Val Southwick, who was convicted of defrauding more than $140 million from hundreds of Utah residents, was quietly paroled last month after serving just ten years, according to KSL News. He pleaded guilty to nine counts of securities fraud, each second-degree felonies, and was sentenced to serve anywhere from 9 to 135 years in Utah State Prison.
Apparently he was a model prisoner.
Mr. Southwick’s case was somewhat infamous in this state because at the time it was the largest Ponzi scheme in Utah history, and because he was so blatant in his use of his LDS faith to convince others to invest.
In its summary of the case the Utah Division of Securities alleged that Southwick “emphasized his membership and ecclesiastical roles in The Church of Jesus Christ of Latter-day Saints during solicitation of meetings with investors.”
“Southwick showed his LDS temple recommend, or mentioned its existence, to several investors, and his office contains LDS ‘memorabilia,’ all of which appeared designed to breed a sense of trust between Southwick and investors.” Investigators said Southwick touted himself as a “respectable LDS gentleman, who was more concerned about the consequences of the after-life than those in this life if he lied to investors.”
Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.
If you are not sure who to contact or have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.
Question 2: Is The Investment Registered?
Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
Question 3: How Do The Risks Compare With The Potential Rewards?
The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.
Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds.
Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities or, better yet, report them to the SEC.
Question 4: Do You Understand The Investment?
Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.
Question 5: Where Can You Turn For Help?
Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ websites. If you have a question or concern about an investment, please contact the SEC, FINRA, or your state securities regulator for help.
Editor’s note: This is a repost of an article from the SEC’s investor education website. I have a more extensive checklist of my top ten ways to avoid getting caught in a financial scam that is still highly relevant today. If you have questions about an investment or knowledge of ongoing fraud please contact me.
Editor’s note: This is re-post of an investor alert that recently appeared on FINRA’s website. This is a good reminder of the need to “trust but verify” the credentials of your investment professional.
FINRA recently issued an investor alert on fraudsters impersonating FINRA executives, offering bogus investment “guarantees” to investors as part of an advance-fee scam. But regulators are not the only ones who need to worry about someone trying to steal their good name.
We are aware of a recent scheme that involved an unregistered individual impersonating a registered investment professional to lure in potential investors. This scammer created a fake version of a public FINRA BrokerCheck® report of a legitimate broker—picking an experienced broker with a spotless regulatory record.
The doctored BrokerCheck report was emailed to potential “clients” using the name and CRD number of a registered investment professional, and a company that is not registered as a broker-dealer with FINRA. The solicitation included other documentation and a request for investors to respond with a photo of their driver’s license and other personal information. Here are some of the red flags we spotted on the doctored report:
Here are six tips to keep your money and personal information safe from these types of scams.
1. Go to the source. FINRA encourages investors to “ask and check” by using BrokerCheck before investing with an investment professional. Don’t assume that the information you receive in an investment pitch is legitimate. Go directly to the sources that collect the regulatory information to produce these reports, including FINRA’s BrokerCheck, the SEC’s Investment Adviser Public Disclosure, and state registration databases. You can search both professionals and firms not only by name, but also by their registration number—known as a CRD number.
2. Look for things that appear out of place. Compare whatever BrokerCheck report or other documentation you receive from an individual or firm soliciting your business with the real reports you obtain yourself from BrokerCheck or the sources in Tip 1. Be wary of typos, and look for differences in the reports. For instance, in a recent scam, the doctored information was in fonts that were different from fonts used in other parts of the report, items appeared to be pasted into the document, and the state of the branch office address was not included in the list of states where the individual was licensed.
3. Verify information with an internet search. Take a few moments to use a common search engine to type in the name of the individual who is soliciting your business and the firm name, and see what comes up. Does it match the information provided to you, including the contact information? If something doesn’t look right, do a little more digging, including a map search on the address or a reverse lookup on the phone number. Be sure to check all this information against a reliable source such as BrokerCheck. When scanning LinkedIn profiles, be aware that scammers often copy select information from a registered person’s LinkedIn profile to create the appearance of legitimacy.
4. Do not send money or personal information without verifying the recipient. In the scam described above, investors were asked to send a driver’s license photo and other personal information in response to an email solicitation. Don’t ever send money or personal information, such as your driver’s license, passport, social security number, date of birth, or bank account information, until you verify who contacted you, as described in Tip 3.
