Rust Rare Coin: An Analysis of Utah’s Latest Massive Ponzi Scheme

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.

Photo by Chris Detrick | The Salt Lake Tribune

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.

After all, Rust was an active, respected member of the Church of Jesus Christ of Latter Day Saints and a generous promoter of music education in the schools.  What could go wrong?

Well, as it turns out plenty.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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
  8. 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.
  9. 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.
  10. 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.

Copyright © 2018 by Mark W. Pugsley.  All rights reserved.

Another Former LDS Stake President Indicted for Affinity Fraud

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.

The “position of prominence” the DOJ is referring to is the fact that Mouritsen was a stake president of the Kaysville Utah Crestwood Stake of the Mormon Church from 1989 to 1997.   He also wrote a book called “Mantle: Windy Day in August, at Nauvoo, When the Mantle of the Prophet Joseph Smith Fell on Brigham Young Hardcover” (available on Amazon!).

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.

How To Avoid Affinity Fraud

Investing always involves some degree of risk, but investors can mitigate these risks by carefully investigating investment opportunities. The Securities and Exchange Commission recommends the following steps to avoid getting caught up in an affinity fraud scheme:

  • 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 enforcement@sec.gov.

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.

Copyright © 2018 by Mark Pugsley.  All rights reserved.

The Problem With Private Placements

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.

Copyright 2018 by Mark Pugsley.  All rights reserved,

More Trouble for John Zane Jeppesen of Garland, Utah

I have previously  written about Mr. Jeppeson, now his is more trouble.  This is from the Ogden Herald Journal this week:

The Utah Division of Securities of the Department of Commerce have filed court documents against John Zane Jeppesen, of Garland, bringing forth more accusations and details into Jeppesen’s nearly 20 year behavior of securities fraud and outlining a series of investments that have totaled nearly $9 million while naming family members of Jeppesen’s as recipients of those investment funds.

The Utah Division of Securities recently 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.

Breaking down the timeline of Jeppesen’s fraudulent investment behavior, the Division outlined three separate time frames that go back as far as 1999.

According to these documents, in 1999 Jeppesen acknowledged in an Idaho order that he was not licensed to sell securities under Idaho code but violated that code by selling securities that were unregistered. He also violated Idaho code by making untrue statements of material facts, and omitted facts to investors by failing to disclose to them that the promissory notes he was selling were not registered as securities and that he did not have a license to sell securities.

Jeppesen took this pattern of unlawful activity to Utah and in 2005 entered into a similar order with Utah and the Division for similar charges. In this series of events, court documents state, “Jeppesen deceived 134 Utah investors and raised approximate $8 million. For his unlawful services, Jeppesen received a total of $986,563 in compensation.” Many of those Utah investors were Box Elder County residents.

In a 2007 Utah order, Jeppesen was told he “would not engage in the sale of unregistered securities in the state of Utah” and that he would become a licensed broker dealer, investment adviser of agent before the Division before engaging in any securities transactions. Jeppesen was also told he was prohibited from making any untrue statements or omitting facts and that he would tell potential investors the existence of his current stipulation.

In 2010, Jeppesen violated the securities laws in a third round of securities violations. In this round of violations, according to court documents, Jeppesen worked with six investors in both Utah and Idaho.

Investors 1 and 2 are residents of Idaho with family and business ties to Utah. They met Jeppesen through a family member that previously invested with him in a different venture. Jeppesen collected $100,000 from these investors (over the course of a year), returned approximately $25,770, promising a 12 percent return on property located in Utah County.

According to the Stipulation and Consent Order, Jeppesen “used these funds in a manner inconsistent with what he told Investor 1 and Investor 2,” and instead used $5,225 towards banks and credit cards, $18,720 for payments to earlier investors, $530 to LaDene Jeppesen and $2,500 to his wife, Robyn Jeppesen. According to this document, Jeppesen told these investors “there was no way to lose money on this deal.”

Investors 3 and 4, a married couple from Salt Lake County, also met Jeppesen through a family member that invested with him previously. This couple invested five different times with Jeppesen for a total of $135,000 and are still owed the full amount in principal alone.

The document states that Jeppesen did not provide these investors with a promissory note or trust deed at the time of investment and when asked, Jeppesen claimed, “he forgot to record the trust deed and create a note.” These investors were told that they would be paid back within one year.

