Val Southwick, who was convicted of defrauding more than $140 million from hundreds of Utah residents, was quietly paroled last month after serving just ten years, according to KSL News. He pleaded guilty to nine counts of securities fraud, each second-degree felonies, and was sentenced to serve anywhere from 9 to 135 years in Utah State Prison.
Apparently he was a model prisoner.
Mr. Southwick’s case was somewhat infamous in this state because at the time it was the largest Ponzi scheme in Utah history, and because he was so blatant in his use of his LDS faith to convince others to invest.
In its summary of the case the Utah Division of Securities alleged that Southwick “emphasized his membership and ecclesiastical roles in The Church of Jesus Christ of Latter-day Saints during solicitation of meetings with investors.”
“Southwick showed his LDS temple recommend, or mentioned its existence, to several investors, and his office contains LDS ‘memorabilia,’ all of which appeared designed to breed a sense of trust between Southwick and investors.” Investigators said Southwick touted himself as a “respectable LDS gentleman, who was more concerned about the consequences of the after-life than those in this life if he lied to investors.”
Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.
If you are not sure who to contact or have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.
Question 2: Is The Investment Registered?
Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
Question 3: How Do The Risks Compare With The Potential Rewards?
The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.
Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds.
Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities or, better yet, report them to the SEC.
Question 4: Do You Understand The Investment?
Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.
Question 5: Where Can You Turn For Help?
Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ websites. If you have a question or concern about an investment, please contact the SEC, FINRA, or your state securities regulator for help.
Editor’s note: This is a repost of an article from the SEC’s investor education website. I have a more extensive checklist of my top ten ways to avoid getting caught in a financial scam that is still highly relevant today. If you have questions about an investment or knowledge of ongoing fraud please contact me.
Imagine waking up one day and discovering that all of your retirement savings were gone; all the money you had been working to save had evaporated in a poof.
That’s what happened to over 200 people on November 15th. They had invested in a “Silver Pool” investment promoted by Gaylen Rust who claimed he had inside information about the silver market and told investors he was consistently making returns of 25 to 40% per year. He claimed that investor money would be used to purchase and store silver bars, and that he had never lost money in his trading.
People bought into this Silver Pool investment and recommended it to their family and friends. And after watching their investment increase (on paper) many “doubled down” and put all of their retirement money with him.
On November 13, 2018 the Commodities Futures Trading Commission (CFTC) and the Utah Division of Securities jointly filed a lawsuit against Gaylen Rust and his company Rust Rare Coin, Inc. The SEC filed a similar lawsuit a few days later. The filing of simultaneous, obviously coordinated lawsuits by three different securities regulators is quite rare in this state, and is indicative of the size and seriousness of the case.
The state and federal regulators have alleged that Gaylen Rust has been “engaged in a massive scheme to defraud” and has been running a Ponzi scheme since 2008. He raised over $200 million from investors in the last 5 years alone, and now it’s gone.
If true, this will be one of the largest Ponzi schemes in Utah history.
I have been getting calls from investors, regulators and former Rust employees over the last few weeks and almost all of them are stunned by this news. Gaylen Rust and his father Alvin have maintained a good reputation in the rare coin and precious metals industry in Utah for many years. Alvin Rust was an avid coin collector and started Rust Rare Coin in 1966 as a way to combine his hobby with his livelihood. Rust Rare Coin was known as a reputable place to purchase gold and silver coins, even after Alvin got caught up in some ill-fated deals with Mark Hoffman years ago.
According to the allegations in the CFTC Complaint, Rust and his company began promoting a “Silver Pool” in 2008 as a way for people to invest in the silver market, which Rust probably seemed to understand quite well:
“[Rust] told investors and prospective investors that they would sell silver held in the pool as market prices rose and buy silver for the pool as market prices fell; thereby increasing the amount of silver held in the Silver Pool, as well as the value of each investor’s share in that pool. [Rust] told investors and prospective investors in the Silver Pool that by trading silver in this manner, they generated extraordinarily high returns, averaging twenty to twenty-five percent per year and sometimes as high as forty percent per year or more.”
