and investment scenarios that are being aggressively marketed to those trying to build and protect their nest eggs for retirement. The Utah Division of Securities investigators are concerned that with the passage of the JOBS Act lifting advertising restrictions on securities and other investments, consumers face even greater challenges when deciding where to invest their earnings.

“With new advertising flooding the marketplace and currency vehicles such as Bitcoin making headlines, investors are facing new and confusing messages,” cautioned Director Woodwell, “Rest assured, our messages at the state level remain stable: Choose your investments carefully, don’t jump into something you don’t fully understand, and work with a licensed professional when it comes to protecting your money.”

The 2013 list was compiled by the members of North American Securities Administrators Association.

Private Offerings: Fraudulent private placement offerings continue to rank as the most common product or scheme leading to investigations and enforcement actions by state securities regulators. These offerings commonly are referred to as Reg D/Rule 506 offerings, named for the exemption in federal securities laws that allows private placements to be sold to investors without registration). By definition these are limited investment offerings that are highly illiquid, generally lack transparency and have little regulatory oversight. While Reg D/Rule 506 offerings are used by many legitimate companies to raise capital, they carry high risk and may not be suitable for many individual investors. With the passage of the JOBS Act and recent adoption of rules implementing certain aspects of the Act, restrictions on how Reg D/Rule 506 offerings can be marketed to the general public have been relaxed, including the lifting of an 80‐year ban on general solicitations (advertising). Investors soon will begin to see advertisements for private placement offerings on a variety of platforms including social media, billboards, or t‐shirts on window washers as one startup has proposed, even though only a very small percentage of the population will be eligible to invest. And, as is often the case, scam artists are likely to use this legally permissible avenue to their advantage leading, no doubt, to another year of Rule 506 offerings holding the top spot as the most frequent source of state securities enforcement actions.

Real Estate Investment Schemes: The popularity of investments involving distressed real estate continues throughout the boom and bust cycle in the U.S. housing market. Even as housing prices continue to recover in many U.S. markets, investors should be aware that schemes related to new real estate development projects or buying, renovating, flipping or pooling distressed properties are popular with con artists. In the latest NASAA enforcement survey, real estate investments were the second‐most common product leading to securities fraud investigations by state securities regulators. While legitimate real estate investments can be an important part of a diversified investment portfolio, there are substantial risks with many types of real estate investments. In particular, state regulators have seen problems with non‐traded real estate investment trusts (REITS), properties that are bank‐owned, pending short‐sale, or in foreclosure, and flimsy promises
of investment funds being secured by an interest in real property when the property in question is already highly leveraged and has no
remaining equity. As with all investments, careful vetting and due diligence is a must with real estate investments.

High‐Yield Investment and Ponzi Schemes: Retail investors chasing yield often find themselves falling prey to high‐yield investment and Ponzi schemes promising unbelievably high rates of returns. That trend continues and does not appear to be going away any time soon. As with other alternative investments, high yield means higher risk and these types of alternative investments are favorites of scam artists. Whether a typical Ponzi scheme or a high‐yield investment program, many of the characteristics are the same – promise of incredibly high return coupled with low risk; a reasonably plausible explanation of why the investment is so good; a scam artist with credibility often based on claims of holding false credentials or being part of a particular group or organization. Initial investors are paid a return and help spread the word by promoting the investment to others.

Ultimately the scam will collapse leaving later investors with nothing to show for their trust in the scheme. One way to protect yourself is to ask questions and when you think you have asked all the questions you have, ask more questions. As Bernie Madoff, the king of Ponzi schemes, once said, he only turned people away when they asked too many questions.

Affinity Fraud: Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. Fraudsters know that people tend to trust someone who is perceived to have a common interest, beliefs or background and use that trust to exploit members of specific groups. The most commonly exploited are the elderly or retired, religious and ethnic groups, and the deaf community. Members of the group often find it hard to believe that “one of their own” could be scamming them. Consequently, affinity fraud can go unreported or when a regulator becomes involved,
members of the group choose not to cooperate. Investors should keep in mind that investment decisions should be made based on a careful evaluation of the underlying merits of the offer rather than common affiliations with the promoter.

