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.
Editor’s Note: This is an excerpt from a guest post that I wrote for The White Coat Investor, a fantastic website that provides financial tips and education to medical professionals.
I have represented a number of doctors and dentists over the years in disputes with their stockbrokers and in Ponzi schemes and investment fraud cases. My medical professional clients are typically intelligent and savvy with respect to managing their money, but because they are often too busy to dig into the details they can often be taken advantage of by unscrupulous investment advisors, and in some cases, they fall victim to fraud. Below are a couple of war stories. Of course, most investment professionals are good and well-qualified – but not all of them. A keen intellect cannot substitute for taking the time to read the documents carefully. The devil may really be in the details
The Falls Event Centers
Utah-based entrepreneur Steve Down had been pitching investments in The Falls Event Centers since 2011. He raised approximately $120 million from more than 300 investors – the majority of whom are dentists throughout the United States.
So why did so many dentists fall for this scheme? How did he do it? Steve Down is a gregarious 61-year-old promoter who billed himself as an “an innovative entrepreneur and successful business owner, is passionate about creating companies and providing jobs.”
One of Mr. Down’s companies was called CE Select, a continuing education provider for dentists. According to the detailed complaint filed by the SEC, dentists attending CE Select seminars were pitched an investment in The Falls during their lunch break.
I honestly cannot figure out how he managed to make a pitch for a wedding reception center investment seem like a normal part of a dental continuing education seminar. But I digress.
The investment was basically a hard-money loan to fund the purchase and construction of more event centers and was supposed to pay returns of 10 to 14% per year to investors.
Down’s investment pitch remained essentially the same for years. The SEC alleged that Down made the following representations to his captive audience of unsuspecting dentists:
The Falls had 8 profitable locations and was growing at a rapid pace,
The Falls would have 200 event centers by 2022
After The Falls had 12 centers, it would be able to obtain institutional loans to replace the hard money loans,
Many of the event centers were profitable even before they opened, because they were accepting event bookings before they opened, and continued to be profitable after they opened,
Each event center would earn gross revenues of $1 million per year and cover expenses of approximately $650,000, leaving a profit of approximately $350,000, or 35% of revenue, per year.
The 200 projected centers would bring in net income of $70 million per year.
The Falls would be worth $2.8 billion by the time it had 200 centers in 2022.
The problem, according to the SEC, is that many of these representations were false, and Down allegedly knew it.
The Falls’ own accounting records showed that the event centers had never been profitable. Down also allegedly knew that his business model was unsustainable because of crippling debts owed to investors and mortgage holders. But he nevertheless kept on pitching this “profitable” investment to dentists and other investors until the SEC finally shut him down.
Down did not admit or deny the allegations in the SEC’s complaint, but he and The Falls did consent to the entry of a final judgment permanently enjoining them from future violations of securities laws and Down paid a civil penalty of $150,000. A final judgment was entered against Down and The Falls on May 11, 2018, by United States District Court Judge Jill Parrish. Despite all this, according to an article in the local paper, Down planned to continue building his wedding center empire, and “The Falls will continue to conduct business as usual.”
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.
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.”
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 know this is an unusual post but someone recently sent me a copy of an unsigned whistleblower letter to the SEC. This post is for that person:
To the person who sent me an unsigned letter involving a company with the initials TEG or EA (I don’t want to identify the company here) please call me or email me immediately. I can help you!
You have a very interesting whistleblower case, but it appears from your letter that you are still working with the company which is the subject of your report. Understandably, you are concerned about protecting your identity and your job. I get it.
The good news is that the SEC’s whistleblower rules provide attorneys with powerful ways to protect your identity, and from retaliation by the company – but there is a catch.
In order to submit a tip submit anonymously you must have an attorney represent you in connection with your submission. For my whistleblower clients I typically prepare a lengthy submission with a detailed description of the illegal conduct and the statutes that have been violated, and then I transmit it to the SEC on their behalf.
In some cases my clients prefer to remain anonymous. In those situations my client’s name does not appear on the submission and remains unknown to the SEC staff – and to the company. The identity of the whistleblower is known only to me and will be protected from disclosure by the attorney-client privilege.
And if the company eventually figures out who you are I can help protect you from retaliation. The law is clear: employers may not discharge, demote, suspend, harass, or in any way discriminate against you for providing information to the SEC under the whistleblower program, or assisting in any investigation. In fact, retaliation against a whistleblower will likely lead to a separate enforcement action by the SEC against a company and a civil lawsuit (filed by me). Also, under the Sarbanes-Oxley Act, you may be entitled to file a complaint with the U.S. Department of Labor if you are retaliated against for reporting possible securities law violations. We can help with that too.
