Does Disclosure of a Ponzi Scheme in the PPM make it legal? No.

Dee_Randall-1Dee Randall ran one of Utah’s largest Ponzi schemes, raising more than $72 million from approximately 700 investors nationwide.

On June 18, 2014 Utah Attorney General Sean D. Reyes’ office filed a criminal information and affidavit of probable cause against Randall for multiple counts of securities fraud and other related charges.  Randall, a resident of Kaysville, Utah, was charged with 21 second degree counts of felony securities fraud, one third-degree felony securities fraud count, and one second degree count of pattern of unlawful activity.

At the initial hearing on his criminal case victims testified that Randall, who was the owner of Horizon Mortgage & Investment, sold what he called “Horizon Notes” which were supposed to pay annual returns of 9 to 17 percent.  Investors were told that their funds would be used to finance car loans and real estate, but in reality Randall used investor funds for other things, such as payments to his other entities and payments to earlier investors – a classic Ponzi scheme. If you are in the market for a new home then you need, NorthPoint Mortgage.

What is unique about this case is Randall argued in court that although it may have been a Ponzi it was nevertheless legal because he disclosed it to his investors in the Private Placement Memoranda (or PPM).  Specifically, he disclosed that he was going to use new investor money to make payments to earlier investors, apparently hoping such a disclosure would get around securities laws.  So if you tell someone you’re going to defraud them is it still fraud?

Keith Woodwell, head of the Utah Division of Securities, says there’s no such thing as a “legal fraud” since Utah law also says it is illegal to operate a business in way that defrauds investors. “Using money from new investors to pay older investors, with no way to generate profits to pay people back, is a fraud regardless of whether you disclose it or not.”  This novel argument was also rejected by the bankruptcy judge.

My question is this: did anyone ever actually read the Horizon PPM?  PPM’s are required for a non-registered offerings of securities and are definitely worth reading before you invest.  In this case potential investors who read the PPM would have discovered that their money was going to be used to pay off other investors and (hopefully) would have declined to participate in this investment opportunity.  But the unfortunate reality is that  hardly anyone ever reads PPM, they are long and usually difficult to understand.

After months of legal maneuvering, this week Randall finally pleaded guilty to four counts of securities fraud and one count of pattern of unlawful activity, each punishable by up to 15 years in prison. Sentencing is set for Feb. 6, 2017.

If you are a victim of the Dee Randall/Horizon Financial scam feel free to share your story in the comments below.   The bankruptcy trustee is Gill Miller of Rocky Mountain Advisory, and his website can be found here.

TOP TEN WAYS TO AVOID LOSING MONEY IN A FINANCIAL SCAM*

130911175808-financial-scam-620xaEvery week Utah residents lose money by investing with friends, family or neighbors – people they knew and trusted. Investment fraud is a big problem here in Utah, largely because our close-knit communities are a prime target for “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.

I have seen people who borrowed money against their homes or liquidated retirement accounts in order to fund risky investments based on pitch by someone they trusted.  Unfortunately by the time they call me, the money is long gone – and so is the person who took the money. Because I specialize in helping people recover losses in investment fraud cases I often get asked for advice on how to avoid needing me.  So, at the risk of all my work drying up, here is my TOP TEN ways to avoid investing in a financial scam:

10. Slow down.  According to the Insider Monkey blog, many people invest after only hearing the pitch; watch out for promoters who try to commit you on the spot.  Don’t do it!  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.

9.  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.  Hire an attorney to evaluate the investment and help you perform due diligence.  Attorneys have access to court databases to look for lawsuits and bankruptcies.  Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved.

8. 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.  Your lawyer can review the offering materials and help you understand what the risks are.  Hiring a good attorney up front is an investment in your investment.

7.  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.  Don’t do it!  If things go bad later, proper documentation will be critical to me in my efforts to get your money back.  The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.  (See number 8.) In any private investment opportunity you should receive a detailed lengthy disclosure document called a private placement memorandum (PPM).  Take the time to review it before you invest.  It contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things.  If the company soliciting your money has not prepared a PPM, that should be the end of your discussions with them.

6.  Beware of guarantees.  If anyone tells you that your investment is “guaranteed” that should cause some you concern.  All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back. Even if you are approached to loan money and get a promissory note that is usually still considered to be an investment, and such loans can be very risky if not properly secured.  If you are told that the loan or investment is “secured” hire an attorney to document the security interest and verify the collateral.  (See Number 8.)