Consistent returns of 25% to 40% per year?? A simple Google search would have shown that trading commodities is extremely risky. How did he achieve such consistent profitability? The simple answer is that he didn’t. Potential investors should have been skeptical of those consistently high returns, but most trusted him and did not attempt to verify the claims Gaylen Rust was making. My opinion is that if any investment claims to achieve returns of 15% or more per year you should be extremely careful.
Shockingly, Rust didn’t provide investors with any paperwork setting forth the terms of the investment, he didn’t formally disclose his financials, and he didn’t provide any risk disclosures. All of those should have been huge red flags to any investor.
Once he had their money, Rust sent out “account statements” via email showing impressive (but unfortunately fake) returns on their investments. Rust purportedly claimed that he had as much as $80 million dollars of silver bars stored at Brink’s depositories in Salt Lake City and Los Angeles, and that this reserves would permit investors to liquidate their investments at any time.
How much silver is that? One source told me that $80 million in silver would fill five semi-trucks. That’s a lot of silver, but unfortunately Brinks depositories aren’t big enough to hold that much silver. Not good.
According to the CFTC complaint, Rust did not use investor money to purchase silver or silver contracts for the Silver Pool as he had represented. Instead, investor’s retirement money went to make payments to other investors, to fund other affiliated Rust Companies, and to pay personal expenses for the Rust family.
Rust never even had a commodities trading account at HSBC Bank, and was never licensed as a broker or commodities trader.
It was all a big scam.
The Prospects for Recovery
One of the first questions I invariably get from victims in a case such as this is: “What are the chances of recovering of my retirement losses?”
Unfortunately, they are not great in this case, as in most Ponzi scheme cases. It is exceedingly rare to recover all of your losses from a Ponzi scheme.
The CFTC case (which is the main case) has been assigned to United States District Judge Tena Campbell who is a highly respected jurist here in Utah. Based on the CFTC’s motion Judge Campbell has selected Jonathan Hafen to serve as the receiver in this case and he will work under the direction of the Court along with several lawyers in his firm, including Joe Covey who will be lead litigation counsel.
Because I am not involved in that aspect of the case and only have access to the public filings I cannot predict how much money will ultimately be recovered. Mr. Hafen has stated in open court that there are no significant assets to recover, which is not a good sign.
Mr. Hafen’s job will be to gather assets from any sources he can, and then to distribute those assets in an equitable manner to the victims. You can learn more about how an SEC receivership works here. The latest filings and information about the case can be found on the Receiver’s website: https://rustrarecoinreceiver.com/.
Unfortunately, one of his primary tasks will be to file clawback lawsuits against investors who got their money out before the whole scheme collapsed. So if you are one of the lucky investors who got out you should expect a demand letter from the receiver within a year. It’s a good idea to hire an attorney to handle that clawback case; preferably one who understands the process.
Complex receiverships such as this are extremely expensive and can stay open for years, depending on how long to takes to pull together and then distribute all of the assets. The Vescor case involving Val Southwick took ten years to complete, which led understandable criticism of the receivership process.
The only winners in this process are the lawyers.
How To Avoid Getting Scammed
This is a tragic story that is repeated over and over in our state, and most of these scams take advantage (intentionally or not) of the relationships of trust that members of the LDS Church have with one another. This is commonly called “affinity fraud.” Our state has a long history of financial scams and Ponzi schemes, many of which have been perpetrated by members of the LDS church on members of their ward or stake. It’s heartbreaking to say, but Utah has one of the highest rates of fraud per capita of any state in the country.
I specialize in helping people recover losses from investment fraud, but by the time people call me the money is usually long gone – and so is the person who took the money. So here are a few tips to avoid getting sucked into an investment scam:
Slow down. Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy. Be very wary of aggressive sales pitches and deadlines. Ask the hard questions before you hand over your money, not after.
