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.”

The Financial Fraud Institute is coming to St. George, Utah

STOP FRAUD UTAH and the Financial Fraud Institute are coming to St. George!  The event will take place on November 2nd from 4:00 to 7:00 p.m., at the Dixie Center.  The keynote speaker will be John W. Huber the United States Attorney for the District of Utah. Click on this link to access the brochure.

STOP FRAUD UTAH is a collaboration of federal, state, and local law enforcement and self-regulatory organizations working together to fight fraud in Utah by educating the community about ways to avoid being victimized. What is unique about this program is the depth of cooperation among federal, state, local law enforcement and self-regulatory organizations.  STOP FRAUD UTAH includes the following state and federal agencies:

• The SEC
• The United States Attorney’s Office
• The Commodities Futures Trading Commission
• The FBI
• The IRS
• The Financial Industry Regulatory Authority (FINRA)
• Utah Attorney General’s Office
• Utah Division of Securities
• Utah Division of Consumer Protection
• Salt Lake County Attorney’s Office
• Utah County Attorney’s Office
• Washington County Attorney’s Office

Additionally two panels made up of presenters from many of the agencies listed above will discuss financial fraud and consumer fraud. Informational booths from the various agencies, as well as the AARP, Utah Retirement Systems, Adult Protective Services, the Utah Department of Veterans & Military Affairs and the Better Business Bureau will be available to provide information to attendees.

STOP UTAH FRAUD

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

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

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

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

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


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

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

Salt Lake City

WHEN:                      April 26 in Salt Lake City

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

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

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

Free parking at the University of Utah Stadium

Utah County

WHEN:                      May 10 in Utah County

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

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

                                    800 W. University Parkway, Orem, UT 84058

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

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

ACCESS THE STOP FRAUD UTAH WEBSITE HERE

Follow us on Twitter at #StopFraudUtah.

 

SEC Publishes Recommendation on How Avoid Common Investment Scams in 2017

The Securities and Exchange Commission has published its annual list of tips designed to help investors with managing their money and avoiding common scams in the New Year.  Here is the list which is published by the SEC’s Office of Investor Education and Advocacy:

SEC INVESTOR BULLETIN: 10 INVESTMENT TIPS FOR 2017

12/27/2016

Whether you are a first-time investor or have been investing for years, here are 10 tips from the SEC’s Office of Investor Education and Advocacy to help you make better informed investment decisions and avoid common scams in 2017.

1. Always check the background of an investment professional—it is easy and free. You can find details of an investment professional’s background and qualifications through the search tool on the SEC’s website for individual investors, Investor.gov.  If you have any questions about checking the background of an investment professional, you can call our toll-free investor assistance line at (800) 732-0330 for help.

2. Promises of high returns with little or no risk are classic warning signs of fraud.  Every investment carries some degree of risk and the potential for greater returns often correlates with greater risk.  Ignore so-called “can’t miss” and “guaranteed risk-free” investment opportunities.  Better yet, report them to the SEC.

3. Be careful when using social media as an investment tool.  Social media and the Internet have become important tools for investors, but also present opportunities for fraudsters to lure investors into a wide range of scams.  For additional information on ways to avoid fraud through social media, please read our bulletin on Social Media and Investing.

4. It can be costly to ignore fees associated with buying, owning, and selling an investment product.  Expenses vary from product to product, and even small differences in costs can mean large differences in earnings over time.  An investment with high costs must perform better than a low-cost investment to generate the same returns.Read our bulletin on How Fees and Expenses Affect Your Investment Portfolio to learn more.

5. Be alert to affinity fraud.  Affinity frauds target members of identifiable groups, such as the elderly, religious or ethnic communities, or the military.  Even if you know the person making the investment offer, be sure to check out the investment and the person’s background—no matter how trustworthy the person seems.

