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.

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.

UPDATE: Former Salt Lake City Councilman and LDS Stake President Eric Jergensen Convicted in New York

UPDATE: For those of you who are watching this case, I have been informed that Mr. Jergensen’s sentencing has been postponed.  The sentencing was rescheduled to March 2, 2018 at 1:30 p.m. in the federal courthouse in Syracuse, NY.  I assume the judge will be the same one who conducted the trial; U.S. District Court Judge Brenda K. Sannes.  If you or someone you know was defrauded by Mr. Jergensen you may want to submit a letter to the Judge to tell her about your experience in advance of the sentencing hearing.


Last week former Salt Lake City councilman and former LDS Stake President Eric Jergensen was convicted of conspiring to defraud an aerospace company of $2.5 million.  A New York jury returned the guilty verdict after a seven-day trial in U.S. District Court in Syracuse, NY. Jergensen and another man, Debashis Ghosh of Chicago Illinois, face a maximum punishment of 20 years in prison and a $250,000 fine.  They may also be ordered to pay restitution to their victims.

The two men were convicted of conspiring to defraud the Laurentian Aerospace Corporation of $2.5 million.  Acting United States Attorney Grant C. Jaquith stated: “Jergensen and Ghosh stole $2.5 million from a group of people who founded Laurentian with the hope of building a new business in the North Country.  Jergensen and Ghosh quickly gained their victims’ trust, and just as quickly abused it by taking their money and then lying to them about what had occurred.  They strung their victims along for years with false promises that their money would be returned.  Yesterday’s verdict brought them to justice, brought justice to their victims, and demonstrates our commitment to investigating and prosecuting financial crime.”

Jergensen and Ghosh were officers of Verdant Capital Group, LLC.   Laurentian retained Verdant to raise funds for the construction of an airplane maintenance facility to be built in Plattsburgh, New York.  Jergensen and Ghosh asked Laurentian to invest $2.5 million as seed money for the project, and promised to retein the money in a Wells Fargo account.  Soon after Laurentian wired $2.5 million into the Wells Fargo account  Jergensen and Ghosh began transferring the money out of the account without Laurentian’s authorization.

For several years after the money had been used, the men assured Laurentian and its investors that their money was safe and secure.  Jergensen even forged a memorandum of understanding showing that the money was still in the bank.  The government also showed at trial that the defendants  misappropriated an additional $2.4 million in funds that other businesses had entrusted to them.

I didn’t see any evidence that any of the victims were members of Jergensen’s stake so this story doesn’t appear to have an affinity fraud angle. Feel free to share your story in the comments below if that is incorrect.

There have been, however, stories in the local press about his financial difficulties that anyone who was considering doing business could have found through a simple Google search.  In 2009 the Salt Lake Tribune reported on several embarrassing headlines and suggested that these troubles were the reason he decided not to seek a third term on the city council.  At the time he had two bench warrants issued against him in 3rd District Court involving his business. He told the paper he had resolved a $98,000 debt his company owed to an Ogden businessman and was working to repay a $120,000 loan from local businessman Kem Gardner, former president of The Boyer Co.

Jergensen served on the Salt Lake City Council from 2001 through 2009, representing Capitol Hill and the Avenues. He also served as head of Salt Lake City’s redevelopment agency.

Copyright © 2017 by Mark W. Pugsley.  All rights reserved.

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.

Barred Broker Hank Brock Pleads Guilty to $10 Million Tax Fraud Scheme

Henry (“Hank”) Brock of St. George, Utah pleaded guilty on Monday to tax evasion, securities fraud and wire fraud. According to the Department of Justice press release, Brock sold fraudulent tax-avoidance and investment strategies to his clients through a financial services company he ran called Mutual Benefit International Group, Ltd.  and through its subsidiaries, Brock Seminars LLC, and MB Holdings BVI, LLC.  The DOJ alleged that as president of Mutual Benefit Brock marketed a fraudulent tax scheme investment called “IRA Exit Strategy” to potential investors through seminars, phone calls, mailings, emails and online ads from 2009 through 2017.

According to the Felony Information that was filed on October 17, 2017, Brock promised investors that this IRA Exit Strategy would help them to avoid paying taxes on IRA withdrawals, which are normally subject to IRS penalties and taxes. Specifically, Brock gave his clients tax forms which falsely showed they were investors in his business, and that the company had incurred substantial losses.  These losses were then used to offset tax liabilities from their IRA withdrawals on fraudulent income tax returns that they were instructed to file with the IRS.