Do your homework. Run a simple Google search on the company and its managers, or the individual. If it involves a company, ask for a private placement memorandum and company financials. Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved. The local office of the SEC can be reached at 801-524-5796, or you can call the Utah Division of Securities at (801) 530-6600.
Hire an attorney. Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up. A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes.
Get it in writing. I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake. The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.
Beware of guarantees. If anyone tells you that your investment is “guaranteed” that should be a red flag. All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back.
Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals. Avoid investing with anyone who claims to have a secretive investing algorithm or touts unusual success. These types of investments nearly always involve extremely high risk, despite what you may be told.
Work through licensed stock brokers or investment advisors. Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell securities, which is required under most circumstances. Run their name through FINRA’s Broker Check
Don’t invest with friends and neighbors. It may seem like doing business with someone you know and trust would be safer, but that is simply not true. All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good. Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.
Keep church out of it. If someone pitching you an investment casually mentions that they used to be the bishop or in some other church position, watch out! Church activity or high callings are not relevant to investment decisions, and if anyone mentions their church position as part of an investment pitch warning bells should be going off.
If it sounds too good to be true it probably is. If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out.
On Wednesday September 6, 2018 the US Department of Justice announced the indictment of Robert G. Mouritsen of Kaysville, Utah on three counts of wire fraud and three counts of money laundering.
The DOJ alleged that Mouritsen used a “position of prominence” to induce friends and fellow church members to give him money to further a fraud scheme he called “The Project” which targeted his fellow church members and was ongoing at the time the Indictment was filed. Luckily he only managed to raise $1.5 million before the feds shut him down.
Kaysville, Utah is predominantly LDS community 20 miles north of Salt Lake City. He allegedly began the scheme just a few years after he was released as the stake president.
Mouritsen told prospective investors that The Project “involved a series of complicated international transactions” that “involved governments in Asia and Europe and required the help of attorneys and bankers.” He also purportedly told investors that this investment opportunity had to be kept “strictly confidential” so he could not disclose many of the details. Right.
And of course he promised that the investment would produce very high returns. Secrecy, unusually high returns and urgency are all significant red flags that should have caused investors to forego this investment opportunity, but unfortunately some folks fell for it. If it sounds too good to be true, it probably is.
Predictably, Mouritsen neglected to tell investors that The Project had failed to produce any returns in over a decade and that he used a significant portion of investor money for his own personal use and benefit.
Affinity Fraud in Utah
Affinity fraud is particularly prevalent among members of the LDS Church. The primary reason for this, in my opinion, is because church members tend to have a high level of trust in fellow church members, and that invites unscrupulous people to take advantage of that trust.
The thought process is that since Brother So-and-so is/was a bishop, stake president, elders quorum president, etc., he was called by revelation and therefore is a worthy priesthood holder in the eyes of God. Sure, the investment sounds too good to be true, but since he was a great church leader it must be legit! In Utah affinity fraud schemes are nearly always targeted at people who are in same ward or stake – a place where his current or former church service is well-known.
I have written about affinity fraud schemes targeting members of the Mormon Church for years, including here, here, here, here and here (among others).
This is a big problem in our community and I have repeatedly called on leaders of the LDS Church to be more proactive in warning church members that they need to carefully evaluate investment opportunities on their merits, regardless of who is pitching them.
Check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
Do not fall for investments that promise spectacular profits or “guaranteed” returns. If an investment seems too good to be true, then it probably is. Similarly, be extremely leery of any investment that is said to have no risks; very few investments are risk-free. The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.
Be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing, but legitimate investments are usually in writing. Avoid an investment if you are told they do “not have the time to reduce to writing” the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential.
Don’t be pressured or rushed into buying an investment before you have a chance to think about – or investigate – the “opportunity.” Just because someone you know made money, or claims to have made money, doesn’t mean you will, too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.