6. Any offer or sale of securities must be either registered with the SEC or exempt from registration.  Otherwise, it is illegal.  Registration is important because it provides investors access to key information about the company’s management, products, services, and finances. Always check whether an offering 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.

7. Diversification can help reduce the overall risk of an investment portfolio.  By picking the right mix of investments, you may be able to limit your losses and reduce the fluctuations of your investment returns without sacrificing too much in potential gains.  Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.

8. Did you know that active trading and some other very common investing behaviors actually can undermine investment performance? According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state, or company, and holding on to losing investments too long and selling winning investments too soon.

9. If you are investing or saving toward a goal, or just want to learn about how your money can grow under various hypothetical scenarios, take advantage of our compound interest and savings goal calculators.These calculators are great tools to help inform any decisions you make about your investing and saving.

10. Unbiased resources are available to help you make informed investing decisions. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a significant advantage for investing wisely.  A great starting point is Investor.gov.

If you have questions about your investments, your investment account or a financial professional, don’t hesitate to contact the SEC’s Office of Investor Education and Advocacy online or on our toll-free investor assistance line at (800) 732-0330.


The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Confessed Fraudster Thomas Andrews Has Been Sentenced to 97 Months in Prison

As a follow-up to my prior story about a shocking small town fraud scheme that occurred in Nephi, Utah.  Yesterday the confessed perpetrator of that scheme, Tom Andrews, was sentenced to 97 months in prison.  This is the maximum sentence Judge Sam could have imposed. Hopefully others who might consider starting up a scheme like this will think twice when they see this significant prison sentence. This story about the sentencing appeared in the Deseret News today:

Judge comes down hard on former Nephi man in affinity fraud case

SALT LAKE CITY — A Sanpete County dairy owner told a federal judge Thursday that he’d be happy to have the man who stole his retirement money do some time on his farm.

Bob Bown said Tom Andrews needs to do some physical labor, get his hands dirty, rake manure out of stalls. “One of the best things that could happen to him is to do some hard work,” Bown said.

U.S. District Judge David Sam agreed thprison_mainat it would be “wonderful” if Andrews could “get some calluses to earn a buck,” but federal rules prevented him from imposing such a penalty.

The judge, however, sentenced Andrews to 97 months in prison — the maximum under sentencing guidelines — after the former Nephi man admitted to securities fraud and mail fraud. Sam, who rejected an earlier plea deal as too lenient, said he would have ordered a longer prison term if he could. Sam also ordered him to pay $8.3 million in restitution.

Sam then made the rare move for a white-collar case of placing Andrews, 40, in custody on the spot. A couple dozen of the victims applauded as U.S. marshals escorted Andrews from the courtroom in handcuffs.

“It just makes me sad,” Sam said, noting how Andrews wiped out people’s retirement savings. “It’s kind of like taking the widow’s mite.”

Andrews, who ran a Nephi tax return preparation service, admitted to encouraging nearly two dozen people to roll over their retirement accounts into fake companies he created called Jackson Trust and Lincoln Financial Group. He mailed them doctored financial statements from California to make the companies appear legitimate.

Andrews used at least $5.5 million for his living expenses and personal benefit, including luxury cars, homes and vacations. Investigators say all the money is gone. Victims — many of them longtime friends whom Andrews considered family — don’t expect to ever recoup their losses.

“He has lived as a millionaire for years and everybody else is paying for that now,” victim Ben Rosenloff told the judge.

It was also revealed in court Thursday that Andrews failed to remit some of his clients’ federal and state tax payments, landing them in trouble with the IRS.

“I don’t understand him,” Bown said. “I thought I knew him, but I don’t.”

Prosecutor Jacob Strain said this case wasn’t like other investment fraud cases where investors hope to double their money in a get-rich-quick scheme. These were people who knew and trusted Andrews and who thought their money was safe and secure with him, he said.

Andrews read an apology to the victims, saying words can’t describe his regret and that he hopes people forgive him.