In this case, Jeppesen told investors, “There was no need for a promissory note or trust deed because it is a short-term investment and they have to move fast.” Instead, the Division stated, Jeppesen used these funds in a manner inconsistent with what he told these investors with payments to earlier investors of $24,130, a payment of $4,357 to banks and credit cards and over $4,000 to various businesses.

The Division also states that Jeppesen used those funds paying Robyn Jeppesen $11,532, Shannon Fitzgerald (wife of Michael Fitzgerald) $10,336, $5,000 to Lone Peak Real Estate and $2,200 in payments to earlier investors.

Investor 5 is a resident of Davis County and was told by Jeppesen that “he could not wait for a bank loan” and that his investment would be a trust deed. Jeppesen also told Investor 5 that “he was working with Mike Fitzgerald, his business partner on several land deals” and that Fitzgerald was “a genius with land deals.” Investor 5 was told that Jeppesen and Fitzgerald wouldn’t need 45 days to return his funds because they had property in Beverly Hills, California that was under contract that would sell within 30 days.

Investor 5 was also told that he could foreclose on the property if Jeppesen or Fitzgerald didn’t return his funds in 45 days. This investor wired $100,000 to JLP in Feb. 2012. One month later Jeppesen told Investor 5 that he would not be able to return the funds within the promised 45 days because “of an issue with the closing on the Beverly Hills property.”

Jeppesen offered Investor 5 an extra 1 percent interest on top of the guaranteed 20 percent if Investor 5 agreed to keep his funds with Jeppesen and not foreclose on the property but the investor declined the offer.

To this date, Investor 5 is still owed $100,000 in principal alone and that the investment monies were used by Jeppesen in a manner inconsistent with what the investor was told.

Instead, the funds were used to make payments to earlier investors in the amount of $53,556, $16,571 to a credit card, $11,113 to Robyn Jeppesen, $6,500 to Shannon Fitzgerald, $5,425 to Carole Jeppesen (Jeppesen’s sister in law), $2,625 transferred to other bank accounts, $1,665 to Best Buy, $1,500 transferred to himself, $530 transferred to LaDene Jeppesen and other transactions all totaling $100,000.

According to documents, Jeppesen used Investor 6’s funds in a manner inconsistent with what Jeppesen told him including, $79,045 in payments to earlier investors, $49,881 in credit card payments, $22,475 to Robyn Jeppesen, $19,841 to Shannon Fitzgerald, $12,711 in transfers to other bank accounts, $21,465 to Utah County Treasurer, $5,447 for remodeling, $2,650 to LaDene Jeppesen, $4,969 in unknown expenses and various other transactions totaling $220,000.

During Jeppesen’s May 24, 2018, hearing, he presented two arguments. “First, Jeppesen asserted that he thought that he had not violated the securities laws this third time because he had obtained a business license for his new enterprise and because he had secured the investment of the investors by security interests in real property. Secondly, he asserted that his investors would not be harmed because the value of the properties involved in the investment exceeded the total amount owed to the investors, documents state.

Although the first argument is unrelated to the fine imposed on Jeppesen, the Division states that he did not consult with a knowledgeable securities attorney to assure that the investments weren’t in violation of securities laws. Instead, Jeppesen said he “relied on the advice of two non-attorneys, one of whom was a Mr. Fitzgerald who had been Jeppesen’s accomplice in the $8 million securities fraud transaction that was the subject of the 2007 Utah Order,” documents state.

“Jeppesen’s testimony that he was now complying with securities laws, or thought that he was complying with securities laws, is inherently and clearly not to be believed,” court documents state. The Division added that there was no documented credible evidence produced at that hearing that said investors had security interest in real property.

Countering Jeppesen’s claim that his investors weren’t harmed in a substantial way, “First and foremost, is the fact that the parties acknowledge and agree that the investors in the present third round of securities fraud are currently owed $488,830 in principal alone. These investors are currently harmed in a substantial way,” the document states.

Jeppesen also stated during that hearing that “the properties that could be sold to make payment to the investors were not presently owned by him or the Respondent entity, but by the Jeppesen family members,” it added. He added that one of the properties had already been sold but the sales proceeds from the transaction were “tied up in escrow” and subject to multiple claims.

“No credible evidence was given that even one dollar of the present or prospective sales proceeds from these properties would ever pass into the hands of the harmed investors,” the document stated.