Fraudsters are increasingly using the Internet to target particular groups through e-mail spams. If you receive an unsolicited e-mail from someone you don’t know, containing a “can’t miss” investment, your best move is to pass up the “opportunity” and forward the spam to the SEC at email@example.com.
If you are a victim of this scam or know more details about Mr. Mouritsen please feel free to share your story in the comments below. Anonymous comments are welcomed.
Editor’s Note: I have been contacted by a number of individuals who invested in Future Income Payments or FIP through Utah-based Live Abundant, which is referenced in the article below. This article appeared in the Wall Street Journal today and has a pretty good summary of the FIP situation. Spoiler alert: it’s not good.
Private Pension Product, Sold by Felon, Wipes Investors Out
Investors accuse Future Income Payments of taking them for more than $100 million
Mr. Kohn’s company, Future Income Payments, appears shut, according to court filings. His investors are likely to be wiped out, according to lawyers representing them, who plan to sue scores of firms that sold Future Income products as soon as this week. At least 25 states have taken enforcement actions or are investigating the company, it said in April.
The blow-up shines a light on the boom in opaque private markets, to which investors have flocked in the hope of doing better than they can in traditional stock and bond markets.
Private-market products, including the ones offered by Future Income, are frequently sold by financial advisers. Sales targets are often retirees looking to beat the anemic returns on bonds and other savings products.
Future Income essentially sold investors other people’s pensions. Mr. Kohn’s firm would find workers entitled to pension payments and temporarily buy the rights to those payments—effectively lending the beneficiaries money against their future pension income in what is called a “pension advance.” Then, Future Income would sell the rights to investors for a lump sum. An investor might put up $100,000 in exchange for an income of 7% for five years, for example.
But Future Income’s apparent collapse has left investors stranded. The company is no longer collecting the pension money that funds its own payments to investors, according to court documents. Mr. Kohn couldn’t be reached for comment. It isn’t clear if he has a lawyer.
JC and Mary Barb of Hemet, Calif., say their financial adviser Kevin Kraemer persuaded them to invest some $78,000 with Future Income last year. “He came to us and said, ‘Hey we can make some more money on your money,’ [and] sold us this new deal,” said Mrs. Barb, a 66-year-old retired postal worker. Her husband, a 63-year-old retired teacher, said the money “was to be a big help to us in our retirement and now it’s not there, it’s gone.” Mr. Kraemer declined to comment.
Unlike publicly traded investments, there are few rules on how pension advances can be sold or by whom. “They illustrate the problems with the financial services industry selling opaque, high-commission private investments,” says Joe Peiffer, a New Orleans-based plaintiffs’ lawyer representing some purchasers of Future Income’s products. “We have clients who were advised to cash in their pensions and refinance their homes to buy these things.”
In a letter sent to investors in April, Mr. Kohn said his company was suffering from “intense regulatory pressure and legal expense,” and investors had been told there were “no guarantees [they] would receive all payments.” Future Income didn’t respond to emails, and its phones appear to be down. Christopher Jones, a lawyer representing the company over a civil investigation by the Consumer Financial Protection Bureau, didn’t respond to requests for comment. The CFPB declined to comment.
Future Income called itself “America’s largest pension cash-flow originator,” boasting of a “global footprint of over 200 employees.” Its mailing address is a mailbox at a United Parcel Service Inc. store in a strip mall outside Las Vegas. The same address has been used by Mr. Kohn for dozens of other companies, most of them now defunct, state records show.
Mr. Kohn formed Future Income in 2011, company records show. In 2016, he set up a separate company, FIP LLC, controlled via a Philippines-based corporation of which he is the sole owner, according to a complaint filed last year by Minnesota regulators. He pleaded guilty to trafficking in counterfeit goods in 2006 and served 15 months in federal prison.