5. Beware of the use of personal contact information. Sometimes a scammer will ask you to send money or personal information to a personal (not firm) email address or to respond to phone numbers that are not listed as official firm contacts. One general rule all investors should follow: if you invest through an account at a financial firm, use BrokerCheck to verify that the firm is registered and send all deposits directly to the financial firm. If an individual pitches an investment opportunity that requires you to write a check directly to him or to a third party, proceed with caution.
6. Be alert to the red flags of fraud. Be cautious of guarantees, unregistered products, overly consistent or high returns, complex strategies, missing documentation, account discrepancies and pushy salespeople. The vast majority of investment professionals are trustworthy individuals, but there are always exceptions who might look to take advantage of your trust. Practice spotting the persuasion tactics that con artists use, and always exercise healthy skepticism. For instance, be wary of sales pitches that make exaggerated claims about performance. This is a red flag of fraud.
If you are suspicious about information you receive from an individual or firm soliciting your business, contact FINRA or another regulator BEFORE you send any personal or financial information. If you are an investment professional and have concerns that someone is using your name or information as part of a potential scam, contact your firm’s compliance department, and alert FINRA by calling our BrokerCheck hotline at (800) 289-9999, or emailing BrokerCheck@finra.org.
This is actually the third post I have written about a guy named Zane Jeppeson of Garland, Utah. My prior posts can be found here and here. Today’s update comes to us courtesy of The Leader out of Tremonton, Utah. Apparently Mr. Jeppeson is having a hard time getting his restitution paid and may go back to jail. Kudos to Judge Royal Hansen for keeping his feet to the fire.
Garland resident Zane Jeppesen has been given more time by a judge to pay restitution to victims in the amount of $488,830, extending his time to March 14, 2019. Jeppesen appeared before Third District Court Judge Royal Hansen on Thursday, Feb. 7, 2019, for an evidentiary hearing on one count of pattern of unlawful activity, a second degree felony.
On April 4, 2016, Jeppesen was charged with 11 counts of securities fraud, two counts of theft and one count of pattern of unlawful activity, all second-degree felonies. On July 7, 2017, Jeppesen entered into a plea deal with the state and plead guilty to one count of pattern of unlawful activity and the remaining charges were dismissed.
On Dec. 8, 2017, Jeppesen was sentenced to one to 15 years in the Utah State Prison but the term was suspended. Instead, he was sentenced to 30 days in jail, which he served. Jeppesen was also ordered by the judge to pay restitution to the investors in the previously mentioned cases in the amount of $488,830 within six months of his release, which would have been June 2018.
Jeppesen failed to make a court appearance on Sept. 28, 2018, an order to show cause. On Oct. 1, 2018, on an outstanding bench warrant issued by Third District Court in Salt Lake City. Jeppesen arrested and taken into custody in Box Elder County but was released later that day on a $25,000 cash only bail.
According to a probable cause document, from 2010 to 2014 Jeppesen raised approximately $555,000 from at least four investors and issued promissory notes to those investors. Jeppesen sold promissory notes on land in Saratoga Springs and Payson with the promise that the land was worth value and offered a promissory note and trust deed as security for the real estate development.
Court documents show that Jeppesen failed to tell these investors that he filed for bankruptcy in 2005 and was unable to pay back prior investors. The money from investors was spent on “Ponzi like payments to other investors” as well as transfers to family members, credit card payments, transfers to other bank accounts, electronic stores and bank fees.
The probable cause statement added that Jeppesen has never held a securities license and that Jeppesen’s company, Jeppesen Land and Property, has never been licensed or registered with the Utah Division of Securities.
Documents state that Jeppesen, in connection with the offer of sale of security, directly or indirectly, and made untrue statements or omitted facts in an act, practice or course of business which operated or would operate as fraud or deceit in violation of Utah state laws. The theft charges stem from Jeppesen’s allegedly obtaining or exercised unauthorized control over the property of another with a purpose to deprive them thereof.
This isn’t the first time Jeppesen has been charged with securities fraud. According to court documents Jeppesen was employed through Beverly Hills Development Corporation, a real estate development enterprise ran by Michael J. Fitzgerald of Utah County, from April 1998 to May 2004. In that time Jeppesen obtained a total of 134 Utah investors, many in Box Elder County, and raised approximately $8 million for Beverly Hills Development. During that time he was paid $986,563 in compensation from the company for his work raising investment funds.
There were at least 100 investors from Box Elder County, many of which from Tremonton and Garland that invested with Jeppesen before 2005. Investments ranged from as little as $380 to as much as $467,000.
