This is a re-post of an article in Financial Advisor Magazine on how the SEC is increasingly looking into affinity fraud issues:
SEC TARGETING AFFINITY AND MICROCAP FRAUD
Social media and the Internet are making it easier for people to commit affinity fraud — when a person uses a common bond he has with others to cheat them out of their money, says SEC Chairwoman Mary L. Schapiro.
U.S. Attorneys in several states have made arrests recently in cases in which a Jewish person misused trust from a close-knit Jewish community or someone infiltrated an elderly community to build enough trust to sell fraudulent investments.
“Religious groups or ethnic groups can be a hot bed for these types of fraud,” says Owen Donley, chief counsel of investor education and advocacy. “We put out publications and use social media to fight this. I would hope this type of fraud is not something an advisor would fall for, but it is something advisors can help their clients watch out for. Continue reading “The SEC is Targeting Affinity Fraud”
This is a repost of an excellent article by Christine Benz that was published in Morningstar entitled Seniors: Beware of Affinity Fraud:
In hindsight, a scam like the one Bernie Madoff perpetrated on his victims looks like it should’ve been a cinch to detect. Madoff’s clients were promised steady returns of 10%-12% per year; that should’ve looked impossible even to novice investors, particularly given the extreme market volatility that marked the first decade of the 21st century. Financial analyst and Madoff whistle-blower Harry Markopolos said he knew that Madoff had faked his clients’ returns within five minutes of seeing them.
Much ink has been spilled over how Madoff managed such a swindle–a court-appointed trustee estimated client losses in the $18 billion range–but one of his methods was clear: Using a technique called affinity fraud, Madoff presented himself as a trusted member of communities at the same time he was trying to separate them from their money. Various Jewish organizations and institutions, as well as Jewish individuals planning for their own financial goals, were hit particularly hard: In addition to losing millions, several charitable entities were forced to lay off staff or close altogether. Continue reading “Seniors: Beware of Affinity Fraud”
UPDATE: On November 3rd Marc Jenson was sentenced to back-to-back, zero-to-five-year prison terms for failing to pay restitution to investors pursuant to the restitution order in his first fraud conviction involving a bicycle company. Judge Reese had given him three years to pay $4.1 million in restitution, but according to prosecutors Jenson moved to California and used up all of the money to fund his lavish lifestyle. According to prosecutors from the attorney General’s Office, Jenson “went through $9 million, none directed to the victims in this case.”
According to the Salt Lake Tribune, Judge Reese said he based his sentencing decision on “Jenson’s failure to pay the men back on his conviction years earlier for failure to pay federal income tax and a ‘pattern of you raising money, making promises and not repaying [people].'” This City Weekly Article contains a lot of interesting detail about the hearing, and in particular how Mr. Jenson spent the $9 million he raised over the past few years, including “a sports car worth more than $150,000, an extended stay at a Laguna Beach residence costing $360,000 up front for the rental agreement, followed by a nine-month stay at the Pelican Hills Resort in California costing over $500,000.” he also spent some of his investor’s money on something (or someone) called “Russian Wow Girls.”
The case discussed below, involving the Mount Holly Club, is a separate case and has not been resolved yet. That case could well result in more prison time for Mr. Jenson. Continue reading “UPDATE: Why its important to run a Google search on anyone you want to invest with.”
The North American Securities Administrators Association, Inc. (“NASAA”) has just issued its annual top ten list for this year. This list is the primary “financial products and practices that threaten to trap unwary investors” as told to NASAA by their members, which include the Utah Division of Securities. Continue reading “NASAA’s Top Ten List of Investment Traps”
Update #3: Today Judge Clark Waddoups rejected the plea bargain that Wright had negotiated with prosecutors concluding that the deal appeared too light given the magnitude of how Wright had “intentionally deceived and misled people.” The defendant will now be forced to negotiate a new plea bargain with the U.S. Attorney’s office — or go to trial. The judge’s decision appears to be based primarily upon the letters he received from angry investors.