The Division added that Jeppesen provided no cooperation to their investigation and that “the Respondents have transferred to Jeppesen family members the real properties that were meant to respond to, or secure, the investments of the victims of the Respondents.”

On April 4, 2016, Jeppesen was charged in Utah’s Third District Court in Salt Lake City 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. If he fails to make the payments to investors he may be sentenced to addition time in jail and/or prison.

A Pyramid of Lies

Editor’s Note: This is a fascinating story that appeared on the FBI’s website this week about a $43 Million Ponzi Scheme in Sparta, Tennessee.  Tractor salesman Jeff Gentry preyed on the implicit trust of friends, family, and neighbors in this small Tennessee town.  

Nobody would have suspected that the affable Tennessee tractor salesman who was raised among them, tended their lawns in high school, and prayed beside them at Sunday services was scamming them by the millions. Indeed, that’s probably what made the man’s investment scheme so successful, investigators say.

Jeffery Gentry, 40, pleaded guilty in federal court last August to charges related to his $43 million scheme that bilked investors—including friends, family, neighbors, and fellow parishioners—out of more than $10 million. Gentry, who owned and operated Gentry Brothers Tractor Supply and Gentry Auto in the Middle Tennessee town of Sparta, was sentenced on May 14 in U.S. District Court in Nashville to three years in prison. He was also ordered to pay $10.4 million in restitution to his victims.

Gentry’s scam was a textbook Ponzi scheme that promised investors high guaranteed rates of return on investments. He told investors the funds would finance the purchase of mowers and farm equipment to satisfy lucrative state contracts. In return, investors could expect monthly proceeds as high as 10 percent, thanks in part to rebates from equipment manufacturers for cash purchases, according to investigators. But it was all a lie, sustained in large part by investors’ faith that a lifelong neighbor and friend would never purposely do them wrong.

“He kind of preyed on that aspect of it,” said Jeff Guth, chief of the Sparta Police Department in White County, a close-knit rural community of 26,000 residents where the median household income is about $36,000. “Most of these people were friends of his. A lot of them went to church with him. They wouldn’t believe that someone close to them like that would be doing that.”

Guth learned of the scheme a few days before Christmas in 2016, when the police station lobby filled up with distraught investors fearing they had been duped. Gentry’s tractor store—an informal gathering spot where many of the investment transactions occurred—had shut down without explanation, suddenly casting doubt on their guaranteed returns. At the police station, former farmers and other retirees waved handwritten statements revealing their six-figure outlays, much of it from savings and retirement accounts. Suspecting there would be still more victims, Guth called the FBI in nearby Cookeville—a satellite office of the Bureau’s Memphis Division—for support.

“He said he had some people in his office who felt they may have been the victim of a crime,” recalled FBI Special Agent Traci Lovell. “I don’t know if they used the term ‘Ponzi scheme,’ but their money had been stolen—a large amount of money.” Lovell and fellow agent Ric Fagan began interviewing more than 50 victims who had invested as far back as 2012. The picture that emerged was a typical pyramid scheme: Gentry’s initial investors may have seen promising returns early on, but without new money coming in—to pay investors their guaranteed returns and support Gentry’s increasingly lavish spending—the ruse ultimately fell apart, leaving many underwater and angry.

“That was a hard day for a lot of people, because they were finally coming to the realization that they had been duped and that they would be lucky if they got anything back at all,” Guth said.

In addition to funneling investor cash into real estate, livestock, vehicles, and farm equipment, Gentry spent $365,000 in March 2016 to launch a used car business, Gentry Auto, in Sparta. “He sold for a living,” said Special Agent Fagan. “He could talk to people. Just what every scam artist needs is the ability to convince you that giving me your money is the best thing to do.”

U.S. Marshals Service Auction Sign in Sparta, Tennessee
The FBI investigation required months of work with local task force officers in Sparta, the Internal Revenue Service, and the U.S. Marshals Service—which seized Gentry’s assets, including businesses, houses, and land financed through the scheme, as well as $300,000 in cash. An FBI forensic accountant was brought in to make sense of the accounts and handshake contracts, including handwritten notes acknowledging single investments of more than $1 million. Gentry was charged on July 5 with wire fraud and money laundering. An auction last August on the site of Gentry’s former tractor business sought to recoup some money for the victims, though it only resulted in $1.3 million for victim restitution—not nearly enough to make them whole. Guth said some bidders at the auction altruistically overbid certain items “to help their neighbors out a little bit.”