In June 2018, the Utah Division of Securities of the Department of Commerce filed three different reports against Jeppesen, a Stipulation and Consent Order, an Order of Adjudication and a Findings of Fact, Conclusions of Law and Recommended Order, all highlighting Jeppesen’s pattern of securities fraud from six different investors starting in 2010 while adding two other incidents that left many Box Elder County residents out of millions of dollars.
According to these documents, the Division determined that Jeppesen, with Jeppesen Land and Properties, are subject to a $300,000 fine. In the stipulation and consent order, it states that JLP is a business entity that was incorporated in Feb. 2011, and is currently an active entity registered with the Utah Division of Corporations with LaDene M. Jeppesen, 92, (Jeppesen’s mother), listed as the registered agent and manager. Jeppesen Land and Properties has never been registered with the Division as an issuer of securities and found no records showing securities registration, exemption from registration or notice filing in any manner for JLP, according to these documents.
If he fails to make the payments to investors he may be sentenced to addition time in jail and/or prison. It has not been stated in court records if Jeppesen has made any restitution to victims.
Note: this is a re-post of an excellent article that was published on January 3, 2019 in FINRA’s Alert Investor newsletter. The article was co-authored by FINRA staff and The PIABA Foundation.
The vast majority of interactions between investors and investment professionals are positive. However, sometimes the relationship doesn’t go as planned, and the situation can’t be resolved by communicating directly with your firm or broker. In such a situation, you may find yourself considering arbitration or mediation.
There are many factors to consider as you proceed down these paths, one of which is whether to hire an attorney to help you out.
An attorney that represents you during arbitration or mediation proceedings can provide experience, direction and advice. Brokerage firms are generally represented by an attorney in an arbitration proceeding, so even if you choose not to hire an attorney, there might be one representing the firm or individual on the other side.
Securities Arbitration Basics
Arbitration is similar to going to court, but is usually faster, cheaper and less complex than litigation. It is a formal alternative to litigation: two or more parties select a neutral third party, called an arbitrator, to resolve a dispute.
The arbitration process goes something like this. A FINRA arbitrator or panel (consisting of three arbitrators) will listen to the arguments set forth by the parties, study the testimonial or documentary evidence, and then render a decision. The arbitrator’s decision, called an award, is final and binding, and all parties must abide by the award. FINRA does not have an appeals process through which a party may challenge an award. However, under federal and state laws, there are limited grounds on which a court may hear a party’s motion to vacate an award.
The size of the claim will determine how the arbitration process works. Claims involving more than $100,000 require an in-person hearing decided by a panel of three arbitrators, with one chairing the hearing. Smaller claims up to $50,000 can be decided by a single arbitrator in one of three ways: a regular hearing where evidence is presented in person; a phone hearing that incorporates many aspects of a standard arbitration hearing; or a “paper” hearing where an arbitrator makes a decision based solely on the documents submitted.
To Hire or Not to Hire
FINRA’s Code of Arbitration Procedure states that parties are entitled to be represented by an attorney at any stage of the arbitration proceeding. Here are some things to consider when you are trying to decide whether to hire an attorney to represent you in securities arbitration or mediation.
The process governing arbitration proceedings will likely be unfamiliar to you. Hiring an attorney with experience in these matters might be a comfort to you and help you appropriately present your case to the arbitrators.
Arbitration can be faster, less expensive and more streamlined than litigation, but some arbitrations involve complex legal and regulatory issues or large claims for monetary damages. You might benefit from legal guidance if your case falls into these categories.
An attorney can provide guidance even before the arbitration process begins. An experienced attorney can assist aggrieved parties in determining whether they have a viable claim for arbitration. This can be critical so that parties do not waste money or time filing a case that does not have a good chance for success.
FINRA provides identical randomly-generated lists of proposed arbitrators to both parties, along with a detailed report on each arbitrator’s background. An attorney can help you evaluate which arbitrators might be a better fit for your case.
Parties to an arbitration can come to the forum with a lot of emotion about what has transpired to this point. An attorney can serve as a detached third-party representative and provide legal advice to help you meet your goals.
Speaking with an attorney is confidential and protected by attorney-client privilege. This means that your attorney is not allowed to discuss what you tell him or her with anyone else, and that statements you make will be kept between the two of you. Attorney-client privilege helps both parties better understand the strengths and weaknesses of the case and establishes a relationship of trust that can lead to better guidance and decision-making.