State regulators took action against Future Income as early as 2014 over the terms on which it was buying pension benefits, saying the firm was lending illegally. Some states said the company was breaching state laws limiting the interest that can be charged on loans. A disabled Gulf War veteran who borrowed $2,700 was required to send $450 a month from his benefits for five years—a total of $27,000, or an annual percentage rate of 200%, according to one example cited in the Minnesota lawsuit. Mr. Kohn in his April letter said the company was in the process of agreeing, or had agreed to, settlements with the states that limited the amounts it could collect.
“Future Income Payments’ illegal loans were outrageously expensive,” said Lisa Madigan, the Illinois attorney general, who filed a suit against the firm on the same grounds this year.
The string of regulatory actions didn’t stop advisory firms and others selling the commission-rich products, many as part of a retirement-savings strategy. A Future Income marketing presentation urged retirees to “give your savings the opportunity to grow,” with “competitive fixed rates,” according to a copy reviewed by The Wall Street Journal.
The sellers included Live Abundant, a firm based in Salt Lake City that promises on its website to “empower you to live a more abundant life by replacing your old, outdated retirement philosophy.” It has sold products from both Future Income Payments and Woodbridge Group of Cos. LLC, another private-market investment that collapsed, according to lawyers representing investors who said they intend to sue Live Abundant.
Loren Washburn, an attorney for Live Abundant, said the firm plans to review what it “could have done better” in vetting the deals. “This outcome where we’re having to explore options to collect [the money due to investors] is obviously not optimal.”
The sellers also included independent advisers registered with the Securities and Exchange Commission, such as Gus Marwieh of Austin, Texas. Mr. Marwieh “used his strong religious beliefs to engender trust from investors,” said Mr. Peiffer, who is representing some of them. Mr. Marwieh confirmed he sold Future Income products but declined to comment further.
An SEC spokesman declined to comment.
Investors are now scrambling to try to recover money. Mr. Peiffer said he is “highly confident that the losses suffered by investors are well over $100 million.”
Faw Casson & Co., an escrow company in Dover, Del., that held funds on behalf of investors, sued Future Income Payments in May. Faw Casson, whose lawyer declined to comment, said in a court filing it has received calls from several investors including a “retired secret service agent [who] said that if we do not return his phone call, he is coming to the office and trust me that is not what we want.”
One of the biggest problems I am seeing these days is private placements (also called alternatives or non-registered investments) that are sold to accredited investors through a private placement memorandum or PPM. Because these investments are not registered with the SEC the information that you can get about them is far more limited, and can even be fraudulent.
According to this article in the Wall Street Journal yesterday, sales of private placements are surging, as part of a broader rise in private capital markets. Private placements can be great opportunities, but they nearly always carry significant risk and in some cases they can be Ponzi schemes. Caveat emptor.
Aside from the risk, one of the biggest concerns regulators have is how the products are sold. FINRA has warned in the past about “fraud and sales practice abuses” by firms and brokers in the market. In some cases this may be due to the fact that these smaller, less known firms tend to hire troubled brokers for their track record in aggressively selling high-commission deals, sometimes using questionable tactics. Most of these firms are small to midsize brokerages, with fewer than 500 brokers, and are spread throughout the country.
According to the WSJ, more than 1,200 brokerage firms sold around $710 billion of private placements last year, and sales for the first five months of this year will be even higher. To make matters worse, securities firms with an unusually high number of “bad brokers” are selling tens of billions of dollars a year of private stakes in companies. The WSJ reviewed records of who was pushing these investments and identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records. This is not normal (always run your broker or advisor’s name through Brokercheck).
The bottom line is that investors are far more likely to be exposed to losses or fraud in private investments. If your broker or advisor recommends a private placement or “alternative” investment make sure he/she has a good track record and has done extensive due diligence.
If you get a cold call from a firm you’ve never heard of trying to convince you to invest in one of these, just say NO.
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.”
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.
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 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:
Robert Shapiro lived in luxury homes, drove a Porsche and charged $1 million in expenses to Woodbridge Group of Cos. as the business he led teetered on the edge of bankruptcy with securities regulators in hot pursuit.
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.
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!
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 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.