“Many of them, they are never going to see the amount that they had put into it,” Guth said. “But they will be able to benefit from some of it. And some of it may be better than nothing at all.”

The FBI agents said secrecy was a key element of Gentry’s ploy—as it is in most Ponzi schemes. Potential investors are lured into thinking they are lucky to get access to this kind of lucrative investment, and that if too many people know about it, their own windfall might be diluted. The air of secrecy also keeps victims from swapping notes, which can reveal inconsistencies and irregularities. That’s what happened in Sparta.

These tractors and mowers were among the assets seized from convicted fraudster Jeff Gentry that were auctioned by the U.S. Marshals Service at a public auction on August 26, 2017 in Sparta, Tennessee.

Tractors and mowers were among Jeff Gentry’s seized assets auctioned last summer by the U.S. Marshals Service. The resulting $1.3 million in proceeds will go toward restitution for victims of Gentry’s investment scheme.


“When the victims started comparing notes, they realized the basis of this scam was implausible,” said Lovell, referring to the sheer volume of tractors Gentry would have needed to sell to justify what he promised investors. “The victims can see in hindsight how ludicrous it was to believe that this scheme was true.”

In hindsight, there were warning signs: guaranteed high returns, secrecy, and a fundamentally flawed investment model. Investigators cautioned anyone entering into an investment opportunity to do their homework before handing over money. “If someone tells you to keep it a secret, that should be a red flag,” Fagan said. “If someone uses the words ‘guaranteed return,’ that should be a red flag. If a contract you’re looking at doesn’t make sense, ask more questions and try to understand it. Don’t make yourself an easy target.”

Guth said some victims, including retirees on fixed incomes, lost their life savings. Their trust and faith has also been tested. “People are more on guard than they were before, and they are probably having a hard time trusting anybody,” he said. “It was hard to take. But being a small, close community, I think people have kind of wrapped their arms around some of these people [who were victims]. I’m sure it’ll take a while, but we’ll get through this.”

What is a Ponzi Scheme?

Ponzi schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artists pay “dividends” to initial investors using the funds of subsequent investors. The schemes generally fall apart when the operators flee with the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”

This type of fraud is named after Charles Ponzi of Boston, Massachusetts. In the early 1900s, Ponzi launched a scheme that guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial backers, the scheme dissolved when he was unable to pay later investors.

Tips for Avoiding Ponzi Schemes

  • Be careful of any investment opportunity that makes exaggerated earnings claims.
  • Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework.
  • Consult an unbiased third party—like an unconnected broker or licensed financial adviser—before investing.

Jeffrey Mowen Has Been Released From Prison

I recently received an anonymous tip telling me that Jeffrey Lane Mowen, formerly of Lindon, Utah, has been released from prison.  I checked the Bureau of Prisons website and sure enough, he was released on January 12, 2018 and is now presumably at large in the community, so watch out Utah County!

Jeffrey Mowen

Mowen was sentenced to ten years, but it’s not unusual for white-collar prisoners to be released early to make room for violent prisoners.  Regardless, this is not someone who I would recommend doing business with.  If you would like to know more about this case and the criminal charges he pleaded guilty to you can read my prior posts about the case here.

The  press release and complaint the SEC filed against him in September of 2009 can be found here, and the Daily Herald’s article about his plea deal can be found here.

One of the more interesting things about this case is that rather than investing the victims’ money as represented, Mowen used about $6 million of investor monies to purchase over 200 antique, classic and muscle vehicles which he kept in a warehouse in Bountiful.  The collection included  cars, trucks, trailers, motorcycles and three-wheelers, most of which were auctioned off in 2010. You can see some photos of the totally random assortment of cars that they auctioned off in this article from the Deseret News.  As one observer told the paper, “It’s just a bizarre collection. There’s a lot of junk in there.”

Hopefully his taste in automobiles has improved during the time he spent in the federal penitentiary.

John Zane Jeppesen of Garland, Utah And His History of Fraud 

John Zane Jeppesen of Garland, Utah is probably not someone you want to invest your money with.