If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.
A word about non-attorney representatives or NARs. Although NAR firms are an alternative to representation by attorneys, NAR firms are not subject to the same professional rules or guidelines, nor are they subject to malpractice insurance requirements. Investors may also not be aware of the absence of these protections, and therefore may not properly evaluate the benefits and costs of representation by NAR firms.
If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.
Ask These Questions
Picking the right attorney is a personal decision that is often unique to your own needs and preferences. It’s a good idea to interview more than one attorney—and ask the following questions:
Do you have experience representing investors in securities arbitrations? Experience matters. Representation by someone with specialized legal knowledge of the investments sold to you and the procedures that apply to the arbitration process are important. Ask how long the attorney has been in business and how many securities arbitration cases he or she has handled.
How will you represent my interests? Aggrieved investors commonly do not understand, or cannot articulate, the extent of their harm. A critical component to effective representation is your attorney’s ability to communicate to you, the opposing counsel and, ultimately, the arbitration panel any underlying problems with the investments or actions at issue. Your attorney should also be expected to articulate the regulatory standards your investment professional is held to, and how those standards were breached.
How are you paid? Attorneys are paid under different arrangements. Many attorneys who specialize in representing investors in securities arbitrations do so on a contingent fee basis. This means the attorney is willing to advance their time with the hope and expectation of recovering money from the investment firm or professional. Read the fee agreement presented by the attorney to make sure that you understand the terms.
Editor’s Note: This is an excerpt from a guest post that I wrote for The White Coat Investor, a fantastic website that provides financial tips and education to medical professionals.
I have represented a number of doctors and dentists over the years in disputes with their stockbrokers and in Ponzi schemes and investment fraud cases. My medical professional clients are typically intelligent and savvy with respect to managing their money, but because they are often too busy to dig into the details they can often be taken advantage of by unscrupulous investment advisors, and in some cases, they fall victim to fraud. Below are a couple of war stories. Of course, most investment professionals are good and well-qualified – but not all of them. A keen intellect cannot substitute for taking the time to read the documents carefully. The devil may really be in the details
The Falls Event Centers
Utah-based entrepreneur Steve Down had been pitching investments in The Falls Event Centers since 2011. He raised approximately $120 million from more than 300 investors – the majority of whom are dentists throughout the United States.
So why did so many dentists fall for this scheme? How did he do it? Steve Down is a gregarious 61-year-old promoter who billed himself as an “an innovative entrepreneur and successful business owner, is passionate about creating companies and providing jobs.”
One of Mr. Down’s companies was called CE Select, a continuing education provider for dentists. According to the detailed complaint filed by the SEC, dentists attending CE Select seminars were pitched an investment in The Falls during their lunch break.
I honestly cannot figure out how he managed to make a pitch for a wedding reception center investment seem like a normal part of a dental continuing education seminar. But I digress.
The investment was basically a hard-money loan to fund the purchase and construction of more event centers and was supposed to pay returns of 10 to 14% per year to investors.
Down’s investment pitch remained essentially the same for years. The SEC alleged that Down made the following representations to his captive audience of unsuspecting dentists:
The Falls had 8 profitable locations and was growing at a rapid pace,
The Falls would have 200 event centers by 2022
After The Falls had 12 centers, it would be able to obtain institutional loans to replace the hard money loans,
Many of the event centers were profitable even before they opened, because they were accepting event bookings before they opened, and continued to be profitable after they opened,
Each event center would earn gross revenues of $1 million per year and cover expenses of approximately $650,000, leaving a profit of approximately $350,000, or 35% of revenue, per year.
The 200 projected centers would bring in net income of $70 million per year.
The Falls would be worth $2.8 billion by the time it had 200 centers in 2022.
The problem, according to the SEC, is that many of these representations were false, and Down allegedly knew it.
The Falls’ own accounting records showed that the event centers had never been profitable. Down also allegedly knew that his business model was unsustainable because of crippling debts owed to investors and mortgage holders. But he nevertheless kept on pitching this “profitable” investment to dentists and other investors until the SEC finally shut him down.
Down did not admit or deny the allegations in the SEC’s complaint, but he and The Falls did consent to the entry of a final judgment permanently enjoining them from future violations of securities laws and Down paid a civil penalty of $150,000. A final judgment was entered against Down and The Falls on May 11, 2018, by United States District Court Judge Jill Parrish. Despite all this, according to an article in the local paper, Down planned to continue building his wedding center empire, and “The Falls will continue to conduct business as usual.”
