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.

The Woodbridge Group of Companies – Another Ponzi Targeting Utahns

The Woodbridge Group of Companies was run by a flashy promoter in Los Angeles named Robert Shapiro.  Woodbridge marketed promissory notes (which were in reality unregistered securities) to an estimated 7,000 retail investors throughout the United States, including Utah.  Investors were told their funds would provide a safe, secured return from short-term real-estate loans.

In reality, investor money was used to fund real-estate purchases made by shell companies run by Shapiro himself, including high-priced luxury homes in Los Angeles according to the SEC lawsuit filed in December of 2017.  The SEC alleged that investors received monthly interest checks that were actually funded by money from newer investors, which is a classic Ponzi scheme.

This story about the case appeared in the Wall Street Journal today, and is a follow-up to the WSJ’s fascinating article about the case from February:

 

Woodbridge Bankruptcy Spotlights CEO’s Luxury Spending

The money for his lavish lifestyle came from the pockets of thousands of people, from an 89-year-old widow in a memory care facility in Tennessee to ABC news anchor George Stephanopoulos, according to the Securities and Exchange Commission, which has accused Mr. Shapiro of running a Ponzi scheme.

“Like many others, I was a victim of Woodbridge and now must deal with the consequences of its bankruptcy,” Mr. Stephanopoulos told The Wall Street Journal. Woodbridge filed for chapter 11 bankruptcy protection on Dec. 4, a few days after Mr. Shapiro stepped down from the chief executive spot and, according to court papers, spent $16,000 of company money at Macy’s.

He expected to stay on as a $2 million-a-year consultant, but the arrangement didn’t last long: Woodbridge cut ties to him after the SEC sued him and the company for fraud on Dec. 20.

 Mr. Shapiro denies running Woodbridge as a Ponzi scheme and is fighting the SEC case in federal court in Florida. However, his former company has said it would admit to running a Ponzi scheme, and is providing details with new bankruptcy court filings that sketch a picture of a troubled company with tangled finances.

Woodbridge promised investors safe returns on short-term notes, which were to be secured by valuable real estate in some of the priciest markets in the country, from the Holmby Hills area of Los Angeles to Aspen, Colo.

An SEC fraud case filed in federal court in Florida alleges the real estate was bait to draw investors into Woodbridge’s $1.2 billion Ponzi scheme. Cash that came in from new investors was recycled to pay older investors, according to the civil fraud complaint and bankruptcy court testimony from an SEC expert.

The SEC lawsuit was the culmination of a year-long federal investigation into Woodbridge, which sold unregistered securities, often through unlicensed agents. Securities authorities in Arizona, California, Iowa, New Jersey, Oregon, South Carolina and Colorado were also looking into Woodbridge, court papers say.

Now in the hands of legal and real estate professionals, Woodbridge continues to operate under the watchful eyes of the SEC and a bankruptcy judge. The first order of business: start selling Woodbridge’s portfolio of more than 130 properties which are estimated to be worth more than $650 million and start paying off investors.

Estimates are that investors could get from 45% to 76% of what they are owed, if things go according to plan in Woodbridge’s bankruptcy proceeding. That recovery estimate doesn’t include what Woodbridge might be able to recover from lawsuits against its ex-chief executive and brokers that sold the notes, court papers say.

Mr. Shapiro invoked his Fifth Amendment right not to testify against himself during the SEC probe, and in the face of questions from creditors. His lawyer didn’t respond to a request to discuss Woodbridge’s spending.

In addition to paying Mr. Shapiro’s credit card bills, country club dues and other expenses, Woodbridge transferred $3.8 million to his wife, Jeri, in the year before the company’s bankruptcy filing, most of it through a media-buying company she owned, court records show. Others in the Shapiro circle—a nephew, an uncle, a brother-in-law, a stepson—profited as well, according to court records.

Investors such as Mr. Stephanopoulos could also come under scrutiny for possible clawback lawsuits. Mr. Stephanopoulos received $2.5 million in investor payments from Woodbridge in the 90-day period before the bankruptcy, court papers say. By that time, the SEC had gone public with its probe of Woodbridge. Court papers didn’t say how much Mr. Stephanopoulos invested.

 In many Ponzi schemes, the chief recovery for investor victims is suing other victims on the premise that the financial pain of the fraud should be shared equally.