5.  Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals.  This could be an article all by itself.  Generally, avoid anyone who credits a highly complex or secretive investing technique or touts unusual success.  Legitimate professionals should be able to explain clearly what they are doing and how they make money.  And if the individual is really making as much money with their strategy as they say they are, they shouldn’t need yours.  These types of “alternative” investments nearly always involve extremely high risk, despite what you are told.

4.  Work through licensed stock brokers or investment advisors.  Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell you the investment, which regulator issued that license and whether the license has ever been revoked or suspended.  A legitimate securities salesperson must be properly licensed under most circumstances.  If you have any questions contact the Utah Division of Securities at (801) 530-6600.

3.  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.

2.  Keep church out of investing.  If someone pitching you an investment casually mentions that they used to be the bishop or in some other church position, watch out!  Church callings and temple worthiness are not relevant to investment decisions, so beware of those who bring these issues up in an investment pitch.

1.  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.  The fact that others may have been getting their promised returns does not mean you will.  All Ponzi Schemes eventually implode, and you may be left holding the bag.

Note:  I wrote this article for The Enterprise  and it was published in their July 2014 issue.  Because their content is only available to subscribers I am posting it here.

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


*This article is intended to address private investments, not those made through a licensed stock broker or registered investment advisor.

Utah Division of Securities Releases Top Investor Threats for 2013

SALT LAKE CITY, Utah – Keith Woodwell, Director of the Utah Division of Securities, announced today that the Division has released a new list of Top Investor Threats facing consumers with its partner, the North American Securities Administrators Association (NASAA). The 2013 list examines offers, practices, and investment scenarios that are being aggressively marketed to those trying to build and protect their nest eggs for retirement. The Utah Division of Securities investigators are concerned that with the passage of the JOBS Act lifting advertising restrictions on securities and other investments, consumers face even greater challenges when deciding where to invest their earnings.

“With new advertising flooding the marketplace and currency vehicles such as Bitcoin making headlines, investors are facing new and confusing messages,” cautioned Director Woodwell, “Rest assured, our messages at the state level remain stable: Choose your investments carefully, don’t jump into something you don’t fully understand, and work with a licensed professional when it comes to protecting your money.”

The 2013 list was compiled by the members of North American Securities Administrators Association.

Private Offerings: Fraudulent private placement offerings continue to rank as the most common product or scheme leading to investigations and enforcement actions by state securities regulators. These offerings commonly are referred to as Reg D/Rule 506 offerings, named for the exemption in federal securities laws that allows private placements to be sold to investors without registration). By definition these are limited investment offerings that are highly illiquid, generally lack transparency and have little regulatory oversight. While Reg D/Rule 506 offerings are used by many legitimate companies to raise capital, they carry high risk and may not be suitable for many individual investors. With the passage of the JOBS Act and recent adoption of rules implementing certain aspects of the Act, restrictions on how Reg D/Rule 506 offerings can be marketed to the general public have been relaxed, including the lifting of an 80‐year ban on general solicitations (advertising). Investors soon will begin to see advertisements for private placement offerings on a variety of platforms including social media, billboards, or t‐shirts on window washers as one startup has proposed, even though only a very small percentage of the population will be eligible to invest. And, as is often the case, scam artists are likely to use this legally permissible avenue to their advantage leading, no doubt, to another year of Rule 506 offerings holding the top spot as the most frequent source of state securities enforcement actions.

Real Estate Investment Schemes: The popularity of investments involving distressed real estate continues throughout the boom and bust cycle in the U.S. housing market. Even as housing prices continue to recover in many U.S. markets, investors should be aware that schemes related to new real estate development projects or buying, renovating, flipping or pooling distressed properties are popular with con artists. In the latest NASAA enforcement survey, real estate investments were the second‐most common product leading to securities fraud investigations by state securities regulators. While legitimate real estate investments can be an important part of a diversified investment portfolio, there are substantial risks with many types of real estate investments. In particular, state regulators have seen problems with non‐traded real estate investment trusts (REITS), properties that are bank‐owned, pending short‐sale, or in foreclosure, and flimsy promises
of investment funds being secured by an interest in real property when the property in question is already highly leveraged and has no
remaining equity. As with all investments, careful vetting and due diligence is a must with real estate investments.