Imagine waking up one day and discovering that all of your retirement savings were gone; all the money you had been working to save had evaporated in a poof.
That’s what happened to over 200 people on November 15th. They had invested in a “Silver Pool” investment promoted by Gaylen Rust who claimed he had inside information about the silver market and told investors he was consistently making returns of 25 to 40% per year. He claimed that investor money would be used to purchase and store silver bars, and that he had never lost money in his trading.
People bought into this Silver Pool investment and recommended it to their family and friends. And after watching their investment increase (on paper) many “doubled down” and put all of their retirement money with him.
On November 13, 2018 the Commodities Futures Trading Commission (CFTC) and the Utah Division of Securities jointly filed a lawsuit against Gaylen Rust and his company Rust Rare Coin, Inc. The SEC filed a similar lawsuit a few days later. The filing of simultaneous, obviously coordinated lawsuits by three different securities regulators is quite rare in this state, and is indicative of the size and seriousness of the case.
The state and federal regulators have alleged that Gaylen Rust has been “engaged in a massive scheme to defraud” and has been running a Ponzi scheme since 2008. He raised over $200 million from investors in the last 5 years alone, and now it’s gone.
If true, this will be one of the largest Ponzi schemes in Utah history.
I have been getting calls from investors, regulators and former Rust employees over the last few weeks and almost all of them are stunned by this news. Gaylen Rust and his father Alvin have maintained a good reputation in the rare coin and precious metals industry in Utah for many years. Alvin Rust was an avid coin collector and started Rust Rare Coin in 1966 as a way to combine his hobby with his livelihood. Rust Rare Coin was known as a reputable place to purchase gold and silver coins, even after Alvin got caught up in some ill-fated deals with Mark Hoffman years ago.
According to the allegations in the CFTC Complaint, Rust and his company began promoting a “Silver Pool” in 2008 as a way for people to invest in the silver market, which Rust probably seemed to understand quite well:
“[Rust] told investors and prospective investors that they would sell silver held in the pool as market prices rose and buy silver for the pool as market prices fell; thereby increasing the amount of silver held in the Silver Pool, as well as the value of each investor’s share in that pool. [Rust] told investors and prospective investors in the Silver Pool that by trading silver in this manner, they generated extraordinarily high returns, averaging twenty to twenty-five percent per year and sometimes as high as forty percent per year or more.”
Consistent returns of 25% to 40% per year?? A simple Google search would have shown that trading commodities is extremely risky. How did he achieve such consistent profitability? The simple answer is that he didn’t. Potential investors should have been skeptical of those consistently high returns, but most trusted him and did not attempt to verify the claims Gaylen Rust was making. My opinion is that if any investment claims to achieve returns of 15% or more per year you should be extremely careful.
Shockingly, Rust didn’t provide investors with any paperwork setting forth the terms of the investment, he didn’t formally disclose his financials, and he didn’t provide any risk disclosures. All of those should have been huge red flags to any investor.
Once he had their money, Rust sent out “account statements” via email showing impressive (but unfortunately fake) returns on their investments. Rust purportedly claimed that he had as much as $80 million dollars of silver bars stored at Brink’s depositories in Salt Lake City and Los Angeles, and that this reserves would permit investors to liquidate their investments at any time.
How much silver is that? One source told me that $80 million in silver would fill five semi-trucks. That’s a lot of silver, but unfortunately Brinks depositories aren’t big enough to hold that much silver. Not good.
According to the CFTC complaint, Rust did not use investor money to purchase silver or silver contracts for the Silver Pool as he had represented. Instead, investor’s retirement money went to make payments to other investors, to fund other affiliated Rust Companies, and to pay personal expenses for the Rust family.
Rust never even had a commodities trading account at HSBC Bank, and was never licensed as a broker or commodities trader.
It was all a big scam.
The Prospects for Recovery
One of the first questions I invariably get from victims in a case such as this is: “What are the chances of recovering of my retirement losses?”
Unfortunately, they are not great in this case, as in most Ponzi scheme cases. It is exceedingly rare to recover all of your losses from a Ponzi scheme.
The CFTC case (which is the main case) has been assigned to United States District Judge Tena Campbell who is a highly respected jurist here in Utah. Based on the CFTC’s motion Judge Campbell has selected Jonathan Hafen to serve as the receiver in this case and he will work under the direction of the Court along with several lawyers in his firm, including Joe Covey who will be lead litigation counsel.