UPDATE #2: Last week Travis Wright pleaded guilty to one count of fraud, admitting he operated a massive Ponzi scheme that owed investors at least $44 million when it went bust in 2009. He will be sentenced after the judge hears testimony from the victims.
UPDATE: My friend Tom Harvey reported yesterday in the Salt Lake Tribune that Travis Wright, who ran Waterford Funding, entered a plea of not guilty before U.S. Magistrate Paul Warner to the charge of mail fraud. The article can be found here.
On July 7, 2010 the New York Times ran a story about the SEC’s recent lawsuit against Travis Wright and Waterford Funding. The SEC’s press release about the case can be found here. Among other things, the SEC’s lawsuit alleges that Wright lied to his investors saying he was investing their money in hard money loans secured by real estate, when really he was funneling most of their money to the inventor of the “Candwich” (who also planned to offer Pepperoni Pizza Pockets and French toast in a can). Yum.
This is the part that is really baffling to me about this case. Did he really think the Candwich would be more profitable than real estate? Given the current state of the real estate market it may be the case — but not between 2001 and 2007 when the fund was really going strong. The SEC also alleges that he used $15 million of investor funds for personal use, including the purchase of a $5 million home on Walker Lane from former Jazz legend Jeff Hornacek, which he completely renovated and imported cobblestones from France for the driveway. But it was probably pretty trashy after Hornacek moved out.
Continue reading “UPDATE: Would you Invest in the Candwich?”
In May of this year the Financial Industry Regulatory Authority (FINRA) announced the launch of its disciplinary actions database, a web-based searchable system that makes its disciplinary actions easily accessible to the general public. Continue reading “FINRA’s New Disciplinary Actions Database”
Michael Smith and his son Quintin Smith have each been charged with six counts of securities fraud and one count of pattern of unlawful activity, all second-degree felonies, in connection with a furniture loan company they owned called Newport Financial. According to a Salt Lake Tribune article published today they have been accused of “bilking investors of hundreds of thousands of dollars — one while serving as counselor to an LDS stake presidency — in a fraudulent furniture-financing scheme that targeted, among others, a prominent University of Utah football coach.”
The indictment alleges that the Smiths promised a return of 18 percent to gain investments of at least $1.8 million from 18 victims. Their biggest investor was Norm Chow, the offensive coordinator for the University of Utah’s football team, who invested $500,000. Continue reading “Yet Another Local Ponzi Scheme Indictment – Newport Financial”
As reported on the website Law360, A Utah federal judge on Wednesday approved a $125.6 million final judgment that settled the U.S. Securities and Exchange Commission’s case against Vescor Capital Corp. This judgment apparently relates to the company, not Val Southwick who pled guilty to nine counts of securities fraud in 2008 and was sentenced to serve nine consecutive 1 to 15-year prison terms.
But if you are an investor hoping to get you money back, don’t hold your breath. According to the article Vescor’s receiver, Robert G. Wing of Prince Yeates & Geldzahler, has stated publicly that the money may never materialize. “They did not get $125 million, they got a judgment,” he said. Mr. Wings expects to be able to recover only a small fraction of the money Vescor allegedly took from investors. In his most recent report to the court, Wing said he had recovered just over $5 million, and the legal and accounting fees continue to mount, the Receiver’s lawsuits to recover money from third parties will continue.
Bottom line: nobody wins in a Ponzi Scheme — except maybe the lawyers.
Last week the U.S. Attorney’s Office filed a 17-count indictment alleging money laundering, wire fraud and bank fraud in connection with an alleged Ponzi scheme that was run by John S. Dudley, age 56, of Sandy, Utah.
In this case Dudley pitched investors at investment club meetings in people’s homes. These were likely homes of people who are prominent in their local church or community, who then invited their friends and fellow ward members to hear a presentation. In some cases the hosts of the meeting may even have received a “finder’s fee” or other compensation if attendees invested (which is usually illegal).
Continue reading “Family Home Evening with a Fraudster”