The Growing Problem With Sales of Unregistered Securities

Recently I have been busy working to recover losses for a large number of investors who lost money in unregistered investments offered by Woodbridge and Future Income Payments or FIP. In many cases these investments were recommended by insurance agents who were not licensed to sell securities, and did not perform adequate due-diligence on these companies before they made the recommendation.

FIP offered pensioners upfront, lump-sum payments in return for a portion of their monthly pension payments over a specific term, often three to five years. FIP then used these pension payments to fund a monthly income stream back to the investors who put up the money for the lump-sum payments. In July of 2018 Scott Kohn, the 64-year-old felon who started the company, closed the doors and disappeared leaving investors with more than $100 million in losses.

Subsequently the SEC filed charges against thirteen individuals and ten companies who recommended and sold Woodbridge, including Utah-based Aaron Andrew and Live Abundant. Live Abundant and its agents were not licensed to sell securities, and yet they recommended both FIP and Woodbridge to hundreds of people here in Utah and throughout the western United States. Our lawsuits against Live Abundant and the individuals and entities who perpetrated this scheme are ongoing.

The common link between these two fraud schemes is that investments in FIP and Woodbridge were not registered with the SEC. These are sometimes referred to as private placements or unregistered offerings.  Generally, a company may not offer or sell securities in the United States unless the offering has been registered with the SEC or an exemption from registration is available. For more information about exempt offerings I recommend you look at this article on the SEC’s website.

Below is a repost of an article from Investment News that highlights some of the challenges for individual investors from these investments, and for the firms that offer them.


Sales of Unregistered Securities are a Growing Problem That’s Harming Investors — and the Industry

By Bruce Kelly

To an investor, Castleberry Financial Services Group’s promise of up to a 12.2% annual yield on the alternative investment fund it was selling might have seemed awfully tempting. So might the assurance that your principal would be insured and bonded by well-known insurance companies CNA Financial Corp. and Chubb Group.

In promotional materials, Castleberry claimed to have invested almost $800 million in local South Florida companies and to have a portfolio of real estate holdings that was generating $2.8 million in rental income annually.

But in late February, the Securities and Exchange Commission went into court to shut the company down, claiming it was all a fraud, including the involvement of CNA and Chubb.

Before the SEC acted, though, it said that Castleberry had managed to raise $3.6 million from investors, some of which was used to pay the personal expenses of its principals. Other funds were transferred to family members or other businesses the principals controlled, according to the SEC.

By all indications, the marketplace for all types of private, unregistered securities, including private placements sold to wealthy investors and institutions, is thriving. But what’s growing alongside this legitimate, if risky, market is a seedy side of the financial advice industry. Investment funds promising above-market returns that employ networks of brokers, former brokers, insurance agents or others lurking on the fringes of the industry to sell their investments are taking advantage of unsuspecting investors.

Add in the ability to offer private securities over the internet and solicit clients via social media, and unregistered, private securities being sold to less-than-wealthy investors, many of them senior citizens, are becoming increasingly dangerous. Fraudulent securities are damaging the reputation of the legitimate financial advice industry,​ and the industry itself might serve as the best solution to safeguarding the investing public.

“I’m seeing more of it:​ the spike in the sale of nontraditional investments,” said David Chase, a former SEC staff attorney who’s now in private practice and based in South Florida.

Sales soar

The proliferation of potentially fraudulent schemes comes at a time when the sale of legitimate private securities, which are exempt from having to be registered if they meet certain SEC guidelines, has taken off. While the annual amount of public stock offerings has remained relatively steady over the past decade, the sale of new private stock offerings has soared.

The most popular of these, known as Regulation D offerings, have more than doubled, from 18,295 in 2009 to 37,785 in 2017. Those deals, along with other types of private offerings, raised a total of $3 trillion in 2017.

Brokers and advisers can sell private, unregistered shares to only the wealthiest clients; investors need a net worth of $1 million or an annual individual income of $200,000 to buy in. But the public disclosure is negligible, making the securities opaque, some sources said, and that is hazardous.