Because I am not involved in that aspect of the case and only have access to the public filings I cannot predict how much money will ultimately be recovered. Mr. Hafen has stated in open court that there are no significant assets to recover, which is not a good sign.
Mr. Hafen’s job will be to gather assets from any sources he can, and then to distribute those assets in an equitable manner to the victims. You can learn more about how an SEC receivership works here. The latest filings and information about the case can be found on the Receiver’s website: https://rustrarecoinreceiver.com/.
Unfortunately, one of his primary tasks will be to file clawback lawsuits against investors who got their money out before the whole scheme collapsed. So if you are one of the lucky investors who got out you should expect a demand letter from the receiver within a year. It’s a good idea to hire an attorney to handle that clawback case; preferably one who understands the process.
Complex receiverships such as this are extremely expensive and can stay open for years, depending on how long to takes to pull together and then distribute all of the assets. The Vescor case involving Val Southwick took ten years to complete, which led understandable criticism of the receivership process.
The only winners in this process are the lawyers.
How To Avoid Getting Scammed
This is a tragic story that is repeated over and over in our state, and most of these scams take advantage (intentionally or not) of the relationships of trust that members of the LDS Church have with one another. This is commonly called “affinity fraud.” Our state has a long history of financial scams and Ponzi schemes, many of which have been perpetrated by members of the LDS church on members of their ward or stake. It’s heartbreaking to say, but Utah has one of the highest rates of fraud per capita of any state in the country.
I specialize in helping people recover losses from investment fraud, but by the time people call me the money is usually long gone – and so is the person who took the money. So here are a few tips to avoid getting sucked into an investment scam:
Slow down. Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy. Be very wary of aggressive sales pitches and deadlines. Ask the hard questions before you hand over your money, not after.
Do your homework. Run a simple Google search on the company and its managers, or the individual. If it involves a company, ask for a private placement memorandum and company financials. Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved. The local office of the SEC can be reached at 801-524-5796, or you can call the Utah Division of Securities at (801) 530-6600.
Hire an attorney. Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up. A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes.
Get it in writing. I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake. The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.
Beware of guarantees. If anyone tells you that your investment is “guaranteed” that should be a red flag. All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back.
Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals. Avoid investing with anyone who claims to have a secretive investing algorithm or touts unusual success. These types of investments nearly always involve extremely high risk, despite what you may be told.
Work through licensed stock brokers or investment advisors. Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell securities, which is required under most circumstances. Run their name through FINRA’s Broker Check
Don’t invest with friends and neighbors. It may seem like doing business with someone you know and trust would be safer, but that is simply not true. All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good. Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.
Keep church out of it. If someone pitching you an investment casually mentions that they used to be the bishop or in some other church position, watch out! Church activity or high callings are not relevant to investment decisions, and if anyone mentions their church position as part of an investment pitch warning bells should be going off.
If it sounds too good to be true it probably is. If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out.
On Wednesday September 6, 2018 the US Department of Justice announced the indictment of Robert G. Mouritsen of Kaysville, Utah on three counts of wire fraud and three counts of money laundering.
The DOJ alleged that Mouritsen used a “position of prominence” to induce friends and fellow church members to give him money to further a fraud scheme he called “The Project” which targeted his fellow church members and was ongoing at the time the Indictment was filed. Luckily he only managed to raise $1.5 million before the feds shut him down.
Kaysville, Utah is predominantly LDS community 20 miles north of Salt Lake City. He allegedly began the scheme just a few years after he was released as the stake president.
Mouritsen told prospective investors that The Project “involved a series of complicated international transactions” that “involved governments in Asia and Europe and required the help of attorneys and bankers.” He also purportedly told investors that this investment opportunity had to be kept “strictly confidential” so he could not disclose many of the details. Right.
And of course he promised that the investment would produce very high returns. Secrecy, unusually high returns and urgency are all significant red flags that should have caused investors to forego this investment opportunity, but unfortunately some folks fell for it. If it sounds too good to be true, it probably is.
Predictably, Mouritsen neglected to tell investors that The Project had failed to produce any returns in over a decade and that he used a significant portion of investor money for his own personal use and benefit.
Affinity Fraud in Utah
Affinity fraud is particularly prevalent among members of the LDS Church. The primary reason for this, in my opinion, is because church members tend to have a high level of trust in fellow church members, and that invites unscrupulous people to take advantage of that trust.