“I’ve hurt and destroyed people’s lives and I’m truly sorry for that,” he said. “I scarred them both emotionally and financially for years to come.”

Defense attorney Rebecca Skordas argued for a 70-month sentence because she said Andrews was “incredibly forthcoming when originally confronted about wrongdoing” — a statement that drew scoffs from the packed courtroom.

Andrews cooperated with federal investigators and helped them go through bank documents to determine how much money victims were owed, she said.

Mike Sperry, who said his parents lost their life savings, showed the judge a large poster with photos of Andrews, who moved to California, enjoying himself at Disneyland this fall.

“I don’t think any of the victims have been to Disneyland since this happened,” he said.

Sallie Rawlings, a Draper lawyer who along with her husband lost 30 years of retirement savings, suggested Andrews be required to write an apology letter to the 20 victims listed in the criminal charges and spend a year in prison for each of them, an idea the judge said he liked but he couldn’t do.

“This was a calculated and manipulated fraud perpetrated by a masterful thief,” Rawlings said. “Let’s send a message that this cowardly, cruel, brazen act will not be tolerated.”

The Deseret News’ Three Part Series on Affinity Fraud in Utah

hotspotsMy friend Dennis Romboy is a great reporter over at the Deseret News who put together a very detailed two-part story on affinity fraud that was published over the weekend.

Part One of the series was called “Utah’s fraud ‘epidemic’: Victims share anger, embarrassment, hurt” and provided the details of how a number of Utahn’s have been victimized by individuals in their community.  Here are some interesting takeaways from the article:

  • 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.'”

To round it all up the Editorial Board of the newspaper published an opinion on the need to “trust but verify” that I thought was worth reproducing here:

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.

Copyright © 2016 by Mark W. Pugsley.  All rights reserved.

 

 

The Steven B. Heinz Ponzi Scheme

Today I realized that I never posted about the case against Steven B. Heinz.  Please accept my apologies for this oversight, as this is a story that fits the purposes of this blog perfectly.  Heinz solicited his clients at his brokerage firm, Ogilvie Security Advisors Corporation, and used his membership in the Mormon Church to gain trust with investors, many of who were elderly and unsophisticated.  One investor, the recent widow who attended church with Heinz, invested after he volunteered to assist her with her finances and investments after her spouse died.  Her money is now gone.

Heinz “guaranteed” his investors a fixed rate of return from 6 percent to 120 percent a year, which garnered him nearly $4 million from more than fifteen former clients, family members, and friends.  He stated that this money was to be used for the purpose of day-trading futures contracts.  Heinz created the appearance of being a successful futures trader, but in reality he lost approximately $1.5 million.  Heinz also used investor money to pay “returns” to earlier investors using new investor funds (a classic Ponzi scheme).

On August 8, 2013, the Securities and Exchange Commission (“SEC”) filed a lawsuit against Mr. Heinz and obtained a temporary restraining order and an asset freeze.

Mr. Heinz eventually settled with the SEC and on April 28, 2014, the United States District Court for the District of Utah entered a final judgment against him.  Heinz consented to the issuance of the judgment and admitted to all of the material facts the SEC alleged in its Complaint.  Specifically, Heinz admitted the following allegations in the SEC’s complaint:

  1. Beginning in January 2012, Heinz offered and sold investment contracts to more than fifteen investors, raising approximately $4 million for the purported purpose of investing in futures contracts. (SEC Complaint at ¶ 14.)
  2. Heinz solicited investments from his Ogilvie Securities clients. (SEC Complaint at ¶¶ 14, 17.)
  3. Heinz told Claimants that his trading strategy was so successful with his personal funds that he was willing to them with their investments too. (SEC Complaint at ¶ 15.)
  4. Heinz advised Claimants to liquidate some or all of their securities holdings and invest the funds with him. (SEC Complaint at ¶ 16.)
  5. Heinz promised victims that they would earn tax-free income. (SEC Complaint at ¶ 18.)
  6. Heinz advised at least one couple  to liquidate their investment which caused them to incur $45,000 in penalties. (SEC Complaint at ¶ 20.)
  7. Heinz provided written investment contracts which specified a guaranteed rate of return. The investment contracts stated the amount invested and the guaranteed rate of return. (SEC Complaint at ¶ 21.)
  8. Heinz did not prepare a private placement memorandum or financial disclosures with respect to this purported investment. (SEC Complaint at ¶ 22.)
  9. While Heinz did use a portion of investor funds to purchase futures contracts, bank records show that he misappropriated approximately $1 million in investors’ funds for personal purposes, such as the payment of his personal credit cards in the amount of $331,000, household expenses, personal travel, to fund business opportunities for his children, and to repay a personal loan for $600,000. (SEC Complaint at ¶¶ 30, 31.)
  10. Heinz also used new investor funds to repay earlier investors their purported profits or return of principal in what is a classic Ponzi scheme. (SEC Complaint at ¶ 35.)

The judgment permanently enjoined Heinz from future violations of the securities laws and requires him to pay disgorgement and prejudgment interest of $3,656,675.84.  The judgment also bars Heinz from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in any offering of a penny stock.  Heinz consented to the issuance of the judgment as is currently working to pay off the huge disgorgement amount.  Mr. Heinz was also charged criminally by the U.S. Attorney’s office here in Utah and is currently serving weekends under house arrest.

Many of the victims are seeking compensation through a FINRA arbitration against Heinz’s brokerage firm, Ogilvie Security Advisors Corporation and a number of its principals for failing to supervise him appropriately.  Our firm is handling that case.

If you are a victim of this scam feel free to post your experiences in the comments below.

Why Were So Many Madoff Victims Jewish?

This is a repost of an article by Harold Pollack that appeared in the Atlantic Monthly this week.  This has lots of relevance to the issues we deal with here in Utah; insular religious communities are a real hotbed for affinity fraud.  In fact, there is a reference to Utah’s unique affinity fraud problem and a reference to the “Fleecing the Flock” article about affinity fraud in Utah that appeared in the Economist several years ago.


Why Were So Many Madoff Victims Jewish?

The trust people tend to feel toward others in the same ethnic, racial, and political groups makes them easy targets for scammers.