  • In 1999, Jeppesen entered into an agreement with the Idaho Securities Bureau, under which he admitted to violations of registration, licensing and anti-fraud provisions and was ordered to pay outstanding principal and interest to Idaho investors.
  • In 2003 Lehman Brothers Bank filed a $58 million dollar lawsuit against Jeppesen’s company Beverly Hills Development and others in California alleging it was involved in a massive real estate loan fraud scheme occurring over a three-year period through forgery, identity theft, misrepresentations, fraudulent loan documents, wire fraud, and the illegal laundering of funds.
  • In 2005 the Utah Division of Securities charged Jeppesen with raising approximately $8 million dollars for a company called Beverly Hills Development Corporation from 134 Utah investors though unsecured promissory notes. He settled that case, but the conduct didn’t stop.
  • In April of 2016 he was charged by state prosecutors in the Attorney General’s office with 11 criminal counts including securities fraud, theft and one count of pattern of unlawful activity for running a real estate scheme.
  • In September of 2016 the Utah Division of Securities filed another Order to Show Cause against him that included 8 causes of action including securities fraud, unlicensed selling of securities and “willful violation” of the prior 2005 Consent Order with the Division involving strikingly similar conduct.

Despite all that history of fraudulent activity, much of which he admitted, Third District Court Judge Royal Hansen sentenced Jeppesen to just 30 days in jail after he pled guilty to one count of felony pattern of unlawful activity.  Presumably when he gets out of prison he will start paying back his investors, and in fact Just Hansen stated that was his intent in keeping the sentence reasonably short. When Jeppesen’s 30 days is served, he has six months to pay back the victims or he’ll return to jail to serve 11 more months.  Hopefully that will provide the necessary incentive to get everyone repaid!

As detailed in the Tremonton Leader, Jeppesen originally faced eleven counts of securities fraud, two counts of theft and one count of patterns of unlawful activity, all second degree felonies as a result of his alleged role in a real estate investment scheme that has left six known victims out of hundreds of thousands of dollars.  The linked articles by reporter Cari Doutre in the Tremonton Leader contain a lot of great detail about his conduct, and the heartbreaking testimony from his victims at the sentencing hearing.

I will interested to see whether he will be able to get his victims repaid after he gets out of prison. If you are a victim of one of Mr. Jeppeson’s scams please share your story in the comments below.

Copyright © 2018 by Mark W. Pugsley.  All rights reserved.

FBI Article on Affinity Fraud in Utah

This is a re-post of a great article on the unique problem we have with affinity fraud here in Utah.  This article appeared on the FBI’s website yesterday.


Affinity Fraud

White-Collar Criminals Use Bonds of Trust to Prey on Investors

White-Collar Crime Offender Registry Website (Stock)

Financial fraudsters are known to be an unscrupulous lot, but it is particularly loathsome when these white-collar criminals exploit trusting members of their own church or social circle to line their pockets.

Financial crimes based on bonds of trust—known as affinity fraud—occur throughout the United States but are especially prevalent in Utah, where members of The Church of Jesus Christ of Latter-day Saints too often are victimized by savvy fraudsters who claim to be just like them.

“These are greedy individuals who will stop at nothing,” said John Huber, the U.S. Attorney for the District of Utah, a lifelong resident of the state and member of the Mormon Church. “What’s so disconcerting is that these criminals approach us at church or through associations at our work or referrals from friends. They are silver-tongued devils—wolves in sheep’s clothing who will take our money and we’ll never see it again.”

So serious is the problem of affinity fraud in Utah that in 2015 the state legislature passed a law establishing an online white-collar crime registry—similar to sex-offender registries—which publishes the names, photographs, and criminal details of individuals convicted of financial fraud crimes in the state going back a decade. Currently, there are 231 individuals listed on the registry.

In addition, a collaboration between federal, state, and local law enforcement partners has resulted in the Stop Fraud Utah campaign, which aims to educate the public about affinity fraud—what people can do to avoid it and how best to report it if they have been victimized.


In Their Words

A Utah woman who believed she had done her homework on retirement investments later discovered she was part of an elaborate scam that cost her thousands.

Transcript | Download

John Huber, U.S. Attorney for the District of Utah, describes how affinity fraud takes advantage of established “relationships of trust.”

Transcript | Download

Michael Pickett, supervisor of the white-collar crime squad in the FBI’s Salt Lake City office, describes tactics fraudsters use to prey on potential affinity fraud victims.