The thought process is that since Brother So-and-so is/was a bishop, stake president, elders quorum president, etc., he was called by revelation and therefore is a worthy priesthood holder in the eyes of God. Sure, the investment sounds too good to be true, but since he was a great church leader it must be legit! In Utah affinity fraud schemes are nearly always targeted at people who are in same ward or stake – a place where his current or former church service is well-known.
I have written about affinity fraud schemes targeting members of the Mormon Church for years, including here, here, here, here and here (among others).
This is a big problem in our community and I have repeatedly called on leaders of the LDS Church to be more proactive in warning church members that they need to carefully evaluate investment opportunities on their merits, regardless of who is pitching them.
Check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
Do not fall for investments that promise spectacular profits or “guaranteed” returns. If an investment seems too good to be true, then it probably is. Similarly, be extremely leery of any investment that is said to have no risks; very few investments are risk-free. The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.
Be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing, but legitimate investments are usually in writing. Avoid an investment if you are told they do “not have the time to reduce to writing” the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential.
Don’t be pressured or rushed into buying an investment before you have a chance to think about – or investigate – the “opportunity.” Just because someone you know made money, or claims to have made money, doesn’t mean you will, too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.
Fraudsters are increasingly using the Internet to target particular groups through e-mail spams. If you receive an unsolicited e-mail from someone you don’t know, containing a “can’t miss” investment, your best move is to pass up the “opportunity” and forward the spam to the SEC at email@example.com.
If you are a victim of this scam or know more details about Mr. Mouritsen please feel free to share your story in the comments below. Anonymous comments are welcomed.
Editor’s Note: I have been contacted by a number of individuals who invested in Future Income Payments or FIP through Utah-based Live Abundant, which is referenced in the article below. This article appeared in the Wall Street Journal today and has a pretty good summary of the FIP situation. Spoiler alert: it’s not good.
Private Pension Product, Sold by Felon, Wipes Investors Out
Investors accuse Future Income Payments of taking them for more than $100 million
Mr. Kohn’s company, Future Income Payments, appears shut, according to court filings. His investors are likely to be wiped out, according to lawyers representing them, who plan to sue scores of firms that sold Future Income products as soon as this week. At least 25 states have taken enforcement actions or are investigating the company, it said in April.
The blow-up shines a light on the boom in opaque private markets, to which investors have flocked in the hope of doing better than they can in traditional stock and bond markets.
Private-market products, including the ones offered by Future Income, are frequently sold by financial advisers. Sales targets are often retirees looking to beat the anemic returns on bonds and other savings products.
Future Income essentially sold investors other people’s pensions. Mr. Kohn’s firm would find workers entitled to pension payments and temporarily buy the rights to those payments—effectively lending the beneficiaries money against their future pension income in what is called a “pension advance.” Then, Future Income would sell the rights to investors for a lump sum. An investor might put up $100,000 in exchange for an income of 7% for five years, for example.
But Future Income’s apparent collapse has left investors stranded. The company is no longer collecting the pension money that funds its own payments to investors, according to court documents. Mr. Kohn couldn’t be reached for comment. It isn’t clear if he has a lawyer.
JC and Mary Barb of Hemet, Calif., say their financial adviser Kevin Kraemer persuaded them to invest some $78,000 with Future Income last year. “He came to us and said, ‘Hey we can make some more money on your money,’ [and] sold us this new deal,” said Mrs. Barb, a 66-year-old retired postal worker. Her husband, a 63-year-old retired teacher, said the money “was to be a big help to us in our retirement and now it’s not there, it’s gone.” Mr. Kraemer declined to comment.
Unlike publicly traded investments, there are few rules on how pension advances can be sold or by whom. “They illustrate the problems with the financial services industry selling opaque, high-commission private investments,” says Joe Peiffer, a New Orleans-based plaintiffs’ lawyer representing some purchasers of Future Income’s products. “We have clients who were advised to cash in their pensions and refinance their homes to buy these things.”
In a letter sent to investors in April, Mr. Kohn said his company was suffering from “intense regulatory pressure and legal expense,” and investors had been told there were “no guarantees [they] would receive all payments.” Future Income didn’t respond to emails, and its phones appear to be down. Christopher Jones, a lawyer representing the company over a civil investigation by the Consumer Financial Protection Bureau, didn’t respond to requests for comment. The CFPB declined to comment.
