Another Former LDS Stake President Indicted for Affinity Fraud

On Wednesday September 6, 2018 the US Department of Justice announced the indictment of Robert G. Mouritsen of Kaysville, Utah on three counts of wire fraud and three counts of money laundering.

The DOJ alleged that Mouritsen used a “position of prominence” to induce friends and fellow church members to give him money to further a fraud scheme he called “The Project” which targeted his fellow church members and was ongoing at the time the Indictment was filed.  Luckily he only managed to raise $1.5 million before the feds shut him down.

The “position of prominence” the DOJ is referring to is the fact that Mouritsen was a stake president of the Kaysville Utah Crestwood Stake of the Mormon Church from 1989 to 1997.   He also wrote a book called “Mantle: Windy Day in August, at Nauvoo, When the Mantle of the Prophet Joseph Smith Fell on Brigham Young Hardcover” (available on Amazon!).

Kaysville, Utah is predominantly LDS community 20 miles north of Salt Lake City.  He allegedly began the scheme just a few years after he was released as the stake president.

Mouritsen told prospective investors that The Project “involved a series of complicated international transactions” that “involved governments in Asia and Europe and required the help of attorneys and bankers.”  He also purportedly told investors that this investment opportunity had to be kept “strictly confidential” so he could not disclose many of the details.  Right.

And of course he promised that the investment would produce very high returns.  Secrecy, unusually high returns and urgency are all significant red flags that should have caused investors to forego this investment opportunity, but unfortunately some folks fell for it.  If it sounds too good to be true, it probably is.

Predictably, Mouritsen neglected to tell investors that The Project had failed to produce any returns in over a decade and that he used a significant portion of investor money for his own personal use and benefit.

Affinity Fraud in Utah

Affinity fraud is particularly prevalent among members of the LDS Church.  The primary reason for this, in my opinion, is because church members tend to have a high level of trust in fellow church members, and that invites unscrupulous people to take advantage of that trust.

The thought process is that since Brother So-and-so is/was a bishop, stake president, elders quorum president, etc., he was called by revelation and therefore is a worthy priesthood holder in the eyes of God.  Sure, the investment sounds too good to be true, but since he was a great church leader it must be legit!  In Utah affinity fraud schemes are nearly always targeted at people who are in same ward or stake – a place where his current or former church service is well-known.

I have written about affinity fraud schemes targeting members of the Mormon Church for years, including here, here, here, here and here (among others).

This is a big problem in our community and I have repeatedly called on leaders of the LDS Church to be more proactive in warning church members that they need to carefully evaluate investment opportunities on their merits, regardless of who is pitching them.

How To Avoid Affinity Fraud

Investing always involves some degree of risk, but investors can mitigate these risks by carefully investigating investment opportunities. The Securities and Exchange Commission recommends the following steps to avoid getting caught up in an affinity fraud scheme:

  • Check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
  • Do not fall for investments that promise spectacular profits or “guaranteed” returns. If an investment seems too good to be true, then it probably is. Similarly, be extremely leery of any investment that is said to have no risks; very few investments are risk-free. The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.
  • Be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing, but legitimate investments are usually in writing. Avoid an investment if you are told they do “not have the time to reduce to writing” the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential.
  • Don’t be pressured or rushed into buying an investment before you have a chance to think about – or investigate – the “opportunity.” Just because someone you know made money, or claims to have made money, doesn’t mean you will, too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.
  • Fraudsters are increasingly using the Internet to target particular groups through e-mail spams. If you receive an unsolicited e-mail from someone you don’t know, containing a “can’t miss” investment, your best move is to pass up the “opportunity” and forward the spam to the SEC at enforcement@sec.gov.

If you are a victim of this scam or know more details about Mr. Mouritsen please feel free to share your story in the comments below.  Anonymous comments are welcomed.

Copyright © 2018 by Mark Pugsley.  All rights reserved.

Another Scam Comes to Light: Future Income Payments or FIP

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

By Jean Eaglesham of the Wall Street Journal – July 23, 2018 5:30 a.m. ET

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 at home in Hemet, Calif. Mr. Barb says that money they invested ‘was to be a big help to us in our retirement and now it’s not there, it’s gone.’
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.”

Link to original article in the WSJ

The Problem With Private Placements

One of the biggest problems I am seeing these days is private placements (also called alternatives or non-registered investments) that are sold to accredited investors through a private placement memorandum or PPM.  Because these investments are not registered with the SEC the information that you can get about them is far more limited, and can even be fraudulent.