High‐Yield Investment and Ponzi Schemes: Retail investors chasing yield often find themselves falling prey to high‐yield investment and Ponzi schemes promising unbelievably high rates of returns. That trend continues and does not appear to be going away any time soon. As with other alternative investments, high yield means higher risk and these types of alternative investments are favorites of scam artists. Whether a typical Ponzi scheme or a high‐yield investment program, many of the characteristics are the same – promise of incredibly high return coupled with low risk; a reasonably plausible explanation of why the investment is so good; a scam artist with credibility often based on claims of holding false credentials or being part of a particular group or organization. Initial investors are paid a return and help spread the word by promoting the investment to others.

Ultimately the scam will collapse leaving later investors with nothing to show for their trust in the scheme. One way to protect yourself is to ask questions and when you think you have asked all the questions you have, ask more questions. As Bernie Madoff, the king of Ponzi schemes, once said, he only turned people away when they asked too many questions.

Affinity Fraud: Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. Fraudsters know that people tend to trust someone who is perceived to have a common interest, beliefs or background and use that trust to exploit members of specific groups. The most commonly exploited are the elderly or retired, religious and ethnic groups, and the deaf community. Members of the group often find it hard to believe that “one of their own” could be scamming them. Consequently, affinity fraud can go unreported or when a regulator becomes involved,
members of the group choose not to cooperate. Investors should keep in mind that investment decisions should be made based on a careful evaluation of the underlying merits of the offer rather than common affiliations with the promoter.

Scam Artists Using Self‐Directed IRAs to Mask Fraud: Scam artists are using self‐directed individual retirement accounts (IRAs) to increase the appeal of their fraudulent schemes. State securities regulators have investigated numerous cases where a self‐directed IRA was used in an attempt to lend credibility to a bogus venture. While self‐directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self‐directed IRA. Custodians and trustees of self‐directed IRAs may have limited
duties to investors, and generally will not evaluate the quality, value or legitimacy of an investment or its promoters. Fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the responsibilities of self‐directed IRA custodians in order to deceive investors
into believing that their investments are legitimate or protected against losses. While a scam artist may suggest that self‐ directed IRA custodians analyze and validate investments, those custodians only hold the assets in a self‐directed IRA and generally do not evaluate the quality,
value or legitimacy of any investment. In some cases, fraud promoters convince investors to move assets from an existing self‐directed or traditional IRA into a fake self‐directed IRA held by a supposed custodian created and owned by the scam artist. Fraudsters also exploit the tax‐deferred characteristics of self‐directed IRAs, and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means.

Self‐directed IRAs also allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals, and private placement securities. Financial and other information necessary to make a prudent investment decision may not be as readily available for
these alternative investments.

Risky Oil and Gas Drilling Programs: Investors exploring alternatives to traditional securities may be attracted to the lucrative returns often associated with investments in oil and gas drilling programs. Retail investors increasingly are turning to alternative investments including oil and gas drilling investments as opposed to traditional stocks, bonds and mutual funds. These investments appeal to those frustrated with stock market volatility or skeptical of Wall Street.  Unfortunately, energy investments generally prove to be a poor substitute for traditional
retirement planning. Investments in oil and gas drilling programs typically involve a high degree of risk and are suitable only for investors who can bear the loss of the entirety of their principal. Some promoters will conceal these risks, using high pressure sales tactics and deceptive
marketing practices to peddle worthless investments in oil wells to the investing public. There are active investigations into suspect oil and gas investment programs in more than two dozen states and in every region of the U.S. and Canada. Investors should conduct thorough due diligence and assess their own tolerance for considerable risk when considering the purchase of interests in oil and gas programs.

New Threats to Investors

Proxy Trading Accounts: Investors should be wary of individuals who claim to have trading expertise and offer to set up or manage a trading account on an investor’s behalf. Allowing an unlicensed individual to have access to the username and password for your brokerage account or worse, allowing an unlicensed individual to set up a brokerage account in your name, is a recipe for disaster. Allowing someone without the legally‐required safeguards of proper registration and bonding requirements to control your account often leads not only to substantial trading losses, but the loss of investment funds through improper withdrawals from the account including theft. Investors should check with their state securities regulator to confirm that anyone offering to manage your accounts is properly registered and has a clean background. Financial professionals who make the commitment to be properly registered also commit to act ethically and honestly. If they do
not uphold that obligation, they will answer to state or federal regulators. Unfortunately, the same cannot be said for the unlicensed individual looking to capitalize on an investor’s trusting nature.