Future Income called itself “America’s largest pension cash-flow originator,” boasting of a “global footprint of over 200 employees.” Its mailing address is a mailbox at a United Parcel Service Inc. store in a strip mall outside Las Vegas. The same address has been used by Mr. Kohn for dozens of other companies, most of them now defunct, state records show.
Mr. Kohn formed Future Income in 2011, company records show. In 2016, he set up a separate company, FIP LLC, controlled via a Philippines-based corporation of which he is the sole owner, according to a complaint filed last year by Minnesota regulators. He pleaded guilty to trafficking in counterfeit goods in 2006 and served 15 months in federal prison.
State regulators took action against Future Income as early as 2014 over the terms on which it was buying pension benefits, saying the firm was lending illegally. Some states said the company was breaching state laws limiting the interest that can be charged on loans. A disabled Gulf War veteran who borrowed $2,700 was required to send $450 a month from his benefits for five years—a total of $27,000, or an annual percentage rate of 200%, according to one example cited in the Minnesota lawsuit. Mr. Kohn in his April letter said the company was in the process of agreeing, or had agreed to, settlements with the states that limited the amounts it could collect.
“Future Income Payments’ illegal loans were outrageously expensive,” said Lisa Madigan, the Illinois attorney general, who filed a suit against the firm on the same grounds this year.
The string of regulatory actions didn’t stop advisory firms and others selling the commission-rich products, many as part of a retirement-savings strategy. A Future Income marketing presentation urged retirees to “give your savings the opportunity to grow,” with “competitive fixed rates,” according to a copy reviewed by The Wall Street Journal.
The sellers included Live Abundant, a firm based in Salt Lake City that promises on its website to “empower you to live a more abundant life by replacing your old, outdated retirement philosophy.” It has sold products from both Future Income Payments and Woodbridge Group of Cos. LLC, another private-market investment that collapsed, according to lawyers representing investors who said they intend to sue Live Abundant.
Loren Washburn, an attorney for Live Abundant, said the firm plans to review what it “could have done better” in vetting the deals. “This outcome where we’re having to explore options to collect [the money due to investors] is obviously not optimal.”
The sellers also included independent advisers registered with the Securities and Exchange Commission, such as Gus Marwieh of Austin, Texas. Mr. Marwieh “used his strong religious beliefs to engender trust from investors,” said Mr. Peiffer, who is representing some of them. Mr. Marwieh confirmed he sold Future Income products but declined to comment further.
An SEC spokesman declined to comment.
Investors are now scrambling to try to recover money. Mr. Peiffer said he is “highly confident that the losses suffered by investors are well over $100 million.”
Faw Casson & Co., an escrow company in Dover, Del., that held funds on behalf of investors, sued Future Income Payments in May. Faw Casson, whose lawyer declined to comment, said in a court filing it has received calls from several investors including a “retired secret service agent [who] said that if we do not return his phone call, he is coming to the office and trust me that is not what we want.”
One of the biggest problems I am seeing these days is private placements (also called alternatives or non-registered investments) that are sold to accredited investors through a private placement memorandum or PPM. Because these investments are not registered with the SEC the information that you can get about them is far more limited, and can even be fraudulent.
According to this article in the Wall Street Journal yesterday, sales of private placements are surging, as part of a broader rise in private capital markets. Private placements can be great opportunities, but they nearly always carry significant risk and in some cases they can be Ponzi schemes. Caveat emptor.
Aside from the risk, one of the biggest concerns regulators have is how the products are sold. FINRA has warned in the past about “fraud and sales practice abuses” by firms and brokers in the market. In some cases this may be due to the fact that these smaller, less known firms tend to hire troubled brokers for their track record in aggressively selling high-commission deals, sometimes using questionable tactics. Most of these firms are small to midsize brokerages, with fewer than 500 brokers, and are spread throughout the country.
According to the WSJ, more than 1,200 brokerage firms sold around $710 billion of private placements last year, and sales for the first five months of this year will be even higher. To make matters worse, securities firms with an unusually high number of “bad brokers” are selling tens of billions of dollars a year of private stakes in companies. The WSJ reviewed records of who was pushing these investments and identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records. This is not normal (always run your broker or advisor’s name through Brokercheck).
The bottom line is that investors are far more likely to be exposed to losses or fraud in private investments. If your broker or advisor recommends a private placement or “alternative” investment make sure he/she has a good track record and has done extensive due diligence.
If you get a cold call from a firm you’ve never heard of trying to convince you to invest in one of these, just say NO.