Transcript | Download

Richard Best, regional director of the Securities and Exchange Commission’s Salt Lake office, describes taking precautions against affinity fraud.

Transcript | Download


“Within the Mormon population, there is a well-known sense of trust,” said Special Agent Michael Pickett, a veteran white-collar crime investigator in the FBI’s Salt Lake City Division. “Unfortunately, that trust can sometimes take the place of due diligence, and that’s when individuals are more susceptible to being victimized.”

Affinity fraudsters are expert manipulators. “They are great salesmen,” Pickett explained. They will approach members of their social or religious circle with a promising investment opportunity—one that pays a high rate of return—and then use a variety of high-pressure tactics to get their victims’ money.

Pickett described some of the fraudsters’ ploys: “This is a once in a lifetime opportunity. You don’t want to be the one who passed up buying Amazon when it was first offered. You don’t want to be the one that blows that opportunity, but you have to do it now. If you wait, the opportunity is gone. And by the way, you are one of the few people I am making this offer to, so let’s just keep it between ourselves.”

“This type of fraud is significant,” Pickett said. “Within the Utah area, we are investigating more than $2 billion worth of fraud. In the last four months, we’ve opened 10 new cases.” He added that Utah consistently ranks among the top five states for the FBI’s most significant white-collar crime cases.

Too often, individuals dreaming about getting the great deal promised to them by a trusted friend or associate fail to see the red flags. “A key to this is communication,” Pickett said. “You have to do your due diligence. Talk to a neighbor or a family member. Add a little common sense to the equation, and try to separate truth from fiction.”

That’s where the Stop Fraud Utah campaign comes in. “The strategy for law enforcement is not to deal with fraud as a reaction, but to deal with it on the front end,” said Richard Best, regional director of the Salt Lake City office of the U.S. Securities and Exchange Commission (SEC), a partner in the campaign. “The best way to stop fraud is to avoid fraud, and the best way to do that is to educate the community so that when they are confronted with situations—opportunities, as fraudsters would say—they know to ask the right questions.”

Established earlier this year, the Stop Fraud Utah campaign has sponsored several fraud seminars around the state, which are free and open to the public. And because victims of affinity fraud typically call their local police departments to report these crimes, there is also an effort to train local law enforcement personnel on how to identify white-collar fraud, what evidence to collect, and the proper state and federal agencies to report it to for further investigation.

The high level of collaboration among Stop Fraud Utah campaign partners is “crucial to our success here,” Best said. “I cannot stress that enough. The SEC’s relationship with the FBI and the U.S. Attorney’s Office is one of the best I have ever seen.” Other members of the campaign include the Utah Attorney General’s Office, the Internal Revenue Service, and the state’s Consumer Protection Division.

“In Utah, we have to do something to stop fraudsters from exploiting people who trust them,” said U.S. Attorney Huber. That’s why the state’s top law enforcement official has personally attended fraud seminars to caution the public about affinity fraud. “I know Utah very well,” he said. “It troubles me to see good people who have worked very hard to set aside retirement funds and nest eggs lose that to people who seemingly have no conscience.”

Unlike a drug addict who might rob a bank out of desperation, Huber added, financial fraudsters’ crimes are ruthlessly premeditated. “These perpetrators, with a smile on their face and a twinkle in their eye, approach with a handshake and a hug, with intent and with persistence, to violate the trust of their victims and to take their life’s earnings.”

Wolves in Sheep’s Clothing

The white-collar criminals who commit affinity fraud are often charismatic salesmen capable of deceiving even sophisticated investors.

Special Agent Michael Pickett, a veteran financial fraud investigator in the FBI’s Salt Lake City Division, offers a case in point:

His team was investigating a scam artist who had fraudulently collected approximately $5 million from investors—and who would later go to jail for his crimes.

“We talked with one of his victims, an elderly lady, who knew this gentleman very well,” Pickett said. “She had been associated with him for years. Her husband, who had recently passed away, had been good friends with him as well.”

The woman had invested and lost more than $100,000 with the individual. Investigators spoke to her and made her understand that she had been the victim of a fraud. “Ultimately, she agreed to wear a wire for us and talk with the individual to get his sales pitch so we could use that in court against him,” Pickett explained. “She knew it was fraud and agreed to help us.” Wearing the wire, the victim spoke with the man who had taken her money. “She came back about two hours later,” Pickett said, “ready to invest more money with this individual.”