The game plan of the fraudulent unregistered securities schemes currently roiling the investment advice market is simple. An investment manager claims to have an alternative investment to the stock market that beats the return on bonds or bank deposits. The investments are heavily marketed with investment seminars, dinners, and ads on radio and in local newspapers.

James Park, securities professor at UCLA, said the internet is giving the promoters one more outlet to sell their fraudulent investments.

“It’s now possible to get investors from everywhere,” he said. “In the old days, brokers would have to call up people to convince them to invest or put on a road show. Now it’s normalized with online platforms.”

In one of the largest recent cases,​ the SEC said the owners of Woodbridge Securities raised $1.2 billion over a five-year period by claiming they were selling loans to real estate developers.Source: North American Securities Administrators Association

Promising returns of 10%, the scheme reeled in 8,400 investors, many of them senior citizens, with the help of a network made up mostly of insurance agents and former stock brokers, according to the regulator. Woodbridge’s owners kept the scam going, the SEC said, by using money from new investors to pay off old investors — a classic Ponzi scheme.

Without admitting or denying the allegations, Woodbridge and its former CEO Robert Shapiro settled with the SEC for $1 billion in disgorgement and fines. Ryan O’Quinn, a lawyer for Mr. Shapiro, did not return a call seeking comment.

Beyond FINRA’s reach

One of the reasons these cons take time to detect is because the agents selling them mostly work outside the supervision of licensed broker-dealers, who are under the purview of the Financial Industry Regulatory Authority Inc. This gives the fraud ample time to flower before the SEC or a state regulator gets a complaint from an investor, investigates and shuts it down.

The largest Ponzi schemes in general are those that have tapped into a very successful and productive line of independent sales agents who typically have long-standing relationships with clients,” Mr. Chase said. “They sell the deal, and clients get defrauded.”

The SEC did a better job of shutting down what it said was a fraud in the case of Castleberry Financial Services Group after only a year in business. In February, the SEC was granted a temporary restraining order and temporary asset freeze against Castleberry and its principals.

​ Among other allegations, the SEC said the firm’s president, T. Jonathon Turner, formerly known as Jon Barri Brothers, had falsely claimed to have had extensive finance industry experience, an MBA degree and a law degree, while concealing that he had served 18 years in prison for multiple fraud, theft and forgery felonies.

Attorneys for Castleberry Financial and its executives did not return calls seeking comment.

State enforcement

In 2017, state regulators reported that enforcement actions against unregistered brokers and salespeople increased at a faster pace than actions taken against registered individuals. That means the risk from salespeople on the fringes of the financial advice industry is growing. And they are the type of people who often sell scams that are being marketed as unregistered securities.

“[The] enforcement survey reflects a large increase in enforcement actions against unregistered individuals and firms,” according to an October 2018 report from the North American Securities Administrators Association. Members of the group reported actions in 2017 against 675 unregistered individuals and firms — an increase of 24% over the prior year — and 647 registered individuals and firms — a 9% increase.

“The surge in cases against unregistered actors reversed a two-year trend in which registered individuals and firms in the securities industry, broker-dealers and investment advisers, had constituted the majority of respondents in state enforcement actions,” according to NASAA.

Perhaps the poster boy for selling phony unregistered securities is Barry Kornfeld, a leading seller of the Woodbridge Ponzi scheme.

The SEC barred Mr. Kornfeld from working as a broker in 2009. Regardless, he continued to sell private securities; he and his wife allegedly solicited investors at seminars and a “conservative retirement and income planning class” they taught at a Florida university, according to an SEC complaint.

From 2014 to 2017, he and his wife received $3.7 million in commissions after selling more than $60 million of the Woodbridge private securities, according to the commission. Mr. Kornfeld reached a settlement in January with the SEC, agreeing to be barred for a second time from the securities industry. Robert Harris, a lawyer for Mr. Kornfeld, did not return a call seeking comment.

Registered reps involved

Unregistered reps aren’t the only ones selling fraudulent securities. Registered reps working at broker-dealers also are involved.

“We’re starting to see more sophisticated means for registered reps within the broker-dealer space to get investors to invest in private securities,” Thomas Drogan, senior vice president at Finra, said in testimony last year about investor fraud before the SEC’s Investor Advisory Committee. “The challenge in that space has been reps encouraging their customers, for example, to send money from their brokerage account to their bank account. And once the money gets to the bank account, instructing the customer to then send the money to the individual reps’ outside business activity. This creates a problem. This creates a very big challenge for broker-dealers to conduct surveillance on.”