Scam Artists Using Self‐Directed IRAs to Mask Fraud: Scam artists are using self‐directed individual retirement accounts (IRAs) to increase the appeal of their fraudulent schemes. State securities regulators have investigated numerous cases where a self‐directed IRA was used in an attempt to lend credibility to a bogus venture. While self‐directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self‐directed IRA. Custodians and trustees of self‐directed IRAs may have limited
duties to investors, and generally will not evaluate the quality, value or legitimacy of an investment or its promoters. Fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the responsibilities of self‐directed IRA custodians in order to deceive investors
into believing that their investments are legitimate or protected against losses. While a scam artist may suggest that self‐ directed IRA custodians analyze and validate investments, those custodians only hold the assets in a self‐directed IRA and generally do not evaluate the quality,
value or legitimacy of any investment. In some cases, fraud promoters convince investors to move assets from an existing self‐directed or traditional IRA into a fake self‐directed IRA held by a supposed custodian created and owned by the scam artist. Fraudsters also exploit the tax‐deferred characteristics of self‐directed IRAs, and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means.

Self‐directed IRAs also allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals, and private placement securities. Financial and other information necessary to make a prudent investment decision may not be as readily available for
these alternative investments.

Risky Oil and Gas Drilling Programs: Investors exploring alternatives to traditional securities may be attracted to the lucrative returns often associated with investments in oil and gas drilling programs. Retail investors increasingly are turning to alternative investments including oil and gas drilling investments as opposed to traditional stocks, bonds and mutual funds. These investments appeal to those frustrated with stock market volatility or skeptical of Wall Street.  Unfortunately, energy investments generally prove to be a poor substitute for traditional
retirement planning. Investments in oil and gas drilling programs typically involve a high degree of risk and are suitable only for investors who can bear the loss of the entirety of their principal. Some promoters will conceal these risks, using high pressure sales tactics and deceptive
marketing practices to peddle worthless investments in oil wells to the investing public. There are active investigations into suspect oil and gas investment programs in more than two dozen states and in every region of the U.S. and Canada. Investors should conduct thorough due diligence and assess their own tolerance for considerable risk when considering the purchase of interests in oil and gas programs.

New Threats to Investors

Proxy Trading Accounts: Investors should be wary of individuals who claim to have trading expertise and offer to set up or manage a trading account on an investor’s behalf. Allowing an unlicensed individual to have access to the username and password for your brokerage account or worse, allowing an unlicensed individual to set up a brokerage account in your name, is a recipe for disaster. Allowing someone without the legally‐required safeguards of proper registration and bonding requirements to control your account often leads not only to substantial trading losses, but the loss of investment funds through improper withdrawals from the account including theft. Investors should check with their state securities regulator to confirm that anyone offering to manage your accounts is properly registered and has a clean background. Financial professionals who make the commitment to be properly registered also commit to act ethically and honestly. If they do
not uphold that obligation, they will answer to state or federal regulators. Unfortunately, the same cannot be said for the unlicensed individual looking to capitalize on an investor’s trusting nature.

Digital Currency: Virtual reality may exist only in science fiction, but consumers now are able to purchase goods and services with virtual money such as Bitcoin, PP Coin and other digital currencies. Unlike traditional coinage, these alternatives typically are not backed by tangible
assets, are not issued by a governmental authority and are subject to little or no regulation. The value of Bitcoins and other digital currencies is highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts given the complicated
mathematical algorithms that determine when new blocks of coins will be released. This environment has provided fertile ground for scam artists to capitalize on the increasing popularity and acceptance of digital currencies. Investors should be aware that investments that incorporate abstract money systems present very real risks, including the possibility of virtual reality leaving an investor virtually broke.

New Threats to Small Businesses

Capital‐raising Pitfalls: Recent law changes and newly available capital from investors including “angels” – affluent individuals who provide capital for a business startup – have changed the business funding landscape. The new and enhanced opportunities to raise capital through
crowdfunding, public advertising for investors under JOBS Act regulations and angel funding “solutions” also carry risks for unwary entrepreneurs. Securities offerings either must be exempt from registration requirements or properly registered, even under the new laws. Exempt securities remain subject to federal or state anti‐fraud provisions meaning entrepreneurs must provide full and accurate disclosures as part of any offering. Remember a security can be a stock, note, agreement, financial instrument or anything else that provides an investor with an expectation of participating in the profits the entrepreneur generates. The inadvertent failure of an entrepreneur to follow securities laws can result in money judgments for investors that can rob the profits of a new or expanding business enterprise. It pays to research your selected method of capitalization before you solicit any investors.