According to this article in the Wall Street Journal yesterday, sales of private placements are surging, as part of a broader rise in private capital markets.  Private placements can be great opportunities, but they nearly always carry significant risk and in some cases they can be Ponzi schemes.  Caveat emptor.

Aside from the risk, one of the biggest concerns regulators have is how the products are sold.  FINRA has warned in the past about “fraud and sales practice abuses” by firms and brokers in the market.  In some cases this may be due to the fact that these smaller, less known firms tend to hire troubled brokers for their track record in aggressively selling high-commission deals, sometimes using questionable tactics.  Most of these firms are small to midsize brokerages, with fewer than 500 brokers, and are spread throughout the country.

According to the WSJ, more than 1,200 brokerage firms sold around $710 billion of private placements last year, and sales for the first five months of this year will be even higher.  To make matters worse, securities firms with an unusually high number of “bad brokers” are selling tens of billions of dollars a year of private stakes in companies. The WSJ reviewed records of who was pushing these investments and identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records.  This is not normal (always run your broker or advisor’s name through Brokercheck).

The bottom line is that investors are far more likely to be exposed to losses or fraud in private investments. If your broker or advisor recommends a private placement or “alternative” investment make sure he/she has a good track record and has done extensive due diligence.

If you get a cold call from a firm you’ve never heard of trying to convince you to invest in one of these, just say NO.

Copyright 2018 by Mark Pugsley.  All rights reserved,

More Trouble for John Zane Jeppesen of Garland, Utah

I have previously  written about Mr. Jeppeson, now his is more trouble.  This is from the Ogden Herald Journal this week:

The Utah Division of Securities of the Department of Commerce have filed court documents against John Zane Jeppesen, of Garland, bringing forth more accusations and details into Jeppesen’s nearly 20 year behavior of securities fraud and outlining a series of investments that have totaled nearly $9 million while naming family members of Jeppesen’s as recipients of those investment funds.

The Utah Division of Securities recently filed three different reports against Jeppesen: a Stipulation and Consent Order, an Order of Adjudication and a Findings of Fact, Conclusions of Law and Recommended Order, all highlighting Jeppesen’s pattern of securities fraud from six different investors starting in 2010 while adding two other incidents that left many Box Elder County residents out of millions of dollars.

According to these documents, the Division determined that Jeppesen, with Jeppesen Land and Properties, are subject to a $300,000 fine. In the stipulation and consent order, it states that JLP is a business entity that was incorporated in Feb. 2011, and is currently an active entity registered with the Utah Division of Corporations with LaDene M. Jeppesen, 92, (Jeppesen’s mother), listed as the registered agent and manager. Jeppesen Land and Properties has never been registered with the Division as an issuer of securities and found no records showing securities registration, exemption from registration or notice filing in any manner for JLP, according to these documents.

Breaking down the timeline of Jeppesen’s fraudulent investment behavior, the Division outlined three separate time frames that go back as far as 1999.

According to these documents, in 1999 Jeppesen acknowledged in an Idaho order that he was not licensed to sell securities under Idaho code but violated that code by selling securities that were unregistered. He also violated Idaho code by making untrue statements of material facts, and omitted facts to investors by failing to disclose to them that the promissory notes he was selling were not registered as securities and that he did not have a license to sell securities.

Jeppesen took this pattern of unlawful activity to Utah and in 2005 entered into a similar order with Utah and the Division for similar charges. In this series of events, court documents state, “Jeppesen deceived 134 Utah investors and raised approximate $8 million. For his unlawful services, Jeppesen received a total of $986,563 in compensation.” Many of those Utah investors were Box Elder County residents.

In a 2007 Utah order, Jeppesen was told he “would not engage in the sale of unregistered securities in the state of Utah” and that he would become a licensed broker dealer, investment adviser of agent before the Division before engaging in any securities transactions. Jeppesen was also told he was prohibited from making any untrue statements or omitting facts and that he would tell potential investors the existence of his current stipulation.

In 2010, Jeppesen violated the securities laws in a third round of securities violations. In this round of violations, according to court documents, Jeppesen worked with six investors in both Utah and Idaho.

Investors 1 and 2 are residents of Idaho with family and business ties to Utah. They met Jeppesen through a family member that previously invested with him in a different venture. Jeppesen collected $100,000 from these investors (over the course of a year), returned approximately $25,770, promising a 12 percent return on property located in Utah County.