Last week’s ABC mini-series chronicled the most famous financial fraud in recent American history: Bernard Madoff’s $50 billion Ponzi scheme, which devastated elite institutions and families of the American Jewish community. The scale of Madoff’s crimes was breathtaking. There’s much to be said about his crimes—not least about the incompetence of the regulatory apparatus that failed to stop him despite repeated warnings and what researchers Greg Gregoriou and Francois Lhabitant quite appropriately called “a riot of red flags” over many years.The tragedy itself was also its own sort of warning. Madoff’s victims were not a random assortment of the well-off; he decimated a segment of the wealthy Jewish community and several Jewish charitable organizations. Knowing the general magnitude of Madoff’s crime, I’m still taken aback by the particulars, which betray Madoff’s lack of conscience and any sense of limits. He wiped out Elie Wiesel’s life savings, and stole $15 million from Wiesel’s foundation. Madoff defrauded Hadassah. Who defrauds Hadassah? That’s like mugging your grandmother.
 Such crimes would not have been possible without the cultural ease and social entre Madoff enjoyed in the Jewish community. To put a name on things, this was one of the worst affinity frauds in Americans history, whereby unscrupulous people exploit their cultural connections and people’s communal identities to rip them off. In that sense, Madoff’s crimes were a warning to everyone about how in-group feelings of trust leave people vulnerable.
Affinity fraud is depressingly common. My own incidental exposure would be comical if the stakes weren’t so serious. I happen to live in a majority African American neighborhood in south Chicagoland. Although you wouldn’t know it to look at me, marketing algorithms based on my street address and some of my purchases apparently reveal that I am a middle-aged, middle-class African American man.Based on that identification, I get an impressive volume of sales pitches. If the letters, Facebook ads and robo-calls are to be believed, President Obama is obsessed with refinancing my mortgage. Our 44th president particularly wants me to take out a 15-year loan, one much better than what can be found at the bank. He also wants to sell me health insurance and some other things, which would be good for me, and good for the community. Many such deals offer a low interest rate, and are targeted to people in fear of losing their homes. But then they charge hidden or opaque fees for “refinance consultations.” Some ask for people’s home titles or pose as intermediaries, falsely promising to make payments to the actual lenders. The details vary, but purveyors of such sales pitches hope that their too-good-to-be-true offering will go down easier when combined with appeals for political or ethnic solidarity.I sometimes chuckle when I hang up after fielding such a sales call. But there’s nothing funny about efforts to defraud people or to deceptively market products by exploiting people’s personal and communal ties. In light of the empty houses and fading for-sale signs not far from my front door, such pitches are especially terrible, as they purport to offer a way out to many people in deep financial difficulty.
 Other communities face similar challenges. In the lead up to the foreclosure crisis, unscrupulous lenders deployed Spanish-speaking saleswomen to target recent immigrants. Once they won consumers’ trust with a persuasive sales pitch, lenders presented consumers with incomprehensible English-language financial documents that often steered people into risky, overpriced, or fraudulent loans. In other cases, con artists offer to help immigrants of the same nationality, and use the opportunity to obtain people’s Social Security numbers and other financial information, which is then used for mortgage fraud.
Pretty much any powerful connection humans make with others provides some correspondingly powerful opportunity for affinity fraud. Here in Chicago, an ex-Marine exploited his service ties to defraud fellow veterans. Affinity fraud is an issue within the LGBTQ community, as well. A terrific Economist story, aptly titled “Fleecing the Flock,” quotes an Alabama regulator’s estimate that half the affinity frauds in that region arise in religious communities.
It’s easy to see why. Such communities’ intimate ties of faith and mutual trust create particular vulnerabilities. Traditions such as tithing normalize provision of substantial resources to co-religionists whose financial acuity and probity may be difficult to fully discern. The Church of Latter Day Saints has experienced such a spate of cases that the Economist noted the “hook of Mormon” as a distinctive concern.As those Obama mortgage pitches suggest, political tribalism provides another potent opportunity for connection—and thus fraud—in a polarized nation. Right-wing talk radio, for example, features an array of advertising for dubious financial products, whose sales pitch conveniently matches the programs’ scaremongering regarding economic policy. Glenn Beck’s connection with Goldline was one notorious example of such products. Beck’s program relentlessly depicted an American economy on the verge of hyperinflation and collapse—an apocalypse naturally hastened by Barack Obama and other liberal political leaders. During commercial breaks, Beck’s audience was then conveniently exposed to Goldline, a purveyor of dicey gold investments.
Perpetrators of affinity fraud seeking to win our trust do the most lasting damage when they recruit community leaders as explicit or implicit endorsers. Some seek to provide a sense of status or peer pressure through nominally exclusive opportunities to join them. Madoff wouldn’t let just anyone invest in his closed funds. Many practitioners of affinity fraud imply that they have secret and timely information, which can turn into serious money if one acts quickly and discreetly.Practitioners of affinity fraud subtly exploit a community’s distrust of outsiders to discredit alternative sources of information. It becomes a mark of collective identity to spurn conflicting information and advice. Of course the lame-stream liberal media looks down on us for putting so much of our retirement savings into gold. Of course the same Washington experts trying to cut Social Security and Medicare look down on this variable annuity which might plug the holes in your retirement plan.
It’s ironic: The most cynical and distrustful among us are often the easiest marks.The weird information economics of herding also matter. You entrust your money with someone. Many people you know are doing the same thing. Each of you hopes and believes that someone has done the due diligence regarding these investments. If no one actually has, how would you know? After a while, it’s embarrassing to even ask.Whatever public policymakers do to address these problems, individuals should be especially skeptical of any financial product embraced by influential people in their religious, cultural, or political communities. Given such realities, it’s a mistake to allow personal familiarity, community affiliation, or time pressure to become a substitute for proper written contracts and the same due diligence one would apply to any stranger selling investment products or advice.In the end, any person’s best protection against affinity fraud is to avoid complex or speculative investment products offered by anyone, since even the honestly-offered fancy investment products very rarely provide much benefit. Following a simple investment plan is pretty boring. It remains the best bet. Once Americans internalize the reality that vanilla stock-and-bond index funds basically outperform everything else, and that vanilla  fixed-rate mortgages are the safest way to get a loan, they’ll save themselves a lot of time. They just might save themselves a lot of heartache, too.