Digital Currency: Virtual reality may exist only in science fiction, but consumers now are able to purchase goods and services with virtual money such as Bitcoin, PP Coin and other digital currencies. Unlike traditional coinage, these alternatives typically are not backed by tangible
assets, are not issued by a governmental authority and are subject to little or no regulation. The value of Bitcoins and other digital currencies is highly volatile and the concept behind the currency is difficult to understand even for sophisticated financial experts given the complicated
mathematical algorithms that determine when new blocks of coins will be released. This environment has provided fertile ground for scam artists to capitalize on the increasing popularity and acceptance of digital currencies. Investors should be aware that investments that incorporate abstract money systems present very real risks, including the possibility of virtual reality leaving an investor virtually broke.

New Threats to Small Businesses

Capital‐raising Pitfalls: Recent law changes and newly available capital from investors including “angels” – affluent individuals who provide capital for a business startup – have changed the business funding landscape. The new and enhanced opportunities to raise capital through
crowdfunding, public advertising for investors under JOBS Act regulations and angel funding “solutions” also carry risks for unwary entrepreneurs. Securities offerings either must be exempt from registration requirements or properly registered, even under the new laws. Exempt securities remain subject to federal or state anti‐fraud provisions meaning entrepreneurs must provide full and accurate disclosures as part of any offering. Remember a security can be a stock, note, agreement, financial instrument or anything else that provides an investor with an expectation of participating in the profits the entrepreneur generates. The inadvertent failure of an entrepreneur to follow securities laws can result in money judgments for investors that can rob the profits of a new or expanding business enterprise. It pays to research your selected method of capitalization before you solicit any investors.

Unregulated Third Party Service Providers: The implementation of the JOBS Act has created opportunities for unregulated third parties to provide ancillary services. Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to
understand that use of an unregulated third party to provide such services does not change your obligations under federal and state securities laws. Not only should a small business or other entrepreneur make sure they are dealing with a legitimate service provider, they should also make sure that the service being offered is in full compliance with all federal and state requirements. Since the passage of the JOBS Act, new firms have joined existing firms that offer to sell lists of accredited investors for use in private placement offerings. However, new rules recently adopted by the SEC include more stringent requirements replacing the old fail safe of reliance on an investor‐ completed questionnaire claiming accredited investor status. If not done carefully and with federal requirements in mind, an entrepreneur will suffer the consequences, which could include the loss of any claimed exemption. Use of crowd funding portals, while subject to some regulation, also opens the door to scams. Startup businesses, especially small local businesses, should be very careful to verify the legitimacy of a portal before engaging their services.

Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the
business and the investor stand to lose.

About NASAA

Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest
international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50
states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. In the United States, NASAA is the voice of state securities agencies responsible for efficient capital formation and grass‐roots investor protection. Their fundamental mission is protecting consumers who purchase securities or investment advice, and their jurisdiction extends to a wide variety of issuers and intermediaries who offer and sell securities to the public. NASAA members license firms and their agents, investigate violations of state and provincial law, file enforcement actions when appropriate, and educate the public about investment fraud. Through the association, NASAA members also participate in multi‐state enforcement actions and information sharing. NASAA also coordinates and implements training and education seminars annually for state/district/provincial and territorial securities agency staff.

About the Utah Division of Securities

The Division of Securities enhances Utah’s business climate by protecting Utah’s investors through
education, enforcement, and fair regulation of Utah’s investment industry while fostering
opportunities for capital formation. Investors should do business with licensed securities brokers
and advisers and report any suspicion of investment fraud to the Utah Division of Securities by
calling (801) 530.6600; toll free at 1.800.721.7233 or logging on to our website.

CLIENT ADVISORY: SEC Rule 506 Private Securities Offerings Can Now Be Publicly Advertised

Here is a summary of the new SEC’s new Rule 506 written by Mark Cotter, who is the chair of our firm’s Corporate Finance and Securities Law Section.

Summary.  In a fundamental shift in federal securities laws, new U.S. Securities and Exchange Commission (“SEC”) rules will permit companies seeking to raise capital in Rule 506 private placements to engage in “general advertising and solicitation” (e.g., internet solicitations, mass mailings, website banner ads, etc.) to attract investors.  Thus, 80 years of securities laws requiring that “non-public offerings” or “private placements” remain “private” (including conditions intended to limit the offering to potential investors with whom the company or its senior management have pre-existing relationships) have been overturned.