The practice, known as “selling away,” can be grounds for disciplinary action if the broker-dealer employing the broker has not approved the broker’s actions. Unregistered firms and individual topped the list of disciplinary actions by state securities regulators in 2017.

Advisers at independent broker-dealers are commonly paid 7% commissions when selling private placements, clearly on the high end of a broker’s pay scale.

“What’s driving this?” asked Adam Gana, a plaintiff’s attorney. “It’s commissions, commissions, commissions. Brokers think they can get away with selling whatever they want on the side.”

Even though these dubious private securities are creating havoc for investors and the financial advice industry, regulators may soon change the rules about how private securities transactions are supervised.

Simplify supervision?

Last year, Finra proposed rule changes that are intended to simplify how broker-dealers supervise a hybrid rep’s outside business activity and sale of private securities. The new rule focuses on the rep’s RIA firm and decreases some of the responsibility the broker-dealer has to watch over that separate line of business. It would cut costs for the firm and the broker. But some think these changes could prove dangerous.

William Galvin, secretary of the Commonwealth of Massachusetts and the most feared regulator in the securities industry, does not care for the Finra rule proposal.

“Finra claims that the proposed rule will strengthen investor protections, but it is not at all clear how investors will be protected by the removal of supervisory oversight,” Mr. Galvin wrote in a comment letter last April about the proposed rule. “The absence of proper oversight of outside business activities will increase the risk of fraud and abuse.”

Can financial advisers and the financial advice industry do anything to contain this problem?

Local investment advisers are often the best cops on the beat for detecting such frauds. Their knowledge often comes from clients who are being pitched such deals at “free” steak dinners that are provided to get them in the door for a presentation.

Advisers have the responsibility to report a suspicious private securities deal to their firm, said Mr. Chase, the former SEC attorney.

“If brokers get wind of these types of deals, they’ve got to go to the broker-dealer’s compliance department and report to the SEC or Finra,” he said. “They have the ability and obligation to report. There’s nothing wrong with putting these suspicious deals in front of regulators.”

Securities Arbitration—Should You Hire an Attorney?

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.

Finding an Attorney

Whether you decide to engage an attorney or not, a good resource to consult is An Investor’s Guide to Securities Industry Disputes published by The PACE Law School Investor Rights Clinic.

If you decide hiring an attorney is the right choice for you, the first step to take is to locate qualified candidates. The Securities and Exchange Commission (SEC) offers these tips:

  • Consult with your own attorney, if you have one, about your situation and whether you would benefit by an attorney who specializes in securities arbitration or litigation.
  • Contact the American Bar Association and the Public Investors Arbitration Bar Association (PIABA). Both allow you to search their member attorney directories for someone to represent you in your area. PIABA members have specific experience representing investors in disputes with the securities industry.

You can also check with your state, county or city bar associations.

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.

Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.

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,

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.”

SEC Publishes Recommendation on How Avoid Common Investment Scams in 2017

The Securities and Exchange Commission has published its annual list of tips designed to help investors with managing their money and avoiding common scams in the New Year.  Here is the list which is published by the SEC’s Office of Investor Education and Advocacy:

SEC INVESTOR BULLETIN: 10 INVESTMENT TIPS FOR 2017

12/27/2016

Whether you are a first-time investor or have been investing for years, here are 10 tips from the SEC’s Office of Investor Education and Advocacy to help you make better informed investment decisions and avoid common scams in 2017.

1. Always check the background of an investment professional—it is easy and free. You can find details of an investment professional’s background and qualifications through the search tool on the SEC’s website for individual investors, Investor.gov.  If you have any questions about checking the background of an investment professional, you can call our toll-free investor assistance line at (800) 732-0330 for help.

2. Promises of high returns with little or no risk are classic warning signs of fraud.  Every investment carries some degree of risk and the potential for greater returns often correlates with greater risk.  Ignore so-called “can’t miss” and “guaranteed risk-free” investment opportunities.  Better yet, report them to the SEC.