According to the Stipulation and Consent Order, Jeppesen “used these funds in a manner inconsistent with what he told Investor 1 and Investor 2,” and instead used $5,225 towards banks and credit cards, $18,720 for payments to earlier investors, $530 to LaDene Jeppesen and $2,500 to his wife, Robyn Jeppesen. According to this document, Jeppesen told these investors “there was no way to lose money on this deal.”

Investors 3 and 4, a married couple from Salt Lake County, also met Jeppesen through a family member that invested with him previously. This couple invested five different times with Jeppesen for a total of $135,000 and are still owed the full amount in principal alone.

The document states that Jeppesen did not provide these investors with a promissory note or trust deed at the time of investment and when asked, Jeppesen claimed, “he forgot to record the trust deed and create a note.” These investors were told that they would be paid back within one year.

In this case, Jeppesen told investors, “There was no need for a promissory note or trust deed because it is a short-term investment and they have to move fast.” Instead, the Division stated, Jeppesen used these funds in a manner inconsistent with what he told these investors with payments to earlier investors of $24,130, a payment of $4,357 to banks and credit cards and over $4,000 to various businesses.

The Division also states that Jeppesen used those funds paying Robyn Jeppesen $11,532, Shannon Fitzgerald (wife of Michael Fitzgerald) $10,336, $5,000 to Lone Peak Real Estate and $2,200 in payments to earlier investors.

Investor 5 is a resident of Davis County and was told by Jeppesen that “he could not wait for a bank loan” and that his investment would be a trust deed. Jeppesen also told Investor 5 that “he was working with Mike Fitzgerald, his business partner on several land deals” and that Fitzgerald was “a genius with land deals.” Investor 5 was told that Jeppesen and Fitzgerald wouldn’t need 45 days to return his funds because they had property in Beverly Hills, California that was under contract that would sell within 30 days.

Investor 5 was also told that he could foreclose on the property if Jeppesen or Fitzgerald didn’t return his funds in 45 days. This investor wired $100,000 to JLP in Feb. 2012. One month later Jeppesen told Investor 5 that he would not be able to return the funds within the promised 45 days because “of an issue with the closing on the Beverly Hills property.”

Jeppesen offered Investor 5 an extra 1 percent interest on top of the guaranteed 20 percent if Investor 5 agreed to keep his funds with Jeppesen and not foreclose on the property but the investor declined the offer.

To this date, Investor 5 is still owed $100,000 in principal alone and that the investment monies were used by Jeppesen in a manner inconsistent with what the investor was told.

Instead, the funds were used to make payments to earlier investors in the amount of $53,556, $16,571 to a credit card, $11,113 to Robyn Jeppesen, $6,500 to Shannon Fitzgerald, $5,425 to Carole Jeppesen (Jeppesen’s sister in law), $2,625 transferred to other bank accounts, $1,665 to Best Buy, $1,500 transferred to himself, $530 transferred to LaDene Jeppesen and other transactions all totaling $100,000.

According to documents, Jeppesen used Investor 6’s funds in a manner inconsistent with what Jeppesen told him including, $79,045 in payments to earlier investors, $49,881 in credit card payments, $22,475 to Robyn Jeppesen, $19,841 to Shannon Fitzgerald, $12,711 in transfers to other bank accounts, $21,465 to Utah County Treasurer, $5,447 for remodeling, $2,650 to LaDene Jeppesen, $4,969 in unknown expenses and various other transactions totaling $220,000.

During Jeppesen’s May 24, 2018, hearing, he presented two arguments. “First, Jeppesen asserted that he thought that he had not violated the securities laws this third time because he had obtained a business license for his new enterprise and because he had secured the investment of the investors by security interests in real property. Secondly, he asserted that his investors would not be harmed because the value of the properties involved in the investment exceeded the total amount owed to the investors, documents state.

Although the first argument is unrelated to the fine imposed on Jeppesen, the Division states that he did not consult with a knowledgeable securities attorney to assure that the investments weren’t in violation of securities laws. Instead, Jeppesen said he “relied on the advice of two non-attorneys, one of whom was a Mr. Fitzgerald who had been Jeppesen’s accomplice in the $8 million securities fraud transaction that was the subject of the 2007 Utah Order,” documents state.

“Jeppesen’s testimony that he was now complying with securities laws, or thought that he was complying with securities laws, is inherently and clearly not to be believed,” court documents state. The Division added that there was no documented credible evidence produced at that hearing that said investors had security interest in real property.

Countering Jeppesen’s claim that his investors weren’t harmed in a substantial way, “First and foremost, is the fact that the parties acknowledge and agree that the investors in the present third round of securities fraud are currently owed $488,830 in principal alone. These investors are currently harmed in a substantial way,” the document states.