According to the Department of Justice, Brock fraudulently raised over $10.8 million by making false representations to investors regarding this “IRA Exit Strategy,” and by misrepresenting the financial condition of his company and other matters.  On at least one occasion the DOJ alleges Brock transferred $196,323 of a client’s investment funds and used the money for his own personal and business expenses.

Brock faces a maximum sentence of five years in prison for tax evasion, 20 years in prison for securities fraud and 20 years in prison for wire fraud. He will also be ordered to pay restitution and monetary penalties.  Sentencing is scheduled for March 5, 2018 before U.S. District Court Judge Ted Stewart.

This is not the first time that Brock has had run-ins with government regulators.  In April of 2006 he entered into a Stipulation and Consent Order with the Utah Division of Securities, which is obtainable through a government records (GRAMA) request.  As part of  that settlement Brock was barred from associating with a broker-dealer or investment adviser licensed in the State of Utah – for life.

He was also specifically prohibited from “advising individuals in any way regarding the sale, promotion or purchase of securities; and presenting seminars in order to solicit business for, or otherwise make referrals to, for any form of compensation, any broker-dealer, agent, investment adviser or investment representative licensed in Utah.”

It is unclear to me whether Brock violated the terms of his settlement with the state when he solicited investors for Mutual Benefit, but I assume the state is looking into that possibility.

Although this 2006 settlement is no longer available on the Division of Securities’ online database, the fact that Brock has been permanently barred from selling securities is disclosed on FINRA’s website brokercheck.com.  It is always a good idea to run a search on Broker Check before doing business with anyone in the financial services industry.

Mr. Brock is also somewhat infamous for a lawsuit he filed against the Utah Division of Securities in 2010 for $357.6 million.  In the lawsuit he an another man, Jay Rice, accused state regulators of targeting them without proof of wrongdoing in an over-zealous campaign to bring down securities violators. They claimed that they were put out of business and forced to declare bankruptcy as a result of the agency’s actions. “They destroyed my reputation maliciously and wholly without cause,” Mr. Brock said in an interview at the time. “ Among the claims in the lawsuit are allegations that the Securities Division bribed Mr. Rice’s clients, went through Mr. Brock’s computers without permission and sent out a press release announcing the action to bar him from the securities industry that contained false information.

U.S. District Court Judge Tena Campbell initially dismissed the case in July 2010 based on governmental immunity, but then the U.S. 10th Circuit Court of Appeals reversed and remanded just the portion of the case alleging violations of their state constitutional rights.

If you lost money or are facing IRS penalties after working with Hank Brock of Mutual Benefit International Group please share your story in the comments below.

Copyright © 2017 by Mark W. Pugsley. All Rights Reserved.

 

Confessed Fraudster Thomas Andrews Has Been Sentenced to 97 Months in Prison

As a follow-up to my prior story about a shocking small town fraud scheme that occurred in Nephi, Utah.  Yesterday the confessed perpetrator of that scheme, Tom Andrews, was sentenced to 97 months in prison.  This is the maximum sentence Judge Sam could have imposed. Hopefully others who might consider starting up a scheme like this will think twice when they see this significant prison sentence. This story about the sentencing appeared in the Deseret News today:

Judge comes down hard on former Nephi man in affinity fraud case

SALT LAKE CITY — A Sanpete County dairy owner told a federal judge Thursday that he’d be happy to have the man who stole his retirement money do some time on his farm.

Bob Bown said Tom Andrews needs to do some physical labor, get his hands dirty, rake manure out of stalls. “One of the best things that could happen to him is to do some hard work,” Bown said.

U.S. District Judge David Sam agreed thprison_mainat it would be “wonderful” if Andrews could “get some calluses to earn a buck,” but federal rules prevented him from imposing such a penalty.

The judge, however, sentenced Andrews to 97 months in prison — the maximum under sentencing guidelines — after the former Nephi man admitted to securities fraud and mail fraud. Sam, who rejected an earlier plea deal as too lenient, said he would have ordered a longer prison term if he could. Sam also ordered him to pay $8.3 million in restitution.

Sam then made the rare move for a white-collar case of placing Andrews, 40, in custody on the spot. A couple dozen of the victims applauded as U.S. marshals escorted Andrews from the courtroom in handcuffs.

“It just makes me sad,” Sam said, noting how Andrews wiped out people’s retirement savings. “It’s kind of like taking the widow’s mite.”