Unregulated Third Party Service Providers: The implementation of the JOBS Act has created opportunities for unregulated third parties to provide ancillary services. Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to
understand that use of an unregulated third party to provide such services does not change your obligations under federal and state securities laws. Not only should a small business or other entrepreneur make sure they are dealing with a legitimate service provider, they should also make sure that the service being offered is in full compliance with all federal and state requirements. Since the passage of the JOBS Act, new firms have joined existing firms that offer to sell lists of accredited investors for use in private placement offerings. However, new rules recently adopted by the SEC include more stringent requirements replacing the old fail safe of reliance on an investor‐ completed questionnaire claiming accredited investor status. If not done carefully and with federal requirements in mind, an entrepreneur will suffer the consequences, which could include the loss of any claimed exemption. Use of crowd funding portals, while subject to some regulation, also opens the door to scams. Startup businesses, especially small local businesses, should be very careful to verify the legitimacy of a portal before engaging their services.

Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the
business and the investor stand to lose.

About NASAA

Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest
international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50
states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. In the United States, NASAA is the voice of state securities agencies responsible for efficient capital formation and grass‐roots investor protection. Their fundamental mission is protecting consumers who purchase securities or investment advice, and their jurisdiction extends to a wide variety of issuers and intermediaries who offer and sell securities to the public. NASAA members license firms and their agents, investigate violations of state and provincial law, file enforcement actions when appropriate, and educate the public about investment fraud. Through the association, NASAA members also participate in multi‐state enforcement actions and information sharing. NASAA also coordinates and implements training and education seminars annually for state/district/provincial and territorial securities agency staff.

About the Utah Division of Securities

The Division of Securities enhances Utah’s business climate by protecting Utah’s investors through
education, enforcement, and fair regulation of Utah’s investment industry while fostering
opportunities for capital formation. Investors should do business with licensed securities brokers
and advisers and report any suspicion of investment fraud to the Utah Division of Securities by
calling (801) 530.6600; toll free at 1.800.721.7233 or logging on to our website.

Ward Financial Clerk Alan Oviatt Sentenced for Defrauding Ward Members in St. George

This is a repost of an article that appeared in The Spectrum yesterday about the sentencing of Alan Herbert Oviatt.   There is also a civil case pending before the Utah Division of Securities that could result in additional civil fines and penalties.

St. George resident sentenced for theft

Written by Kevin Jenkins
Oct. 22, 2013 | thespectrum.com

ST. GEORGE —A St. George resident convicted of stealing more than $100,000 from a fellow church member whose $700,000 investment was otherwise depleted through a failed series of online trades was sentenced to jail time and a court order to repay the victim Tuesday.

Alan Herbert Oviatt, 56, was found guilty of felony theft in August after a jury found him guilty of taking $123,000 from the investment without authorization at a rate of about $6,000 per month. The victim, Steve Hansen, recovered $77,115.99 still remaining in the investment account after the theft was discovered in 2010, but the remainder of the investment was lost in the market.

“You lost over $500,000 of my money because you had no expertise. …Did you think it was going to make my day by stealing $123,000 more?” Hansen asked.

Hansen and his wife, Wendy, told 5th District Court Judge Jeffrey Wilcox that they wanted Oviatt to be sent to prison for the maximum amount of time possible because they don’t believe he will ever repay them and to send a message to the public that “crime doesn’t pay.”

Wilcox sentenced Oviatt to the statutory amount of time for a second-degree felony —between one and 15 years in prison and a fine of $10,000 —but the judge set the sentence aside in favor of 36 months of probation and 120 days in the Washington County Jail to be served on weekends and holidays, starting Friday.

“I don’t want you to see this as being lenient,” Wilcox told the Hansens. “I do want Mr. Oviatt to be (making payments) and there’s no way to do that if he’s in prison or in jail.”

Wilcox ordered Oviatt to repay the $123,000 at a rate of $1,000 per month, which Oviatt’s attorney, Jay Winward, said his client would be able to do based on his expectation of income from a $4,000 a month job.

Deputy Prosecutor Zachary Weiland challenged the income figure, noting he’d contacted the purported employer earlier in the day and was told “nothing’s set in stone yet.” Weiland also noted that Oviatt claimed to have been working in information technology but the Internet-based health product company he’d cited as an employer “is nonexistent.”

Wilcox accepted Winward’s argument that if Oviatt fails to make the $1,000 monthly payments then the court can lift the stay on the sentence and send Oviatt to prison, however.

