Editor’s Note:I often write about the dangers of trusting people in your LDS ward or religious community who are pitching investments, but real stories are sometimes more effective. Below is a CLASSIC example of how members of the LDS Church are targeted for fraud.
St. George man gets prison term for stealing from fellow Latter-day Saints in financial scam
SALT LAKE CITY — A St. George man who took advantage of a couple in his Latter-day Saint congregation in a financial scam is headed to federal prison.
Gregory Moats Sampson, 46, will spend two years behind bars after pleading guilty to wire fraud and money laundering.
U.S. District Judge David Nuffer enhanced the sentence because the scheme put substantial financial hardship on the couple. The judge also ordered Sampson to pay $250,000 in restitution and to serve three years probation after his prison sentence.
Sampson met the couple, identified in court documents as J.S. and K.S., in 2012 when he was their real estate agent. They had $250,000 to invest after selling a home in Australia. Sampson told them he had invested funds for others in the past and could help them, according to court documents.
J.S. and K.S. were not sophisticated investors and believed they could trust Sampson based on the relationship they had with them, prosecutors said. He told them they could earn $1 million in eight to 10 years and that they would receive stock in a company. He also told them that because they were friends, he would not charge them for their investment.
Instead of investing the money, Sampson spent it all within a month of receiving it, including $98,000 to pay off a personal loan, $82,000 to a company his brother owned, and $20,000 to a company that had nothing to do with the investment, according to court documents.
When the couple asked for a portfolio of their investment, Sampson did not provide one but regularly told them it was performing well.
The couple eventually confronted Sampson and demanded documentation or their money back.
According to court records, he told them: “And you know who gets screwed in the deal? You do … and it’s not to say that I’m trying to protect my own (expletive) because I’m not going anywhere, I promise you. If I need to disappear, I would have already been gone. I’ve got enough money that I can disappear if I need to. …”
Chris Parker, executive director of the Utah Department of Commerce, said affinity fraud continues to be a problem in Utah.
“Scammers will use any social connection available to gain your trust and take your money,” he said.
While federal fraud cases typically focus on losses in the million of dollars, scammers in smaller cases also face stiff penalties, said U.S. Attorney John Huber.
“There is no sweet spot in fraud loss where schemers can fly under the radar and get away with it,” he said. “Once again, we remind Utah investors to beware of the risks associated with big promises from purported friends and neighbors.”
Investment fraud is a big issue here in Utah, largely due to our close-knit social and religious communities, which can be prime targets for “affinity fraud.” “Affinity fraud” is a scam that is perpetrated by someone you trust. Scammers use relationships to build trust and legitimacy for their “pitch.” Those relationships can be with family members, neighbors, friends or — especially in Utah — members of your church community. It is important to be aware of the potential for scams and aware of how to protect yourself against them. For example, rushing into an investment because you “trust” your neighbor or friend can lead you to set aside the type of scrutiny you would apply if a stranger was asking for your hard-earned money.
That can be a dangerous mistake.
There are concrete ways to mitigate the risk that you may face in this type of situation. To raise awareness and help people avoid the often life-altering financial losses associated with affinity fraud, I’ve created a list of the ten most important ways to avoid investing in a financial scam. The following tip is the first installment in this series:
Tip #1 — SLOW DOWN
Spotting scammers can be difficult, as they are often someone you know and trust. Do not send out personal information in response to an unexpected request, whether online or in person.
Do not fall for claims of urgency in an investment opportunity. Slow down. If its a legitimate opportunity it will be there tomorrow, and next week. Research the company online, ask lots of questions, search the for lawsuits and enforcement cases, review the legal and financial history of the individuals involved and, if possible, visit the company office. Ask the difficult questions before committing to anything.
In particular watch out for aggressive sales pitches and “deadlines” to invest. Many victims of fraud report that they were told the investment opportunity was a limited-time opportunity and that they needed to move quickly before someone else takes it. Scammers will often try to push you to invest before you have an opportunity to do your research. This should be a red flag.
Finally, retain a lawyer with expertise in financial investments at the outset to help you evaluate the proposed investment.
The bottom line: If an offer sounds too good to be true, it likely is. Don’t fall prey to high-pressure sales tactics or people demanding money immediately. When it comes to financial investments it is critical to slow down and take the time to do your due diligence!
This is the first tip in a ten-part series helping people protect themselves against scams and fraud. Ray Quinney and Nebeker has a team of experts that are well versed in this area of law. For more information and resources, contact Mark W. Pugsley at email@example.com.
Utah is one of only two states in the United States that has a whistleblower act (Indiana is the other). Utah’s statute was written and passed by a young ambitious politician named Ben McAdams in 2011. Ben asked me to assist with the drafting and to provide testimony in support, which I gladly did. We hoped at the time that this new statute would provide powerful incentives for whistleblowers to come forward and help combat Utah’s unusually high Ponzi scheme problem. And that it would be a model for other states to follow.