3. Be careful when using social media as an investment tool.  Social media and the Internet have become important tools for investors, but also present opportunities for fraudsters to lure investors into a wide range of scams.  For additional information on ways to avoid fraud through social media, please read our bulletin on Social Media and Investing.

4. It can be costly to ignore fees associated with buying, owning, and selling an investment product.  Expenses vary from product to product, and even small differences in costs can mean large differences in earnings over time.  An investment with high costs must perform better than a low-cost investment to generate the same returns.Read our bulletin on How Fees and Expenses Affect Your Investment Portfolio to learn more.

5. Be alert to affinity fraud.  Affinity frauds target members of identifiable groups, such as the elderly, religious or ethnic communities, or the military.  Even if you know the person making the investment offer, be sure to check out the investment and the person’s background—no matter how trustworthy the person seems.

6. Any offer or sale of securities must be either registered with the SEC or exempt from registration.  Otherwise, it is illegal.  Registration is important because it provides investors access to key information about the company’s management, products, services, and finances. Always check whether an offering 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.

7. Diversification can help reduce the overall risk of an investment portfolio.  By picking the right mix of investments, you may be able to limit your losses and reduce the fluctuations of your investment returns without sacrificing too much in potential gains.  Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.

8. Did you know that active trading and some other very common investing behaviors actually can undermine investment performance? According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state, or company, and holding on to losing investments too long and selling winning investments too soon.

9. If you are investing or saving toward a goal, or just want to learn about how your money can grow under various hypothetical scenarios, take advantage of our compound interest and savings goal calculators.These calculators are great tools to help inform any decisions you make about your investing and saving.

10. Unbiased resources are available to help you make informed investing decisions. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a significant advantage for investing wisely.  A great starting point is Investor.gov.

If you have questions about your investments, your investment account or a financial professional, don’t hesitate to contact the SEC’s Office of Investor Education and Advocacy online or on our toll-free investor assistance line at (800) 732-0330.


The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

UPDATE: The Shocking Story of A Small Town Fraud

UPDATE: Yesterday United States District Judge David Sam rejected a plea deal that had been worked out between Thomas Andrews (the subject of the story below) and the U.S. Attorney’s Office.  According to a story in the Deseret News, Judge Sam rejected the plea deal because he believed it was too lenient.  Andrews withdrew his guilty plea and his attorney, Rebecca Skordas, told Judge David Sam that she would continue negotiations with prosecutors.

In rejecting the plea Judge Sam said he was very concerned about the statements he had received from victims, including one that said the financial loss reduced them to eating “eggs, pancakes and beans.” The judge said he couldn’t imagine someone taking advantage of their friends and neighbors “to just diminish them to point where they can’t hardly live day to day.”  “It’s absolutely unbelievable that someone would conduct themselves in that way,” Sam said.

Prosecutors had recommended that Andrews spend 48 to 60 months in prison after he agreed to plead guilty to securities fraud and mail fraud in June.  In rejecting that deal Judge Sam noted the sentence was below the federal guidelines, which was calculated as 78 to 97 months in prison.  Andrews’ accomplice Scott Christensen also pleaded guilty and was sentenced to a year and a day in prison.

Stay tuned for more details.


I typically write about lawsuits filed by the SEC, but this time I wanted to write about a civil case that was filed by a number of the victims of a Nephi man named Thomas E. Andrews.  The information in this story comes primarily from allegations that were made in a civil complaint by my friends over at Parr Brown, who filed their case in Juab County in November of 2015 (Civil Case No. 150600025).  I will be filing a separate lawsuit involving these same facts shortly as discussed at the bottom of this post.

NephiTom Andrews grew up in Juab County, Utah, and was known to most of the victims in the case since he was a small kid.  Most of the victims in this case are residents of Nephi, Utah and knew Andrews and his family through their community and their common membership in the LDS Church.

The victims are not sophisticated in financial matters, and so they had the utmost faith and confidence in Tom and his father, Earl Andrews, who was a respected CPA in the community.  Earl prepared tax returns for  the victims and assisted them with their financial matter for many years before he was sentenced to prison in approximately 2005 for an unrelated reason.  When his father went to prison Tom took over his father’s role as tax preparer for the victims and began preparing tax returns for them, although it turns out he was never licensed by the State of Utah to do so.