The new rules affect securities offerings under Rule 506 of SEC Regulation D and are effective as of September 23, 2013.  In effect, companies seeking to raise capital under the Rule 506 exemption from securities registration requirements can now make public solicitations in order to cast a wide net for investors, though companies seeking to utilize these more permissive “manner of offering” rules may only sell securities to “accredited investors” and must satisfy heightened compliance requirements (including new “bad boy” disqualification rules). Continue reading “CLIENT ADVISORY: SEC Rule 506 Private Securities Offerings Can Now Be Publicly Advertised”

Not All Ponzi Schemes Are Prosecuted by the SEC

This week a Utah man named Kenneth Tebbs was sentenced to six and a half years in federal prison for operating a $49 million Ponzi Scheme in Salt Lake City.  According to the article in the Salt Lake Tribune the investment scheme victimized more than 100 investors, many of them elderly people, family and friends.

This case is somewhat unique because civil charges were never filed by the Securities and Exchange Commission or the State of Utah.  Instead, Mr. Tibbs filed for bankruptcy – but only after soliciting more investments from, among other, an elderly widow.  According to her letter to Judge Sam, Tebbs had sat her a couch and held her hand while telling her an investment of practically all of her savings would be profitable and safe. Two weeks later, he filed for bankruptcy. Many of the victims “were victimized on the eve of bankruptcy, when the wheels of the filing of bankruptcy were in motion” according to the article. Continue reading “Not All Ponzi Schemes Are Prosecuted by the SEC”

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

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

Idaho Investment Advisor Matthew Hutcheson Indicted

Mr. Hutchenson
Matthew Hutcheson is an Idaho-based investment advisor and recognized authority on fiduciary standards.  He has testified before U.S. Department of labor in 2008 in support of increasing disclosure requirements for advisors to improve the observance of fiduciary standards.  In 2010 he testified before congress on the need to increase regulatory standards to improve fiduciary conduct.  In 2011 Hutcheson was hired by the California State teachers’ Retirement System as consultant on vetting and screening advisors.  On 17 December 2010 the San Francisco Chronicle referred to him in a headline as “Nation’s Top Fiduciary.”

On 10 April 2012 Hutcheson was indicted on 17 counts of wire fraud and 14 counts of theft.  Mr. Hutcheson pleaded not guilty and was released a day later into third-party custody.

U.S. Attorney’s Press Release: http://www.justice.gov/usao/id/news/2012/apr/hutcheson04112012.html

Fiduciary advocate indicted

April 15, 2012 6:01 am ET

Well-known fiduciary advocate Matthew D. Hutcheson was indicted last week on federal charges that he used retirement plan funds for home renovations and to buy an interest in a ski and golf resort.

The plan adviser was arrested Wednesday in Idaho and indicted on 17 counts of wire fraud and 14 counts of theft. Mr. Hutcheson pleaded not guilty and was released a day later into third-party custody.

Mr. Hutcheson has been on the advice industry’s radar for some time. He hosted a radio show called “The Retirement Hour with Matt Hutcheson” and authored a course called “Retirement Plan Management: Compliance, Reporting and Ethics.”

According to the U.S. Attorney’s Office in Boise, Mr. Hutcheson was a fiduciary and trustee to a trio of multiple employer plans: the G Fiduciary Retirement Income Security Plan, the National Retirement Security Plan 401(k) and the Retirement Security Plan & Trust.

$2M IN ALLEGED TRANSFERS

In 2010, Mr. Hutcheson allegedly directed the record keeper of the G Fiduciary Plan to send a total of $2,031,688 via 12 wire transfers from the plan’s account, which was kept at Charles Schwab & Co. Inc., to accounts that were controlled by the adviser or were for his personal benefit.

Federal authorities also claim that in 2010, Mr. Hutcheson set up an entity called Green Valley Holdings to acquire a golf course and ski lodge at the Tamarack Resort in Idaho. He allegedly funneled $3 million in plan assets out of the Retirement Security Plan & Trust to help buy an interest in Tamarack, according to the complaint.

Federal authorities are seeking about $5.3 million in forfeitures from Mr. Hutcheson. Further, each count of wire fraud is punishable by up to 20 years in prison, while each count of theft from an employee pension benefit plan is punishable by up to five years.