The good news is that individuals who provide original information that leads to an SEC enforcement action with $1,000,000 in fines and penalties will likely qualify for an award. Awards are between 10% and 30% of the money collected by the SEC – and if the fraud is significant the numbers can be huge. The SEC’s Office of the Whistleblower recently announced that it has paid a record award of nearly $50 million to two whistleblowers, and a third whistleblower was paid more than $33 million.
There are significant benefits to whistleblowers, so you absolutely want to be in a position to apply for an award. But you have not done enough to qualify for a whistleblower award at this point. More needs to be done.
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.
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.
White-Collar Criminals Use Bonds of Trust to Prey on Investors
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.
“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.”
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.
Tom 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
FBI supervisory special agent Mike Pickett, who heads the white-collar unit in the Salt Lake field office, estimates the annual dollar amount of fraud in Utah now exceeds $2 billion.
Utah Attorney General said affinity fraud is “rampant” in Utah. He has also used the word “epidemic” to describe what’s happening in the state, and that is despite aggressive efforts to prosecute criminals and educate an unsuspecting public.
So far in 2016, federal criminal fraud cases have totaled $59.3 million in losses, according to the U.S. Attorney’s Office.
Utah is in the top five in terms of investigations, indictments, prosecutions and sentences for investment fraud.
A number of the individuals featured in this story are victims of the Thomas Andrews scam that was detailed in my prior post called “A Shocking Story of A Small Town Fraud.” I applaud these individuals for their bravery in publicly talking about what happened to them in the hope that some people will read the story and avoid making the same mistakes.
Part Two of the series was about how to protect yourself from being defrauded. The article lists a number of ways to protect yourself, including the following “Red flag warnings of fraud”:
If it sounds too good to be true, it is.
Guaranteed returns aren’t. Every investment carries some risk.
Beauty isn’t everything. Don’t be fooled by slick websites.
Pressure to send money RIGHT NOW.
The article quotes me a number of times, including “Pugsley has succinct advice for anyone who receives an offer that mentions religion. ‘If someone brings up the church in the context of an investment pitch, then that’s the end of the discussion and you leave the room because people try to conflate the two,’ Pugsley said. ‘There should be no connection between the church and investments. Period.'”
In our opinion: Utah must ‘be trusting but verify’ regarding affinity fraud
The bucolic land of eastern Ohio is home to sizable pockets of the Amish community. Known for their collective ethos, these tight-knit religious cooperatives thrive on high levels of trust and social cohesion. Yet, the same trust that produces a remarkable culture of burden sharing can be exploited to perpetrate fraud.
In 2012, Monroe L. Beachy, a trusted name within the Amish community, was sent to prison for orchestrating a scheme that defrauded some 2,700 investors, many of them friends and neighbors.
Of course, the Amish are hardly the only religious group that’s vulnerable. As the Deseret News reported in a two-part series this week on affinity fraud: “Bernie Maddoff’s $20 billion fraud targeted wealthy Jewish people in Florida and Israel. Allen Stanford went after Southern Baptists before his $7 billion empire fell.” And, according to the Economist, the state with the most affinity fraud per capita is thought to be Utah, where members of The Church of Jesus Christ of Latter-day Saints comprise some 60 percent of the population.
The common theme is communities with high levels of trust are particularly vulnerable to fraud. The solution then is a heightened scrutiny when mixing financial and religious relationship. Although there is unquestionably a role to play for government in preventing and punishing fraud, individual consumers must also take responsibility for how they spend their money.
As Utah Governor Gary Herbert told the Economist: “be trusting but verify.”
There are a variety of things consumers can do to fortify against potential affinity fraud. As noted, for starters individuals can exercise healthy dubiety, especially when an opportunity sounds too good to be true (spoiler: it probably is). Yet, this is easier said than done. The most effective schemes, for example, do not make extravagant claims. Bernie Maddoff was so successful because his “returns” were relatively modest, making his fraud more convincing.
As with Maddoff’s victims, in Utah there are many highly educated and discerning individuals who have been taken in. Thus, it’s important to look beyond the facade of an investment company to determine its validity, and be doubly cautious about mixing church and financial relationships. There is no substitute for doing your homework instead of relying on the word of someone you trust in other settings. Keeping these principles in mind can protect consumers from deceitful investment opportunities claimed by people they know.
There have always been those who seek gain at the cost of others. Yet, in a hyper-competitive economy with strong cultural status expectations, a heightened temptation may exist to cut corners and profit at the expense of others. In such an environment, it’s incumbent on individuals of sound mind — as well as governments and community leaders — to guard against fraud.
After all, without willing investors, affinity fraud is impossible.