Hansen said he and Oviatt met each other as fellow members of The Church of Jesus Christ of Latter-day Saints while Hansen was serving as a financial clerk in his ward and Oviatt was a clerk in the umbrella stake unit.

Oviatt learned Hansen had lost money in a prior investment and took advantage of their acquaintance to build Hansen’s confidence that Oviatt could do a better job because he had successfully handled large amounts of money as a licensed options trader, claims that later proved to be false, Hansen said.

Oviatt also claimed to have had enough of his own money to make an offer on a nearly $2 million home promoted in the local Parade of Homes, Hansen said. On the other hand, Oviatt failed to mention a series of financial problems, including two bankruptcies, he had experienced during the previous decade.

Hansen said their agreement, which he had in writing but without signatures, included a plan that Oviatt would stop the trades if 50 percent of the investment was lost, and would not take any money unless the investment earned more than a 20 percent return.

A state Securities and Exchange Commission case against Oviatt is pending, stemming from the complaint.

“I believe you started grooming me right from the start. You knew our financial situation,” Hansen said in comments directed to Oviatt.

Hansen blasted Oviatt’s claims during the trial that the two were partners in a business run by Hansen, that Hansen was a “sophisticated investor” who enjoyed taking big risks, and that there was no formal agreement regarding the investment.

“You lied on the stand (in court) when you said you never came to my house. …I was surprised at how easy it was for you to raise your hand to the square and swear to tell the truth, and then lie your guts out,” Hansen said.

Oviatt and his wife read statements directed to the Hansens acknowledging Oviatt’s remorse and responsibility for the family’s loss. Oviatt expressed gratitude to arrive at a resolution of the case after more than three years of court proceedings.

“I look forward to my sentence,” he said.

CLIENT ADVISORY: SEC Rule 506 Private Securities Offerings Can Now Be Publicly Advertised

Here is a summary of the new SEC’s new Rule 506 written by Mark Cotter, who is the chair of our firm’s Corporate Finance and Securities Law Section.

Summary.  In a fundamental shift in federal securities laws, new U.S. Securities and Exchange Commission (“SEC”) rules will permit companies seeking to raise capital in Rule 506 private placements to engage in “general advertising and solicitation” (e.g., internet solicitations, mass mailings, website banner ads, etc.) to attract investors.  Thus, 80 years of securities laws requiring that “non-public offerings” or “private placements” remain “private” (including conditions intended to limit the offering to potential investors with whom the company or its senior management have pre-existing relationships) have been overturned.

The new rules affect securities offerings under Rule 506 of SEC Regulation D and are effective as of September 23, 2013.  In effect, companies seeking to raise capital under the Rule 506 exemption from securities registration requirements can now make public solicitations in order to cast a wide net for investors, though companies seeking to utilize these more permissive “manner of offering” rules may only sell securities to “accredited investors” and must satisfy heightened compliance requirements (including new “bad boy” disqualification rules). Continue reading “CLIENT ADVISORY: SEC Rule 506 Private Securities Offerings Can Now Be Publicly Advertised”

Not All Ponzi Schemes Are Prosecuted by the SEC

This week a Utah man named Kenneth Tebbs was sentenced to six and a half years in federal prison for operating a $49 million Ponzi Scheme in Salt Lake City.  According to the article in the Salt Lake Tribune the investment scheme victimized more than 100 investors, many of them elderly people, family and friends.

This case is somewhat unique because civil charges were never filed by the Securities and Exchange Commission or the State of Utah.  Instead, Mr. Tibbs filed for bankruptcy – but only after soliciting more investments from, among other, an elderly widow.  According to her letter to Judge Sam, Tebbs had sat her a couch and held her hand while telling her an investment of practically all of her savings would be profitable and safe. Two weeks later, he filed for bankruptcy. Many of the victims “were victimized on the eve of bankruptcy, when the wheels of the filing of bankruptcy were in motion” according to the article. Continue reading “Not All Ponzi Schemes Are Prosecuted by the SEC”

Michael Dee Madsen of Herriman, Utah Charged with Securities Fraud

Below is an article that appeared in The St. George Spectrum yesterday.  The alleged losses are relatively small so it has not garnered the attention of the press here in Salt Lake City, but the facts are important because they illustrate the modus operandi of guys like this.  The facts alleged in the indictment are a  classic affinity-fraud scheme – Utah style.