Jeppesen also stated during that hearing that “the properties that could be sold to make payment to the investors were not presently owned by him or the Respondent entity, but by the Jeppesen family members,” it added. He added that one of the properties had already been sold but the sales proceeds from the transaction were “tied up in escrow” and subject to multiple claims.

“No credible evidence was given that even one dollar of the present or prospective sales proceeds from these properties would ever pass into the hands of the harmed investors,” the document stated.

The Division added that Jeppesen provided no cooperation to their investigation and that “the Respondents have transferred to Jeppesen family members the real properties that were meant to respond to, or secure, the investments of the victims of the Respondents.”

On April 4, 2016, Jeppesen was charged in Utah’s Third District Court in Salt Lake City with 11 counts of securities fraud, two counts of theft and one count of pattern of unlawful activity, all second-degree felonies. On July 7, 2017, Jeppesen entered into a plea deal with the state and plead guilty to one count of pattern of unlawful activity and the remaining charges were dismissed.

On Dec. 8, 2017, Jeppesen was sentenced to one to 15 years in the Utah State Prison but the term was suspended. Instead, he was sentenced to 30 days in jail, which he served. Jeppesen was also ordered by the judge to pay restitution to the investors in the previously mentioned cases in the amount of $488,830. If he fails to make the payments to investors he may be sentenced to addition time in jail and/or prison.

A Pyramid of Lies

Editor’s Note: This is a fascinating story that appeared on the FBI’s website this week about a $43 Million Ponzi Scheme in Sparta, Tennessee.  Tractor salesman Jeff Gentry preyed on the implicit trust of friends, family, and neighbors in this small Tennessee town.  

Nobody would have suspected that the affable Tennessee tractor salesman who was raised among them, tended their lawns in high school, and prayed beside them at Sunday services was scamming them by the millions. Indeed, that’s probably what made the man’s investment scheme so successful, investigators say.

Jeffery Gentry, 40, pleaded guilty in federal court last August to charges related to his $43 million scheme that bilked investors—including friends, family, neighbors, and fellow parishioners—out of more than $10 million. Gentry, who owned and operated Gentry Brothers Tractor Supply and Gentry Auto in the Middle Tennessee town of Sparta, was sentenced on May 14 in U.S. District Court in Nashville to three years in prison. He was also ordered to pay $10.4 million in restitution to his victims.

Gentry’s scam was a textbook Ponzi scheme that promised investors high guaranteed rates of return on investments. He told investors the funds would finance the purchase of mowers and farm equipment to satisfy lucrative state contracts. In return, investors could expect monthly proceeds as high as 10 percent, thanks in part to rebates from equipment manufacturers for cash purchases, according to investigators. But it was all a lie, sustained in large part by investors’ faith that a lifelong neighbor and friend would never purposely do them wrong.

“He kind of preyed on that aspect of it,” said Jeff Guth, chief of the Sparta Police Department in White County, a close-knit rural community of 26,000 residents where the median household income is about $36,000. “Most of these people were friends of his. A lot of them went to church with him. They wouldn’t believe that someone close to them like that would be doing that.”

Guth learned of the scheme a few days before Christmas in 2016, when the police station lobby filled up with distraught investors fearing they had been duped. Gentry’s tractor store—an informal gathering spot where many of the investment transactions occurred—had shut down without explanation, suddenly casting doubt on their guaranteed returns. At the police station, former farmers and other retirees waved handwritten statements revealing their six-figure outlays, much of it from savings and retirement accounts. Suspecting there would be still more victims, Guth called the FBI in nearby Cookeville—a satellite office of the Bureau’s Memphis Division—for support.

“He said he had some people in his office who felt they may have been the victim of a crime,” recalled FBI Special Agent Traci Lovell. “I don’t know if they used the term ‘Ponzi scheme,’ but their money had been stolen—a large amount of money.” Lovell and fellow agent Ric Fagan began interviewing more than 50 victims who had invested as far back as 2012. The picture that emerged was a typical pyramid scheme: Gentry’s initial investors may have seen promising returns early on, but without new money coming in—to pay investors their guaranteed returns and support Gentry’s increasingly lavish spending—the ruse ultimately fell apart, leaving many underwater and angry.

“That was a hard day for a lot of people, because they were finally coming to the realization that they had been duped and that they would be lucky if they got anything back at all,” Guth said.