The statute passed easily, but unfortunately other states have not followed suit. Making matters worse, Utah’s Whistleblower Act has never really been used much — they have only paid out one award so far. I can personally attest to the fact that there have been many applications for whistleblower awards filed with the Division of Securities (because I have filed a bunch of them), so why haven’t they paid out more awards?
Paying big awards with a press conference would be a great way to publicize this little-known program. Paying awards will incentivize people with knowledge of fraud to file whistleblower tips, which would stop more fraudulent schemes and put more fraudsters in prison. So why haven’t they done that?
I actually have no idea.
Whistleblower Programs are a Good Thing
I think it is fairly noncontroversial for me to say that whistleblower laws are a good way to expose and stop fraudsters. They provide financial incentives to individuals with knowledge of fraud to report that knowledge to state or federal securities (and tax) regulators.
Whistleblowing can be really bad for your career and can even put you in physical danger, so understandably people are not terribly excited about sticking their neck out. But the prospect of receiving a financial award can change that calculus in a big way. These programs really do work!
The SEC’s Whistleblower Program was created by Congress on July 21, 2010 and can be found in Section 922 of the Dodd-Frank Act. In its most recent report to Congress, the SEC reported that since the program’s inception they have imposed over $2 billion in total monetary sanctions as a result of whistleblower reports, of which almost $500 million has been returned to harmed investors.
In 2019, the SEC received its second largest number of whistleblower tips ever and paid out its third largest award to date – $37 million. The SEC’s Office of the Whistleblower paid out a $50 million award in March 2018 and a $39 million award in September 2018. Clearly, massive whistleblower awards like that provide a powerful incentive for those with knowledge of fraud to come forward.
The CFTC also has a very successful whistleblower program. In its 2019 report to Congress the CFTC reported that since the inception of its whistleblower program it has issued 14 awards totaling approximately $100 million, and that enforcement actions initiated as a result of those tips have let to sanctions totaling more than $800 million.
The IRS whistleblower program has also paid out millions in awards – from billions in collections. Since 2007, the IRS Whistleblower Office has paid out over $931.7 million based on the collection of $5.7 billion in additional taxes. In 2019 alone the IRS handed out 181 awards totaling $120,305,278. According to IRS whistleblower expert (and friend) Dean Zerbe the IRS program has been very successful:
“For all the talk that fills Washington about making sure people pay their fair share, this little program of awarding whistleblowers … has punched far above its weight in terms of successfully going after big-time tax cheats. Any country (or state) that wants to get serious about tax evasion should take note.”
How a Whistleblower Stopped the Rust Rare Coin Ponzi Scheme
Utah’s largest Ponzi scheme, Rust Rare Coin (RRC), would still be ongoing today if not for a brave whistleblower who was an employee at the company, and an investor. He stumbled upon information that led him to be highly skeptical of the outrageously high profit claims that were being made by RRC’s owner Gaylen Rust and began to investigate.
The whistleblower’s suspicions grew as he observed unusual business activities and the total lack of financial controls RRC had. What began as observations of odd and unusual business practices quickly let to serious concerns about outright fraud. By early 2018 the whistleblower concluded that the RRC businesses were operating fraudulently, that investor money was being commingled with other company funds, and that Gaylen Rust was likely running a massive a Ponzi scheme.
Once he became convinced that the company was a scam he reported his concerns to the FBI and began meeting with the state and federal securities regulators. Eventually the SEC, CFTC and State of Utah filed coordinated complaints, froze all of RRC’s assets and shut the whole scheme down.
There were at least 430 victims of the RRC Ponzi, and their collective losses were at least $200 million. But it could have been much worse if not for the actions of this brave whistleblower. The court-appointed receiver Jonathan Hafen is now in the process of trying to unwind the whole mess and return money to the victims.
NOTE: I know this story because the CFTC filed a very detailed declaration from the whistleblower with their complaint.
NASAA’s Model Whistleblower Act
Because of the demonstrated success of the SEC, CFTC and IRS whistleblower programs the North American Securities Administrators Association (NASAA), which is comprised of state securities regulators in all fifty states, seems to have decided that more states should follow Utah’s lead.
They just released a Model Whistleblower Act, which is modeled on Utah’s law and has some nice improvements. Thomas Brady, Director of the Utah Division of Securities, tells me that he was involved in the drafting process.