“I will pursue any valid claims I have and will comply with all proper rulings of the bankruptcy court,” Mr. Stephanopoulos told the Journal.


Lessons to be Learned

Overall, I think there are a number of lessons to be learned from this very large (alleged) Ponzi scheme.

First, regardless of what you are told, Woodbridge Notes are securities under federal and state law.  All investments – including the purchase of promissory notes – must be made through a licensed stock broker or registered investment adviser.   Insurance salesmen are not able to solicit or recommend these investments unless they have the proper securities licenses.  If you want to find out if your “financial planner” or “retirement planner” has a securities license run their name through FINRA’s BrokerCheck database.

Second, there is a reason why it is very difficult to find investments that pay high monthly returns on a consistent basis; it’s just not sustainable.  Investments that pay monthly interest at above-market rates are, in my opinion, very likely to be a Ponzi scheme — or to turn into one eventually.  There just aren’t many businesses that can generate returns like that on a consistent basis.

Third, if your financial adviser recommends an investment like this make sure he or she has a big errors and omissions insurance policy, because that may be your only way to get your money back.

For more ideas on how to avoid losing money in a Ponzi Scheme, check out my Top Ten Ways to Avoid Losing Money in an Investment Scam.

I am working on a number of cases involving the Woodbridge Group of Companies, if you lost money and would like to discuss your legal options please contact me.

 

Copyright © 2018 by Mark W. Pugsley, All Rights reserved.

Jeffrey Mowen Has Been Released From Prison

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

Jeffrey Mowen

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

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

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

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

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

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

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

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

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

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

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

FBI Article on Affinity Fraud in Utah

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


Affinity Fraud

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

White-Collar Crime Offender Registry Website (Stock)

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

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

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

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

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


In Their Words

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

Transcript | Download

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

Transcript | Download

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

Transcript | Download

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

Transcript | Download


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

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

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

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

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

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

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

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

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

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

Wolves in Sheep’s Clothing

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

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

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

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

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

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

SEC Creating Searchable Database of Bad Brokers

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

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

SEC Creating Searchable Database of Bad Brokers

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

 

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

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

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

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

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

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

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

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

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

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

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

Arizona Resident Cory Williams Sued for $13 Million Fraud Scheme Targeting LDS Ward Members

Today I received a tip that earlier this year the Commodity Futures Trading Commission (CFTC) filed a lawsuit in Federal Court in Arizona against Cory Williams and his company Williams Advisory Group of Gilbert, Arizona. In its complaint the CFTC alleged that Mr. Williams defrauded 40 investors out of at least $13 million in connection with a commodity pool he operated in Arizona.

I am interested in this case because Mr. Williams was an active member of the LDS Church and allegedly victimized many church members in Gilbert Arizona where he lives.

The CFTC charged Williams with soliciting $13 million from family members, friends, neighbors and members of his LDS church ward to invest in his commodities trading scheme.  Williams allegedly deposited most of the investors’ money into his personal account and traded futures contracts, but his trading abilities were not as great as he had represented to his investors.  He lost more than $8.3 million in the futures market but continued to tell his investors participants that he was making a profit.

The CFTC alleges that Williams told people that he was an experienced futures trader and that his trading had been consistently profitable, but of course it was not.  Williams sent weekly text messages to his investors reporting fake trading profits as high as $30,000 per week on their investments, but in reality he consistently lost money.  Williams did not have a single profitable month between April 2014 and December 2016.

And as is often the case, Williams also used investor money to fund an extravagant lifestyle; $1.3 million of investor money was diverted to pay for dining, jewelry, vacations and charitable donations such as tithing.

According to James McDonald, Director of CFTC’s Division of Enforcement, “Cory Williams lied to his victims to convince them to invest millions of dollars in his fund. Williams promised to invest their money using his expertise, backed up by a track record of profitable investments. But in reality, Williams simply made up his profitable past, and he spent his victims’ money on himself—using some of it to fund his own dining, travel, and other personal expenses.”

In June the judge in Mr. Williams case froze all of his assets.  Mr. Williams then wrote a letter to the court requesting reconsideration of the preliminary injunction and asking for a stay because he was defending an ongoing criminal investigation.  “I do not have a lawyer for the civil case, and I do not have the money to pay for a lawyer,” Williams said in the June 12 letter to the court, “I have been advised by my criminal lawyer that anything I say in my civil case can be used against me in the criminal investigation.”