A call to Mr. Hutcheson went to a voice mail system that was not set up. His attorney, Dennis Charney, did not immediately return calls. Neither responded to e-mails requesting comment.

UPDATE: Lessons to be Learned from Jeffrey Mowen

Here is an update on this story from the Salt Lake Tribune.  There is another moral to this story that is evident in these prosecutions, and that is you need to be careful who you solicit money on behalf of, and its better not to do it at all.  If you are not licensed to sell securities and accept a fee for raising money on behalf of another person it could get you into a lot of trouble — regardless of whether its a scam or not:

Utahns among six sanctioned over Ponzi scheme

By Tom Harvey
The Salt Lake Tribune
Published: March 7, 2012

Federal regulators have imposed sanctions on six Utah and Colorado men for their involvement with Jeffrey Mowen, the Utah County man who plead guilty to fraud charges for running a Ponzi scheme that took in about $18 million from investors on promises of returns of 2 percent or more a month.

The Securities and Exchange Commission said the six solicited millions of dollars of investor money that went to Mowen using false claims about where the money would go and about the security of the investments.

Sanctions were imposed against Thomas R. Fry, Cedar Hills; Michael W. Averett, Pleasant Grove; Michael G. Butcher, Loveland, Colo.; Gary W. Hansen Berthoud, Colo.; James B. Mooring, Highland; and Bevan J. Wilde, Highland.

Mowen SEC Sanctions

In a 2009 lawsuit the SEC said the six had raised about $41 million from 150 investors in various states. Of that, about $18 million went to Mowen, who used about half of it to make interest payments to investors so it appeared his operation was profitable in what’s known as a Ponzi scheme.

Mowen, who is now serving a 10-year prison sentence, misappropriated another $8 million for personal use, including buying a large collection of luxury and antique motor vehicles, with another $650,000 going to his then wife.

The lawsuit said Fry led the group of promoters in distributing false information about the investments. They also failed to do adequate research to ensure the information was legitimate, it said.

Fry ignored the fact that Mowen had been under investigation and eventually was convicted of securities fraud, the lawsuit said. When Fry learned that Mowen had been convicted, he failed to disclose that information to investors or other promoters.

Fry and the others settled the lawsuit against them and were ordered not to commit anymore violations. The SEC is seeking repayment of funds they earned in the process.

In recent administrative actions, the SEC barred the six from participating in investment sales, services and promotions, including penny stocks.

A seventh man named in the lawsuit, David G. Bartholomew, continues to defend himself.

tharvey@sltrib.com

_____________________________________________________________________________

Tom Harvey reported in the Salt Lake Tribune yesterday that Jeff Mowen finally pled guilty to one count of wire fraud and will spend ten years in prison.  I have not previously written about Mr. Mowen, but now that he has pleaded guilty I feel like I can write about it.  I met with Jeff Mowen several times when he was trying to hire me as his defense attorney.   He never actually hired me and he certainly never paid me a dime, but I am not going to reveal any potentially privileged communications in this post. Continue reading “UPDATE: Lessons to be Learned from Jeffrey Mowen”

How Do Ponzi Schemes Get Started?

The Financial Times recently published a fascinating prison interview with Bernie Madoff.  Of course he spins the story, attempts to justify his actions and it wasn’t really his fault.  He claims that his company was legitimately earning profits until the early 1990, and that in the 1980’s he was “making plenty of legitimate trades.”

But then in 1992, he admits it became a Ponzi scheme when he began using money from new deposits to pay some returns.  As he told the reporter:

“The turning point was really about 1992 onwards. From then on, it started getting worse and worse.  I spend a lot of time thinking about it – it is almost like a blank to me now. I try to piece it together; why didn’t I say, ‘I cannot do it?’  Why didn’t I return the money to those four or five clients – and the others – and say, ‘I can’t do it.’  Why?”

Since 1994 when I began handling securities cases, I have been involved in many many lawsuits and receiverships involving Ponzi schemes.  I also have on occasion represented people who perpetuated these schemes.  As a result, people often ask me how they get started and whether I think people set out to run a Ponzi scheme.  I don’t think they do, at least not in my experience.  Ponzi schemes usually start when people promise unachievable minimum returns to investors, pay returns even when the profits are not coming in, or try to shield their investors from losses. Continue reading “How Do Ponzi Schemes Get Started?”