At about the same time he took over his father’s tax practice, Tom obtained his license to sell financial products and joined LPL Financial as a stock broker, and Gary York.  he then began to solicit investments from the people whose tax returns he was preparing.  Over time the victims began to rely on Tom for investment and retirement advice, as well as for their tax preparation.  They opened investment accounts with LPL through Tom Andrews and placed some or all of the their retirement funds into his hands.

But beginning in 2011 Tom Andrews began to make other plans for their money.

Andrews formed a fake trust named which he called the “Jackson Living Trust” and made himself as Trustee. Andrews then opened a bank account at Cyprus Credit Union under the name of the “Jackson” or the “The Jackson Living Trust.”  It is unclear what paperwork he presented to the credit union, but they nevertheless opened up an account for this fake trust and gave Tom the full signatory authority as the trustee.  This meant that he could cash or deposit checks that were made out to the “Jackson Trust.”

At about the same time, Tom began counseling his clients to invest in an annuity with Jackson National (which does actually exist).  He told them that this investment would pay a guaranteed rate of return between 5 percent and 8 percent annually.  Critically, he advised them to liquidate most or all of their investments held at LPL, or wherever else, and to put the money into this annuity.  This was terrible investment advice; it reduced their diversification and in some cases exposed them to early termination fees and/or tax penalties, but the victims trusted Tom and did what he advised.

Andrews provided real marketing materials from Jackson National Life and even used the company’s application forms.  The victims filled out the applications, and gave Andrews checks for their entire life savings made out to “Jackson Trust” which they believed would be invested in the Jackson National Life annuities.  But the money was never sent to Jackson National Life.

He deposited each of the checks into his fake account at the Cyprus Credit Union and then use the funds as he saw fit.  He basically stole the money.  How much money did he steal?  Over $9 million.

But the victims needed to continue to believe that their money was safe and secure in the annuity they thought they had purchased so Andrews generated fake quarterly statements for them.  He pulled a Jackson logo off the internet  and made up fake account statements that he mailed out to all of his clients. Of course the fake statements showed that their investment was safe and growing as Andrews had promised.

Discovery of the Fraud

In October of 2015, several of his clients became suspicious when they had a hard time withdrawing money from their accounts.  Several contacted Jackson National Life and learned that in fact they had no account with the firm, and the account statements they had received were fake.

Andrews apparently got wind of the problem and disappeared, but has now hired an attorney and is defending the case.  The location of the $9 million of investor money he took is unclear, but I wouldn’t be surprised if he used it to trade commodities, options, currencies or some other high-risk strategy thinking he could generate big returns and the investors would never know the difference.   Time will tell.

But if these allegations are true, there are several troubling aspects of this story.  First, unlike many of the stories I’ve written about, this one it appears to be a deliberate fraud from the outset.  Mr. Andrews set up the bank accounts and with a name that was deliberately similar to the name of a well-known annuity company.   He used marketing materials and account applications for a real investment, and his investors would not have known that their money was going into a personal bank account as opposed to a licensed, verifiable company.   Yes, he used church and family connections to gain their trust, but the investment itself appeared legitimate.

Another troubling aspect of this story is that there are a number of financial institutions who appear to have dropped the ball and did not implement oversight and compliance procedures that could have protected the interests of the victims in this case.  Banks, brokerage firms and others should be watching for red flags and alerting state and federal authorities when they see suspicious activity.  In this case that oversight never happened, and millions of dollars were lost as a result.

On February 12, 2106 FINRA barred Tom Andrews from associating with any brokerage firm in any capacity, and I suspect the SEC and/or DOJ will be filing cases against him soon.

The Juab County lawsuit  is currently pending.


Our firm has been retained by many of the victims in this case to pursue a case against Mr. Andrews’ brokerage firm, LPL Financial.  If you or someone you know was involved in this case in any way please contact me at 801-323-3380, or by email.   -Mark Pugsley

Copyright © 2016 by Mark W. Pugsley.  All rights reserved.