Many of the provisions are based on Utah’s statute:
The Model Act creates a civil cause of action for a whistleblower who is retaliated against with powerful remedies including reinstatement, two times back pay with interest, actual damages, litigation costs, or “any combination of these remedies.” Utah Code Ann. § 61-1-105(5); MWA § 9-6
The Model Act provides that rights and remedies contained in the act cannot be waived contractually. Utah Code Ann. §61-1-108(2); MWA §9-9
The Model Act provides that the regulator cannot disclose information that could reveal the identity of the whistleblower. Utah Code Ann. §61-1-103(2)(a). MWA § 9-7
However, the NASAA update also includes some much-needed protections that are not currently included in the Utah law, including the following:
A specific prohibition on retaliatory behavior, including terminating, discharging, demoting, suspending, threatening, or harassing a whistleblower. MWA § 9-1.
A 10 year statute of limitations for a claim against an employer for retaliatory behavior. MWA §9-5. (Utah’s is currently only 4 years)
A provision that employee non-disclosure (NDA) or confidentiality agreements cannot be used to prevent or discourage communications with the securities regulator about possible securities law violations. MWA §9-8.
I think that all states should seriously consider enacting this model statute. NASAA’s Model Whistleblower Act provides a robust framework for protecting whistleblowers, and substantial financial incentives for them to come forward.
With so much market volatility, many are scrambling to plan for their uncertain future. If you are planning on leaving your IRA, ROTH IRA, or Qualified Plan to your heirs, you may want to rethink how you plan your estate.
Congress passed the SECURE Act in December 2019, in pre-Covid-19 America. The goal was to incentivize businesses to start offering retirement savings plans, including to part time workers. In addition, the bill was aimed at increasing retirement wealth by eliminating an age cap for contributions to IRAs and raising the age of mandatory withdrawal.
Now that Covid-19 has slowed the global economy, Americans are taking a closer look at the SECURE Act, and its long-term effects in a volatile market. The SECURE Act eliminated stretch IRAs, which will increase taxable revenue on inheritable retirement plans. If you were a non-spousal heir, you used to be able to take out minimum distributions from an inherited IRA over time based on your life expectancy. This would allow you to have some control over your taxable income each year, and potentially not raise your tax bracket. Our tax experts at Ray Quinney & Nebeker can help you work through these details and how they apply to you.
Note that under the SECURE Act, you must now make all withdrawals of inherited accounts within 10 years. “There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year.” This means that beneficiaries are required to take out large sums of taxable income, often at times when it is least needed.
What Can You Do?
Get a life insurance policy which can offset your tax burden after death, even if it means cashing out your IRA and Qualified Plan.
Covert your retirement plans to ROTH over your retirement years, when your tax rate is lower.
Withdraw portions of an inherited account each year to spread out and potentially mitigate the associated tax burden.
Review and update your estate plan (i.e., your wills and trusts) and coordinate your estate plan with your retirement plans’ beneficiary designations.
In an uncertain economy with short-term health struggles and a long-term recession pending, make sure that you plan for your estate to maximize the security of your heirs. Visit this calculator to see how the SECURE Act may affect your inheritance.
The Federal Government offers potentially significant rewards to whistleblowers who provide information to the government that helps protect financial institutions by “deterring would-be criminals from including financial institutions in their schemes.” United States v. Serpico, 320 F.3d 691, 694-95 (7th Cir. 2003).
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the Financial Institutions Anti-Fraud Enforcement Act (FIAFEA) enable the Attorney General to investigate and bring a civil suit against a perpetrator for criminal conduct which “affect[s] a depository institution insured by the Federal Deposit Insurance Corporation or any other agency or entity of the United States.” 12 U.S.C. § 4202(2).
Whistleblowers who provide information to the government that leads to a successful investigation and prosecution could be eligible to receive an award of up to $1.6 million. FIRREA reports can involve any of the following types of conduct involving financial institutions:
Giving corrupt gifts, offers, or promises
Stealing, embezzling, or misapplying by bank officer or employee with the willful with intent to injure the bank
Making of false entries, reports, or transactions (including FDIC transactions)
Making false statements for loan and credit applications, renewals and discounts, or crop insurance
Fraudulently obtaining loans or credit through false pretenses, representations, or promises
Making false statements, entries, overvaluation of securities, embezzlement, concealment, or misrepresentations
Making false, fictitious, or fraudulent claims to the Government
Concealing assets from a conservator, receiver, or liquidating agent
Conducting mail or wire fraud
This includes conduct where the financial institution is either the victim or perpetrator of the fraud. See Paul Lawrence, Whistleblower Cases Involving Securities and Financial Fraud, American Association for Justice Annual 188, (2012).
The fraud is reportable if it happened in the last ten years.
To be eligible for a reward, your report must lead the government to recover money. Whistleblowers get 20-30% of the first million dollars recovered, 10-20% of the next four million dollars recovered, and 5-10% of the last five million. There is a maximum bounty of 16% of 10 million – or $1.6 million.
In addition, the Department of Justice may award money to a whistleblower when there is either a criminal conviction or where the government is able to acquire funds or assets that were based in whole or in part on the information you provide.