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Alleged con man appears in court

Written by Kevin Jenkins

ST. GEORGE —A Northern Utah resident accused of conning a St. George woman out of her retirement savings by using a relationship of trust within his church congregation and purported signs from God made his initial appearance Tuesday in 5th District Court.

Michael Dee Madsen, 37, of 4971 W. Buffalo Court, Herriman, is charged with felony counts of unlawful dealing of property by a fiduciary, theft and securities fraud, as well as a misdemeanor count of doing business without a license.

Madsen said he plans to retain a Utah County attorney who is representing him and his wife, Indra Charlese Madsen, on unrelated charges there. Madsen has been charged in Utah County with theft, communications fraud, unlawful use of a financial card and a racketeering count of pattern of unlawful activity. Continue reading “Michael Dee Madsen of Herriman, Utah Charged with Securities Fraud”

UPDATED: Yet Another Local Ponzi Scheme Indictment – Newport Financial

UPDATE: According to an article in the Salt Lake Tribune yesterday, Michael Kay Smith, 66, and his son, Quintin Fullmer Smith, 33, each pleaded guilty to two counts of third-degree felony attempted securities fraud as part of a plea deal with prosecutors in which four second-degree felony counts of securities fraud and one count of pattern of unlawful activity were dismissed.  The two men each face up to 10 years in prison when they are sentenced in 3rd District Court in September. 

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Michael Smith and his son Quintin Smith have each been charged with six counts of securities fraud and one count of pattern of unlawful activity, all second-degree felonies, in connection with a furniture loan company they owned called Newport Financial.  According to a Salt Lake Tribune article published today they have been accused of “bilking investors of hundreds of thousands of dollars — one while serving as counselor to an LDS stake presidency — in a fraudulent furniture-financing scheme that targeted, among others, a prominent University of Utah football coach.”

The indictment alleges that the Smiths promised a return of 18 percent to gain investments of at least $1.8 million from 18 victims.  Their biggest investor was Norm Chow, the offensive coordinator for the University of Utah’s football team, who invested $500,000. Continue reading “UPDATED: Yet Another Local Ponzi Scheme Indictment – Newport Financial”

Two Convictions in the Mathon Ponzi Scheme

A long-running Arizona affinity-fraud case targeting members of the Church of Jesus Christ of Latter Day Saints took an important step toward conclusion with the conviction last week of  Guy Andrew Williams and his father Brent F. Williams.  In 2009 the Williams were indicted on 40 counts of conspiracy, wire fraud, mail fraud and money laundering and last week they were convicted of 38 counts in an action stemming from crimes targeting wealthy Mormons in Arizona and neighboring states beginning in 2002. The verdict capped a two-week trial conducted by visiting U.S. District Judge Jack Zouhary.

According to a 2005 article in the Arizona Republic,  the investments offered by Mathon Management Co. founders Duane Slade and Guy Andrew Williams seemed like can’t-miss deals.  The young investment stars courted clients and enticed savvy investors across the West to part with tens of millions of dollars.

Investors were promised annual returns as high as 120 percent secured by assets and prime real estate everywhere from the industrial belly of Baltimore to the bright lights of the Las Vegas Strip.  Investors, many of whom belonged the LDS Church, told investigators that they had confidence in Slade and Williams because they were former Mormon missionaries would steadfastly guard their clients’ money. Continue reading “Two Convictions in the Mathon Ponzi Scheme”

No, You Can’t Even Trust The Mayor! – Update #3

Former Mayor Eric Richardson

UPDATE #3:  The U.S. Commodity Futures Trading Commission (“CFTC”) announced today that it obtained federal court orders for more than $2.7 million in disgorgement and civil monetary penalties against Bentley Equities, LLC  and its principals, Christopher D. Hales and Eric A. Richardson.

On May 31, 2013, the Honorable Dee Benson of the United States District Court for the District of Utah, Central Division, entered a Consent Order for Permanent Injunction against Richardson requiring him to pay $100,000 in disgorgement and a $150,000 civil monetary penalty. On May 14, 2013, Judge Benson also entered an Order that requires Hales to pay $382,080 in disgorgement and $1,146,240 in civil monetary penalties and Bentley to pay an $840,000 civil monetary penalty. That Order also permanently bans Hales and Bentley from engaging in any commodity-related activity. Continue reading “No, You Can’t Even Trust The Mayor! – Update #3”