Repost: Affinity fraud continues to plague Utahns and Mormons

This is a great article by Donovan C. Baltich that appeared on July 16, 2014 in BYU’s newspaper The Daily Universe:

The case of a Davis County man wanted for an alleged scheme that officials say took the life savings of Utah residents and brought in tens of millions of dollars shows the vulnerability of Utahns to financial scams. The 63-year-old suspect, set for an initial court hearing in July in Salt Lake City, is alleged  to have used the cachet of two Utah institutions — the LDS Church and the Boy Scouts of America — to bilk his victims.

Confidence between members of a religious group has its drawbacks when used by confidence-men, or ‘conmen.’ When a fellow member of a ward, cultural group, neighborhood or school builds affinity and then exploits that trust to profit from it, it’s known as affinity fraud.

The state with the highest rate of affinity fraud is Utah, where more than 60 percent of its population belongs to the LDS Church. The FBI calculates that there were more than 4,400 victims in 2012 with a net loss of $1.4 billion. It’s not that LDS Church members and Utahns haven’t been warned. In 1982, then BYU President Jeffrey R. Holland warned students about such schemes. Warnings have appeared many times over the years in conferences and church publications with a similar theme — if it sounds to good to be true, it probably is.

“I was working … on the BYU—Hawaii Campus only to open the Sunday edition of the Honolulu Advertiser to read this headline: ‘Mormon Utah called a test market for scams,’” Elder Holland said. “‘Utah’s large Mormon population has become a prime target for con artists and swindlers.’”

Many cases of fraud were revealed in the 1980s because of economic decline. Fraud skyrockets when the economy booms, but it is exposed in downturns. The highest case profile of affinity fraud in history was exposed during the recent great recession. This was the case of Bernie Madoff, who used his affiliation as a Jew to target the Jewish community.

“There’s also a mentality … that if we’re righteous we’re going to get wealthy … so when we hear about somebody in the community, our friend or some church leader, who has some great investment we think, ‘Well that’s a blessing for us and we’ve paid our tithing and so forth,’” Zimbelman said. “They decide they don’t need to do their homework because someone else is in it that they trust.” Zimbelman is BYU’s expert on financial statement fraud. He discusses the reason why members of the LDS Church often fall prey to con artists.

Affinity fraud affects victims on a large scale but also has local applications. Travis Hardin, a BYU student, lived at the Riviera Apartments during Fall 2010 semester. One of his roommates was charismatic and claimed to be a BYU basketball player. He was popular within his apartment complex and the Helaman Halls community, but his fame came crashing down when another roommate exposed him.

“You just didn’t realize that his real life was showing through the whole time,” Hardin said. “Everything was a lie; he even lied about what his last name was.”

Hardin’s fraudulent roommate had previously served time in prison for committing check fraud. He invited Hardin and others to move into a house with him. He even collected down payments from them, but the house never actually existed.

Fasi Filiaga Jr., a member of the LDS Church, ran a company called Spread Trade Systems, an organization that taught individuals how to invest in stocks and options. He ran his seminars via the Internet, bringing in students from all over the nation and from various religious denominations.