FBI agents were able to talk her out of investing more funds, Pickett said, “but that’s how good a salesman he was—and it was all based on that relationship of trust.”

SEC Creating Searchable Database of Bad Brokers

This is a repost of an article that appeared in ThinkAdvisor today.  Apparently the SEC agrees with one of the main goals of this website; people are increasingly googling the names of people they want to do business with, so information about people who have a documented history of unethical or fraudulent conduct needs to be easier to find.  The only reservation I have about this approach is that the database will be limited to (1) individuals,  and (2) those “who have been barred or suspended as a result of federal securities law violations.”

This leaves a number of gaps.  I think the database should include companies that have a history of fraud (which could include a number of well-known companies), and it should also include companies and individuals who have been barred or suspended by FINRA or state regulatory agencies.  But otherwise its a good first step!  -MWP

SEC Creating Searchable Database of Bad Brokers

The site ‘will be particularly valuable’ for spotting fraudsters who have been stripped of their registrations, Clayton said

 

SEC Chairman Jay Clayton. (Photo: Diego Radzinschi/NLJ)The Securities and Exchange Commission is creating a website that will contain “a searchable database of individuals” who have been barred or suspended as a result of federal securities law violations, the agency’s chairman, Jay Clayton, said Wednesday.

“This resource is intended to make the prior actions of repeat offenders and fraudsters more visible to investors,” Clayton said at the Practising Law Institute’s 49th Annual Institute on Securities Regulation conference in New York.

“Clearly, there are fraudsters in our marketplace who are seemingly unafraid of, or undeterred by, the risk of being caught. The SEC can target the underlying conduct of those fraudsters – and we do – but we also can and should arm investors with information that makes it more difficult for them to be defrauded.”

The searchable website, Clayton continued, “will be particularly valuable when bad actors have shifted from the registered space for investment advisors and broker-dealers to the unregistered space.”

Clayton stated in late September that the agency was planning to compile data on people who are not registered as advisors or brokers in order to catch more incidences of fraud.

During his Wednesday comments, Clayton said that the securities regulator reminds investors “repeatedly that they should conduct a background check before investing with a financial professional, and we are showing them how to do just that” with the upcoming website and with FINRA’s BrokerCheck.

Clayton told audience members that the SEC should continually be asking: “Are there opportunities to deter, mitigate or eliminate wrongdoing before an enforcement action becomes necessary?”

Looking back at enforcement actions brought by the agency, he continued, “a common theme emerges – where opacity exists, bad behavior tends to follow.”

The agency’s enforcement division, he said, “will continue to be active in pursuing cases where hidden or inappropriate fees are at issue, but we also are exploring whether more can be done to clarify fee disclosures made to retail investors and, thereby, deter and reduce the opportunities for misbehavior.”

As an example, he cited firms that invest clients’ money in a mutual fund share class that charges a 12b-1 fee when a lower-cost share class of the same fund is available, “or advisors may improperly choose to use fund assets to pay expenses that should be paid by the firm.”

Customers, he added, “may be deceived if brokers charge fees that are designed to cover the costs of services provided, while also marking up the prices of securities to earn a profit that is not disclosed.”

A New Podcast Interview

For those who are interested in the intersection between the LDS Faith and the epidemic of affinity fraud and Ponzi schemes in Utah and the LDS community worldwide,  take a listen to this podcast in which I was interviewed by the brilliant scholar Gina Colvin who manages the A Thoughtful Faith Podcast.  This was a fascinating and wide ranging interview that was quite enjoyable for me!

A warning to those with extra sensitivity on issues relating to the LDS Church:  This discussion is not particularly faith affirming or promoting and includes some criticism of the church and its policies.


267: The Church of Jesus Christ of Latter-day Saints and Affinity Fraud: Mark Pugsley

Mark Pugsley is a lawyer in Salt Lake City Utah who specializes in recovering money lost by investors due to bad advice or misconduct.  He has represented victims of investment fraud and unsuitable investment recommendations in civil litigation, whistleblower cases, and receivership (claw back) cases for over twenty years.

Mark reports that Affinity Fraud is a big problem in the Church of Jesus Christ of Latter-day Saints community and he’s 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.

Mark hosts the Utah Securities Fraud website which can be found and contains all of the latest on investment fraud cases in Utah.