The judge nevertheless refused to stay the civil case, and in July of this year the CFTC asked the court to enter a default judgement and order Cory Williams to pay a civil monetary penalty of more than $9.7 million along with restitution in the same amount.  Then on August 28, the CFTC filed a motion for an Order to Show Cause alleging that Williams had violated in the court’s preliminary injunction.  The court has not ruled on either motion.

________________________

So how could these Arizona investors have avoided getting scammed by Brother Williams?

As I discussed in my 2014 article “TOP TEN WAYS TO AVOID LOSING MONEY IN A FINANCIAL SCAM,” it is never a good idea to invest with someone just because they are a friend or a neighbor.  It may seem like doing business with someone you know and trust would be safer, but just because you know and trust the individual soliciting the investment does not mean that the investment itself is good.  You need to do your homework, which in this case would have included asking for trading records and checking with the state and federal regulators to ensure that Mr. Williams had the appropriate licenses.

In 2008 the LDS Church sent a letter to its congregations, urging members to be wary of fraud and warned against “those who use relationships of trust to promote risky or even fraudulent investment and business schemes.”  I’ve been urging people here in Utah to keep church out of investing for years now.  The bottom line is that if someone casually mentions that they used to be the bishop or in some other church position in the context of an investment pitch, watch out!  Church callings and temple worthiness are not relevant to investment decisions.

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

Utah Federal, State, and Local Government Officials Join Forces to Educate Investors on How to Avoid Fraud

Public Seminars to be Held in Salt Lake City and Utah County

SALT LAKE CITY  April 5, 2017 – In a new, collaborative effort, Utah federal, state and local government officials established the Financial Fraud Institute and will hold two separate multi-agency seminars designed to educate Utah investors and consumers on how to recognize and avoid financial and consumer fraud, announced U.S. Securities and Exchange Commission Regional Director Richard R. Best and U.S. Attorney for the District of Utah John W. Huber.  The free seminars are open to the public and will be held in Salt Lake City on April 26 and in Utah County on May 10.

Officials from the U.S. Securities and Exchange Commission, U.S. Attorney’s Office, Utah Attorney General’s Office, Financial Industry Regulatory Authority (FINRA), Utah Division of Securities, U.S. Commodity Futures Trading Commission, Utah Division of Consumer Protection, FBI, IRS and Salt Lake/Utah County Attorneys offices will participate in the seminars. Utah Attorney General Sean Reyes will be the keynote speaker at the April seminar and Chief Magistrate Judge Paul M. Warner of the U.S. District Court for the District of Utah will be the keynote speaker at the May seminar. These are the first in a series of seminars to be held by representatives of the Financial Fraud Institute.

The seminars will provide information on:  key questions to ask before making investment decisions; where to find free and unbiased information; how to spot financial scams; and how to report suspected fraud.


WHO:      National and local experts from federal and state law enforcement and financial regulatory agencies

WHAT:    Financial Fraud Institute Seminars to educate investors and consumers on how to recognize and avoid fraud.

Salt Lake City

WHEN:                      April 26 in Salt Lake City

                                    5:00 p.m. – 8:30 p.m. See full agenda

WHERE:                   University of Utah, S.J. Quinney College of Law Auditorium

                                    383 S. University St., Salt Lake City, UT 84112

Free parking at the University of Utah Stadium

Utah County

WHEN:                      May 10 in Utah County

                                    5:00 p.m. – 8:30 p.m. See full agenda

WHERE:                   Utah Valley University, Classroom Building Rooms 101B and 101C

                                    800 W. University Parkway, Orem, UT 84058

Those interested in attending the seminars must register at: Salt Lake City and Utah County, or call 801-579-6191. For more information, visit www.utfraud.com.

The seminars are open to the press.  Press interested in attending the events should contact Melodie Rydalch of the Utah U.S. Attorney’s Office on 801-243-6475 or melodie.rydalch@usdoj.gov.

ACCESS THE STOP FRAUD UTAH WEBSITE HERE

Follow us on Twitter at #StopFraudUtah.

 

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.”

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.