The Steven B. Heinz Ponzi Scheme

Today I realized that I never posted about the case against Steven B. Heinz.  Please accept my apologies for this oversight, as this is a story that fits the purposes of this blog perfectly.  Heinz solicited his clients at his brokerage firm, Ogilvie Security Advisors Corporation, and used his membership in the Mormon Church to gain trust with investors, many of who were elderly and unsophisticated.  One investor, the recent widow who attended church with Heinz, invested after he volunteered to assist her with her finances and investments after her spouse died.  Her money is now gone.

Heinz “guaranteed” his investors a fixed rate of return from 6 percent to 120 percent a year, which garnered him nearly $4 million from more than fifteen former clients, family members, and friends.  He stated that this money was to be used for the purpose of day-trading futures contracts.  Heinz created the appearance of being a successful futures trader, but in reality he lost approximately $1.5 million.  Heinz also used investor money to pay “returns” to earlier investors using new investor funds (a classic Ponzi scheme).

On August 8, 2013, the Securities and Exchange Commission (“SEC”) filed a lawsuit against Mr. Heinz and obtained a temporary restraining order and an asset freeze.

Mr. Heinz eventually settled with the SEC and on April 28, 2014, the United States District Court for the District of Utah entered a final judgment against him.  Heinz consented to the issuance of the judgment and admitted to all of the material facts the SEC alleged in its Complaint.  Specifically, Heinz admitted the following allegations in the SEC’s complaint:

  1. Beginning in January 2012, Heinz offered and sold investment contracts to more than fifteen investors, raising approximately $4 million for the purported purpose of investing in futures contracts. (SEC Complaint at ¶ 14.)
  2. Heinz solicited investments from his Ogilvie Securities clients. (SEC Complaint at ¶¶ 14, 17.)
  3. Heinz told Claimants that his trading strategy was so successful with his personal funds that he was willing to them with their investments too. (SEC Complaint at ¶ 15.)
  4. Heinz advised Claimants to liquidate some or all of their securities holdings and invest the funds with him. (SEC Complaint at ¶ 16.)
  5. Heinz promised victims that they would earn tax-free income. (SEC Complaint at ¶ 18.)
  6. Heinz advised at least one couple  to liquidate their investment which caused them to incur $45,000 in penalties. (SEC Complaint at ¶ 20.)
  7. Heinz provided written investment contracts which specified a guaranteed rate of return. The investment contracts stated the amount invested and the guaranteed rate of return. (SEC Complaint at ¶ 21.)
  8. Heinz did not prepare a private placement memorandum or financial disclosures with respect to this purported investment. (SEC Complaint at ¶ 22.)
  9. While Heinz did use a portion of investor funds to purchase futures contracts, bank records show that he misappropriated approximately $1 million in investors’ funds for personal purposes, such as the payment of his personal credit cards in the amount of $331,000, household expenses, personal travel, to fund business opportunities for his children, and to repay a personal loan for $600,000. (SEC Complaint at ¶¶ 30, 31.)
  10. Heinz also used new investor funds to repay earlier investors their purported profits or return of principal in what is a classic Ponzi scheme. (SEC Complaint at ¶ 35.)

The judgment permanently enjoined Heinz from future violations of the securities laws and requires him to pay disgorgement and prejudgment interest of $3,656,675.84.  The judgment also bars Heinz from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in any offering of a penny stock.  Heinz consented to the issuance of the judgment as is currently working to pay off the huge disgorgement amount.  Mr. Heinz was also charged criminally by the U.S. Attorney’s office here in Utah and is currently serving weekends under house arrest.

Many of the victims are seeking compensation through a FINRA arbitration against Heinz’s brokerage firm, Ogilvie Security Advisors Corporation and a number of its principals for failing to supervise him appropriately.  Our firm is handling that case.

If you are a victim of this scam feel free to post your experiences in the comments below.

American Pension Services Lawsuit

APSOn April 30, 2014 the Securities and Exchange Commission filed a lawsuit against a Utah-based company called American Pension Services, Inc. (“APS”) and alleged that the retirement plan administrator  defrauded investors.  This is not a Ponzi Scheme case (unlike many the SEC files in Utah) it is really about forgery and theft.   And it was not just any money that was stolen — APS was a third-party administrator for self-directed 401Ks and IRA’s which the securities industry and federal regulations work hard to protect.  Stealing someone’s retirement funds is like stealing money out of the contribution plate at church.   It’s just not done.