In addition to funneling investor cash into real estate, livestock, vehicles, and farm equipment, Gentry spent $365,000 in March 2016 to launch a used car business, Gentry Auto, in Sparta. “He sold for a living,” said Special Agent Fagan. “He could talk to people. Just what every scam artist needs is the ability to convince you that giving me your money is the best thing to do.”

U.S. Marshals Service Auction Sign in Sparta, Tennessee
The FBI investigation required months of work with local task force officers in Sparta, the Internal Revenue Service, and the U.S. Marshals Service—which seized Gentry’s assets, including businesses, houses, and land financed through the scheme, as well as $300,000 in cash. An FBI forensic accountant was brought in to make sense of the accounts and handshake contracts, including handwritten notes acknowledging single investments of more than $1 million. Gentry was charged on July 5 with wire fraud and money laundering. An auction last August on the site of Gentry’s former tractor business sought to recoup some money for the victims, though it only resulted in $1.3 million for victim restitution—not nearly enough to make them whole. Guth said some bidders at the auction altruistically overbid certain items “to help their neighbors out a little bit.”

“Many of them, they are never going to see the amount that they had put into it,” Guth said. “But they will be able to benefit from some of it. And some of it may be better than nothing at all.”

The FBI agents said secrecy was a key element of Gentry’s ploy—as it is in most Ponzi schemes. Potential investors are lured into thinking they are lucky to get access to this kind of lucrative investment, and that if too many people know about it, their own windfall might be diluted. The air of secrecy also keeps victims from swapping notes, which can reveal inconsistencies and irregularities. That’s what happened in Sparta.

These tractors and mowers were among the assets seized from convicted fraudster Jeff Gentry that were auctioned by the U.S. Marshals Service at a public auction on August 26, 2017 in Sparta, Tennessee.

Tractors and mowers were among Jeff Gentry’s seized assets auctioned last summer by the U.S. Marshals Service. The resulting $1.3 million in proceeds will go toward restitution for victims of Gentry’s investment scheme.


“When the victims started comparing notes, they realized the basis of this scam was implausible,” said Lovell, referring to the sheer volume of tractors Gentry would have needed to sell to justify what he promised investors. “The victims can see in hindsight how ludicrous it was to believe that this scheme was true.”

In hindsight, there were warning signs: guaranteed high returns, secrecy, and a fundamentally flawed investment model. Investigators cautioned anyone entering into an investment opportunity to do their homework before handing over money. “If someone tells you to keep it a secret, that should be a red flag,” Fagan said. “If someone uses the words ‘guaranteed return,’ that should be a red flag. If a contract you’re looking at doesn’t make sense, ask more questions and try to understand it. Don’t make yourself an easy target.”

Guth said some victims, including retirees on fixed incomes, lost their life savings. Their trust and faith has also been tested. “People are more on guard than they were before, and they are probably having a hard time trusting anybody,” he said. “It was hard to take. But being a small, close community, I think people have kind of wrapped their arms around some of these people [who were victims]. I’m sure it’ll take a while, but we’ll get through this.”

What is a Ponzi Scheme?

Ponzi schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artists pay “dividends” to initial investors using the funds of subsequent investors. The schemes generally fall apart when the operators flee with the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”

This type of fraud is named after Charles Ponzi of Boston, Massachusetts. In the early 1900s, Ponzi launched a scheme that guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial backers, the scheme dissolved when he was unable to pay later investors.

Tips for Avoiding Ponzi Schemes

  • Be careful of any investment opportunity that makes exaggerated earnings claims.
  • Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework.
  • Consult an unbiased third party—like an unconnected broker or licensed financial adviser—before investing.

The Woodbridge Group of Companies – Another Ponzi Targeting Utahns

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

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

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

 

Woodbridge Bankruptcy Spotlights CEO’s Luxury Spending

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Lessons to be Learned

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

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

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

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

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

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

 

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

Did you send me a letter? Call me!

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.

So please, call me!

Mark Pugsley

Direct: 801-323-3380

Email

 

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

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


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

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

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

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

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

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

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

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

FBI Article on Affinity Fraud in Utah

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


Affinity Fraud

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

White-Collar Crime Offender Registry Website (Stock)

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

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

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

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

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


In Their Words

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

Transcript | Download

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

Transcript | Download

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

Transcript | Download

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

Transcript | Download


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

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

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

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

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

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

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

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

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

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

Wolves in Sheep’s Clothing

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

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

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

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

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

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

SEC Creating Searchable Database of Bad Brokers

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

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

SEC Creating Searchable Database of Bad Brokers

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

 

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

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

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

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

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

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

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

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

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

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

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