Andrews, who ran a Nephi tax return preparation service, admitted to encouraging nearly two dozen people to roll over their retirement accounts into fake companies he created called Jackson Trust and Lincoln Financial Group. He mailed them doctored financial statements from California to make the companies appear legitimate.

Andrews used at least $5.5 million for his living expenses and personal benefit, including luxury cars, homes and vacations. Investigators say all the money is gone. Victims — many of them longtime friends whom Andrews considered family — don’t expect to ever recoup their losses.

“He has lived as a millionaire for years and everybody else is paying for that now,” victim Ben Rosenloff told the judge.

It was also revealed in court Thursday that Andrews failed to remit some of his clients’ federal and state tax payments, landing them in trouble with the IRS.

“I don’t understand him,” Bown said. “I thought I knew him, but I don’t.”

Prosecutor Jacob Strain said this case wasn’t like other investment fraud cases where investors hope to double their money in a get-rich-quick scheme. These were people who knew and trusted Andrews and who thought their money was safe and secure with him, he said.

Andrews read an apology to the victims, saying words can’t describe his regret and that he hopes people forgive him.

“I’ve hurt and destroyed people’s lives and I’m truly sorry for that,” he said. “I scarred them both emotionally and financially for years to come.”

Defense attorney Rebecca Skordas argued for a 70-month sentence because she said Andrews was “incredibly forthcoming when originally confronted about wrongdoing” — a statement that drew scoffs from the packed courtroom.

Andrews cooperated with federal investigators and helped them go through bank documents to determine how much money victims were owed, she said.

Mike Sperry, who said his parents lost their life savings, showed the judge a large poster with photos of Andrews, who moved to California, enjoying himself at Disneyland this fall.

“I don’t think any of the victims have been to Disneyland since this happened,” he said.

Sallie Rawlings, a Draper lawyer who along with her husband lost 30 years of retirement savings, suggested Andrews be required to write an apology letter to the 20 victims listed in the criminal charges and spend a year in prison for each of them, an idea the judge said he liked but he couldn’t do.

“This was a calculated and manipulated fraud perpetrated by a masterful thief,” Rawlings said. “Let’s send a message that this cowardly, cruel, brazen act will not be tolerated.”

The Deseret News’ Three Part Series on Affinity Fraud in Utah

hotspotsMy friend Dennis Romboy is a great reporter over at the Deseret News who put together a very detailed two-part story on affinity fraud that was published over the weekend.

Part One of the series was called “Utah’s fraud ‘epidemic’: Victims share anger, embarrassment, hurt” and provided the details of how a number of Utahn’s have been victimized by individuals in their community.  Here are some interesting takeaways from the article:

  • FBI supervisory special agent Mike Pickett, who heads the white-collar unit in the Salt Lake field office, estimates the annual dollar amount of fraud in Utah now exceeds $2 billion.
  • Utah Attorney General said affinity fraud is “rampant” in Utah. He has also used the word “epidemic” to describe what’s happening in the state, and that is despite aggressive efforts to prosecute criminals and educate an unsuspecting public.
  • So far in 2016, federal criminal fraud cases have totaled $59.3 million in losses, according to the U.S. Attorney’s Office.
  • Utah is in the top five in terms of investigations, indictments, prosecutions and sentences for investment fraud.

A number of the individuals featured in this story are victims of the Thomas Andrews scam that was detailed in my prior post called “A Shocking Story of A Small Town Fraud.”  I applaud these individuals for their bravery in publicly talking about what happened to them in the hope that some people will read the story and avoid making the same mistakes.

Part Two of the series was about how to protect yourself from being defrauded.  The article lists a number of ways to protect yourself, including the following “Red flag warnings of fraud”:

  • If it sounds too good to be true, it is.
  • Guaranteed returns aren’t. Every investment carries some risk.
  • Beauty isn’t everything. Don’t be fooled by slick websites.
  • Pressure to send money RIGHT NOW.

The article quotes me a number of times, including “Pugsley has succinct advice for anyone who receives an offer that mentions religion. ‘If someone brings up the church in the context of an investment pitch, then that’s the end of the discussion and you leave the room because people try to conflate the two,’ Pugsley said. ‘There should be no connection between the church and investments. Period.'”