The SEC has alleged that the owner of APS, Curtis L. DeYoung of Riverton Utah took at least $22.7 million from client accounts and invested it in other Utah Ponzi schemes such as Impact Cash and Horizon Mortgage — both of which are being managed by Utah-based receiver and trustee Gil Miller. Impact Cash is in receivership at the request of the SEC and Horizon Mortgage is in bankruptcy.  According to the SEC’s complaint, DeYoung squandered investor funds on high-risk investments and hid the losses by issuing inflated account statements, allowing him to continue collecting fees and further victimizing his customers.  In addition to Impact Cash and Horizon, DeYoung allegedly invested with a friend of his named Michael Memmott who ran a company called  Innovative Equity Partners LLC, with Charlevoix Homes LLC in Arizona, and in another venture called Remington Commercial Advisors, LLC.  It is unclear whether these companies are solvent, but Charlevoix Homes is in bankruptcy.

According to the SEC Complaint this fraud scheme dates back to at least 2005 and targeted customers with retirement accounts holding non-traditional assets typically not available through traditional 401(k) retirement plans or other IRA custodians.  DeYoung allegedly used forged letters and signatures to invest these retirement funds on behalf of customers without their knowledge.  This is extremely troubling to say the least.

Among investment professionals that I work with APS has long had a reputation for providing an unusual amount of flexibility to investors for where they placed their self-directed funds.  So if you had an investment that you wanted to get into with your IRA and your current plan administrator would not permit it, you could always move your funds to APS who would let you do it.   Because of this flexibility there was a constant flow of IRA money into APS, and in many cases these transfers were at the urging of investment professionals who wanted to put their clients’ funds into investments that generated higher returns – but also had higher risk.   Presumably risk of theft by the owner of APS was not among the risks that were disclosed to investors.   Although it is unclear whether these investment professionals knew or should have known of the problems with APS, in my view the unusual flexibility APS offered should have been a red flag.

Surprisingly the SEC obtained an asset freeze of DeYoung’s account as well as all of the funds in APS (i.e. the funds which were not stolen) which will likely cause significant problems for those who have accounts there until things get sorted out.  Meanwhile DeYoung’s lawyer, Paul Moxley, is attempting to obtain release of some of these funds to pay for his legal defense.

The court appointed as receiver a California lawyer, Diane Thompson, who will be managing APS and the accounts.  The receiver’s website has a Frequently Asked Questions page with current information about investors’ access to their funds, among other things.  Presumably Ms. Thompson and her law firm will shortly disclose what actions she is taking to recover the missing $22 million.  APS depositors should consult this website frequently for updates and make sure the receiver has their correct contact information.

Moreover, I believe it is usually a good idea for investors or depositors in a receivership such as this to join together and hire experienced SEC receivership counsel to follow the case, appear in court if necessary, and ensure that their interests are protected.  SEC receivers have significant latitude in fashioning a plan of distribution for recovered funds (if any), but there are always winners and losers in those plans.  Good counsel can help ensure that you are treated fairly.

Copyright 2014 by Mark W. Pugsley.  All rights reserved.

Why FINRA’s New Rules on “Suitability” Are Important for Investors

FINRA, the regulatory organization that governs broker-dealers, has now implemented a major overhaul of its suitability rules that could have a big impact on investors who feel that they were misled by their stock broker. The new rules went into effect on July 9th and require brokers to (1) perform reasonable due diligence on investment products they recommend, (2) understand those investments, and (3) have a reasonable basis to believe that a security or investment strategy is “suitable” or appropriate for the given investor.  Suitability evaluations must be undertaken with respect to every investor and his or her particular situation. Among other things, a broker must look at an investor’s age, investment experience, time horizon, liquidity needs and risk tolerance when making an investment recommendation.  In short, every investors situation is unique and investment recommendations must take that into account. Continue reading “Why FINRA’s New Rules on “Suitability” Are Important for Investors”