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.

 

 

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.

Two Convictions in the Mathon Ponzi Scheme

A long-running Arizona affinity-fraud case targeting members of the Church of Jesus Christ of Latter Day Saints took an important step toward conclusion with the conviction last week of  Guy Andrew Williams and his father Brent F. Williams.  In 2009 the Williams were indicted on 40 counts of conspiracy, wire fraud, mail fraud and money laundering and last week they were convicted of 38 counts in an action stemming from crimes targeting wealthy Mormons in Arizona and neighboring states beginning in 2002. The verdict capped a two-week trial conducted by visiting U.S. District Judge Jack Zouhary.

According to a 2005 article in the Arizona Republic,  the investments offered by Mathon Management Co. founders Duane Slade and Guy Andrew Williams seemed like can’t-miss deals.  The young investment stars courted clients and enticed savvy investors across the West to part with tens of millions of dollars.

Investors were promised annual returns as high as 120 percent secured by assets and prime real estate everywhere from the industrial belly of Baltimore to the bright lights of the Las Vegas Strip.  Investors, many of whom belonged the LDS Church, told investigators that they had confidence in Slade and Williams because they were former Mormon missionaries would steadfastly guard their clients’ money. Continue reading “Two Convictions in the Mathon Ponzi Scheme”

The LDS Church Issues a Strong Position on Affinity Fraud

I am pleased to see that after years of urging from me and others who have seen affinity fraud perpetrated within LDS church congregations for years (especially in Utah County) the church has finally stepped up to the plate and taken a stronger position on this issue.  They did so at the annual Fraud College event that took place on February 15, 2012 at the University of Utah, and on their website.  The church was asked to speak at the first Fraud College 2010, but they declined that year, and they declined again in 2011.  This “head in the sand” response to the problem was infuriating to federal and state law enforcement officials – and to me.

Thankfully the Church leadership finally decided this year that they needed to acknowledge and confront the growing incidence of church members — often in positions of trust within the church — victimizing other church members.  The FBI has stated that Utah is a hot spot for financial fraud and estimate that $2 billion worth of fraud is “under investigation or being prosecuted in Utah courts.”

The speaker at the conference was Michael Otterson, managing director of the Church’s Public Affairs Department.  And he didn’t mess around.  He compared fraudsters to child molesters because they “exploit one of the things we value most: the trust that makes our communities what they are.”

Continue reading “The LDS Church Issues a Strong Position on Affinity Fraud”

Former Mormon Bishop and Art Collector Will Spend 12 years in Prison

Today there was yet another article about an individual who held a position of trust in the LDS Church and used that position to commit fraud.  U.S. District Judge Marcia Krieger sentenced  Shawn Merriman to 12½ years in federal prison this afternoon for defrauding 67 victims out of $21 million.  Merriman was a Bishop in the LDS Church in Colorado and raised the money from friends, neighbors and fellow church members.  The government seized roughly $4 million in fine art , antique cars, sports memorabilia and animal trophies collected on his safari trips when they arrested him.

One of my favorite parts of this story is the fact that before he was caught Mr. Merriman put together some sort of a traveling exhibit for his art called “The Renaissance of Faith in Art,” which included about two hundred prints by Renaissance artists including Rembrandt van Rijn, Albrecht Durer, Lucas van Leyden and Peter Paul Rubens.  The exhibit was primarily displayed in LDS wards and stake centers in Denver.  Even the Mormon Times wrote a glowing article about this guy and how his art collection promotes the Church.  He has now been excommunicated.

The SEC’s Complaint against Mr. Merriman can be read here.

Copyright © 2010 by Mark W. Pugsley. All Rights Reserved.

Former Stake President, Regional Representative… and Scam Artist

Ronald-Dean-Udy_mugshot.400x800R. Dean Udy, 71, a former stake president and regional representative in Brigham City, Utah was sentenced to 1-to-15 years in state prison last week on securities fraud charges.  He pled guilty to a scheme that ran for 12 years or more.  According to the article in the Ogden Standard Examiner, “Udy’s victims total 1,500, with an estimated loss of $20 million.”

Prosecutors alleged that Mr. Udy  “traded on his positions in The Church of Jesus Christ of Latter-day Saints, which included membership in a stake presidency and as a regional representative in Box Elder County” to gain people’s trust.  “People felt Brother Udy would never do anything wrong.”

So what is the lesson here?  If anyone uses their church position (explicitly or not) to gain your trust in connection with an investment pitch — run for the hills. Don’t trust anyone just because they are a church leader or even  a church member.   Do your homework and check out the individual, the company and everyone connected with the potential investment opportunity on the Utah Division of Securities, FINRA and the SEC databases.

Mr. Udy first entered into a Consent Order with the Division of Securities in 2002, but that didn’t slow him down.  He was then charged criminally in 2005 and pled guilty to two felony criminal counts in 2007.  However, that sentence was held in abeyance for 36 months after he agreed to pay full restitution to his investors and to provide accurate information to the State about those investors. But that didn’t happen, and it took several years for the judge to lose patience with him and send him to jail.

In June a federal grand jury indicted him and his son, Cameron, for charges alleging they ran a $11.4 million in bank fraud in Las Vegas, and they face trial on that charge in October.

Copyright 2010 by Mark W. Pugsley.  All rights reserved.

Even Ponzi Schemers Pay Their Tithing

As a follow-up to my last post, my friend Lon Jenkins has just sued the LDS Church in a “claw back” lawsuit for the RCH2 receivership he is handling.  Lon is seeking return of at least $160,306 plus interest from the Church that was paid as tithing.  Virtually anyone who takes money from a Ponzi Scheme will eventually get sued (including law firms) and the LDS Church is no exception.  From past experience I know the LDS Church is pretty good about returning money received from individuals who are perpetuating these schemes, and I assume they will do so here as well.

Perhaps the more interesting question is why are these people paying tithing on ill-gotten gains in the first place?  Perhaps they don’t realize they are committing fraud, or perhaps they think that the Lord will somehow remove the taint on the money, or bless the scheme.  It’s hard to say, but either way its better to give the money back.

© 2010 Mark W. Pugsley, all rights reserved.

PREYING ON THE FAITHFUL: Thoughts about the Salt Lake Tribune article

Tom Harvey put together a well-researched article on investment scams in Utah that appeared in the Salt Lake Tribune this weekend.  I have just been reading all of the comments about it (149 so far) and aside from the usual anti-Mormon drivel that always seems to fill up the comments in any article that even remotely references the Church, it was interesting to read the comments about why the LDS Church is not participating in the “Fraud College” event that will take place in June.  One comment stated, in effect, that if the church put as much money and effort into fighting fraud among members as it does fighting gay marriage, the problem would be solved.

According to the Tribune article the church did issue a written statement insisting that “church leaders have been warning members for years about the dangers of fraud and get-rich-quick schemes. ‘These messages have been delivered over the pulpit in General Conference, in official letters from church leadership, and in articles found in official church publications.'”  Unfortunately the full statement was not quoted in the article. Continue reading “PREYING ON THE FAITHFUL: Thoughts about the Salt Lake Tribune article”