To round it all up the Editorial Board of the newspaper published an opinion on the need to “trust but verify” that I thought was worth reproducing here:

In our opinion: Utah must ‘be trusting but verify’ regarding affinity fraud

The bucolic land of eastern Ohio is home to sizable pockets of the Amish community. Known for their collective ethos, these tight-knit religious cooperatives thrive on high levels of trust and social cohesion. Yet, the same trust that produces a remarkable culture of burden sharing can be exploited to perpetrate fraud.

In 2012, Monroe L. Beachy, a trusted name within the Amish community, was sent to prison for orchestrating a scheme that defrauded some 2,700 investors, many of them friends and neighbors.

Of course, the Amish are hardly the only religious group that’s vulnerable. As the Deseret News reported in a two-part series this week on affinity fraud: “Bernie Maddoff’s $20 billion fraud targeted wealthy Jewish people in Florida and Israel. Allen Stanford went after Southern Baptists before his $7 billion empire fell.” And, according to the Economist, the state with the most affinity fraud per capita is thought to be Utah, where members of The Church of Jesus Christ of Latter-day Saints comprise some 60 percent of the population.

The common theme is communities with high levels of trust are particularly vulnerable to fraud. The solution then is a heightened scrutiny when mixing financial and religious relationship. Although there is unquestionably a role to play for government in preventing and punishing fraud, individual consumers must also take responsibility for how they spend their money.

As Utah Governor Gary Herbert told the Economist: “be trusting but verify.”

There are a variety of things consumers can do to fortify against potential affinity fraud. As noted, for starters individuals can exercise healthy dubiety, especially when an opportunity sounds too good to be true (spoiler: it probably is). Yet, this is easier said than done. The most effective schemes, for example, do not make extravagant claims. Bernie Maddoff was so successful because his “returns” were relatively modest, making his fraud more convincing.

As with Maddoff’s victims, in Utah there are many highly educated and discerning individuals who have been taken in. Thus, it’s important to look beyond the facade of an investment company to determine its validity, and be doubly cautious about mixing church and financial relationships. There is no substitute for doing your homework instead of relying on the word of someone you trust in other settings. Keeping these principles in mind can protect consumers from deceitful investment opportunities claimed by people they know.

There have always been those who seek gain at the cost of others. Yet, in a hyper-competitive economy with strong cultural status expectations, a heightened temptation may exist to cut corners and profit at the expense of others. In such an environment, it’s incumbent on individuals of sound mind — as well as governments and community leaders — to guard against fraud.

After all, without willing investors, affinity fraud is impossible.

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

 

 

The 2016 Hiscox Embezzlement Study – A report on white collar crime in America

I saw this new study by Hiscox Insurance referenced in an article on Bloomberg and thought my readers might be interested in it, even though its focused more on embezzlement from businesses.

The study shows that white-collar crime is a major problem that all small business owners should be wary of.  Four out of every five organizations that fall victim to embezzlement had fewer than 100 employees and just under half had fewer than 25 employees.  So this is a problem that disproportionately affects small businesses.  The average loss was $807,443 – far more than most small businesses can afford to lose.

The report finds that the ‘average’ embezzler is a 49-year-old woman who works as a bookkeeper or accountant in a company with fewer than 50 employees, and is most likely to work in a company in the financial services or non-profit sector. She may be a long-time, trusted employee who has responsibility for the end-to-end accounts payable or payroll function in her company.

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In some cases, the perpetrator has fallen on hard times and decides to take an unauthorized loan from the company until they get back on their feet. Other times, they feel they are not being paid what they are worth, so they help themselves to a raise. In either case, if they begin by stealing small amounts of money, they may become emboldened if they are not caught, and may continue to steal regularly, until they have pocketed hundreds of thousands of dollars.

Here are some of the primary characteristics of embezzlers the reports says business owners should watch out for:

  • Intelligent and inquisitive  – always wants to know how everything works
  • Big spender  – living beyond means or sudden large purchases
  • Egotistical risk-taker  – rule breaker in and out of work life – from speeding tickets to overusing ‘sick time’
  • Hard worker – immune to stress – in early, out late, no vacations
  • Disgruntled – unable to relax, or experiencing drastic behavioral changes

The report concludes with a list of preventative measures a company can take to protect itself, including the following:

  1. Implement checks and balances
  2. Send bank statements to business owners home
  3. Pay attention to employee lifestyles and extreme changes to them Promote a culture of trustworthiness and integrity
  4. Talk with all employees about fraud detection and internal controls. Have them sign a code of ethics
  5. Complete background and credit checks on employees who will be handling money
  6. Review cancelled checks that come directly from the bank.