Over a series of years, a relationship of trust flourished between Filiaga and his students. He then invited them to take part in his investment management group. They would give him money, and he would invest it for them.

One particular student, Eric Nelson of Utah County and also a member of the LDS church, remained skeptical of Filiaga’s investment group, even though their commonality as Mormons helped Nelson relate with Filiaga. Nelson studied the company and attended the investment meetings for a full year before he and his wife decided to invest.

“It was a fraud from the beginning. The money given to Fasi was never invested; it went to him and his company,” Nelson said.

Over the duration of his investment group, Filiaga swindled $2 million out of his students. Filiaga was not charged for his crimes until Nelson and other victims filed a class-action lawsuit against Filiaga. As a result, Filiaga is serving time in prison. Con artists often say their investments will bring returns of more than 20 percent in a quarter and that one should act fast.

“If you know where the treasure is, you’re not selling maps to show people how to find the treasure; you’re digging up the treasure yourself,” Zimbelman said. “Any kind of return like that, any kind of outrageous interest rate (20 percent), is … virtually guaranteed that it’s a ponzi scheme.”

In 2011, Utah’s governor signed an affinity fraud bill into law. Its aim is to exact harsher penalties on those who exploit confidence against vulnerable adults, like the elderly or mentally handicapped. As fraud is usually exposed in times of economic downturn, data is unavailable to show the effects of the law.

“It’s too early to tell if the law deters affinity fraud; we don’t have a large enough sample size yet,” said Keith Woodwell, director of the Utah Division of Securities. “The bill doesn’t work retroactively, but we’ve had a handful of cases since 2011 that have had harsher penalties applied.”

As measures are taken to deter fraudulent activities, it is ultimately up to individuals to steer clear. Zimbelman advises people to do their homework, to diversify their portfolios and when propositioned with an investment opportunity to think, ‘why do they want me?’ and ‘how do they make their money?’ When investment opportunities sound to good to be true, they usually are.

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

130911175808-financial-scam-620xaEvery week Utah residents lose money by investing with friends, family or neighbors – people they knew and trusted. Investment fraud is a big problem here in Utah, largely because our close-knit communities are a prime target for “affinity fraud.”  Our state has a long history of financial scams and Ponzi schemes, many of which have been perpetrated by members of the LDS church on members of their ward or stake.  It’s heartbreaking.

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

10. Slow down.  According to the Insider Monkey blog, many people invest after only hearing the pitch; watch out for promoters who try to commit you on the spot.  Don’t do it!  Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy.  Be very wary of aggressive sales pitches and deadlines.  Ask the hard questions before you hand over your money, not after.

9.  Do your homework.  Run a simple Google search on the company and its managers, or the individual.  If it involves a company, ask for a private placement memorandum and company financials.  Hire an attorney to evaluate the investment and help you perform due diligence.  Attorneys have access to court databases to look for lawsuits and bankruptcies.  Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved.

8. Hire an attorney.  Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up.  A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes.  Your lawyer can review the offering materials and help you understand what the risks are.  Hiring a good attorney up front is an investment in your investment.

7.  Get it in writing.  I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake.  Don’t do it!  If things go bad later, proper documentation will be critical to me in my efforts to get your money back.  The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.  (See number 8.) In any private investment opportunity you should receive a detailed lengthy disclosure document called a private placement memorandum (PPM).  Take the time to review it before you invest.  It contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things.  If the company soliciting your money has not prepared a PPM, that should be the end of your discussions with them.

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

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

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

3.  Don’t invest with friends and neighbors.  It may seem like doing business with someone you know and trust would be safer, but that is simply not true.  All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good.  Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.

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

1.  If it sounds too good to be true it probably is.  If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out.  The fact that others may have been getting their promised returns does not mean you will.  All Ponzi Schemes eventually implode, and you may be left holding the bag.

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

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


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