HOW TO SUBMIT YOUR CLAIM
To submit a whistleblower claim, you must file a “Declaration of Violation,” under oath, which explains the fraud in detail. This declaration must contain specific facts regarding the fraud, the basis for that knowledge, and at least one new fact that was unknown to the government. This declaration cannot be based on information that has been publicly disclosed, unless you are the original source of the public information. During the investigation, the declaration you submit will remain confidential.
Do you think you have information that might qualify for an award? Contact our legal team to help you navigate this complex process and ensure that your claims are handled correctly.
EDITORS NOTE: this is a repost of a story that aired on our local NPR affiliate, KUER on December 30, 2019. Doug Hronek is a client of mine who agreed to speak publicly about this experience. We have filed lawsuit against Live Abundant and its agents on behalf of Doug and a number of other victims who lost millions due to bad advice they received from Live Abundant.
Doug Hronek first heard about Live Abundant while listening to the radio in his car. He said he ended up investing nearly $500,000 in a Ponzi scheme through Live Abundant.
Doug Hronek was driving home to Heber City through Provo Canyon about five years ago when he tuned his car radio to a conversation about unique investment opportunities.
“I just started listening to it and thought, ‘Well, gosh I’m getting ready to retire — I need to figure out what to do with my retirement funds so I’ve got enough money to get through to end of life,’” Hronek, 62, said.
Hronek and his wife soon went to a seminar at a hotel in Provo, put on by that radio guest Doug Andrew and his financial planning firm Live Abundant.
At that seminar in Provo, Hronek and his wife were presented with what he says were impressive brochures and a video sharing Andrew’s story and investment strategies.
“The experience of losing a house in foreclosure was a defining moment for me as a financial strategist,” Andrew said in the video.
“Because it was his story, it came across as very sincere,” Hronek said.
Ultimately persuaded to invest in a real estate company called Woodbridge, Hronek took out a mortgage on his house, which he and his wife had already paid off, and ended up investing about $500,000.
Two and a half years later, Woodbridge filed for bankruptcy and the Hroneks saw their investment disappear.
“You get a pit in your stomach,” Hronek said. “Attorneys started looking at my documents and saying you don’t have anything here that’s going to provide you any way to recapture that money.”
The Securities and Exchange Commission has filed charges against Live Abundant related to the Woodbridge scheme, alleging they acted as unregistered brokers for unregistered securities. Live Abundant, which has denied those allegations in court papers, did not respond to a request for comment.
Meanwhile, Hronek is not alone. Utah has the highest rate of Ponzi schemes per capita in the United States, more than twice the rate of Florida, the next highest state, according to an analysis by a Salt Lake City investment fraud attorney. The analysis also showed that Utah investors have lost around $1.5 billion to Ponzi schemes over the past 10 years.
“In Utah we are quick to trust, we are quick to see the best in others and to extend a hand of friendship,” McAdams said. “It is that attribute that I love about living in Utah. It’s that very attribute that they are preying upon.”
Trust Is A Double Edged-Sword
The Church of Jesus Christ of Latter-day Saints fosters a trusting culture in its members, who make up almost two thirds of the state’s population, according to Dixie State Sociology Professor Bob Oxley. That has a lot to do with the importance placed on supporting others in the community and with the system of tithing.
“So that’s all built into that value system whereby I’m contributing a certain percentage of my income to the Church which they’ll make their determination to distribute that to other people that are less fortunate than I am,” Oxley said. “And also with the understanding that if I need in the future, I can always depend on the church to be there for me.”
Trust can hurt investors financially by leaving you vulnerable to Ponzi schemes and other forms of investment fraud. But, that same attribute can lead to success in business.
Shaun Hansen, a business professor at Weber State University, said trust is one of the driving factors of economic growth.
“When you deem the person trustworthy, you’re willing to take risks with that person,” Hansen said. “In other words, engage in business with them.”
But critics say the bill would drag out already lengthy investigations by removing an incentive to move quickly. But McAdams argues it often takes a long time for Ponzi schemes to collapse, and the current statute of limitations leaves out a lot of early investors in these companies.
To date, Hronek has gotten back about $20,000 of his nearly $500,000, he said. But he doesn’t expect any more beyond that. The experience has left him less trusting, yet he still thinks trust can be valuable.
“If I had something to say about it and do it over, I would say trust, but verify,” Hronek said.
EDITOR’S NOTE: This is a guest post by Bryce Welker, who is an active speaker, blogger, and tutor on accounting and finance. As the founder of Crush The CPA Exam, he has helped thousands of candidates pass the CPA exam on their first attempt.The views expressed in this article are solely those of Mr. Welker.
Although they’re almost 100 years old, Ponzi schemes will never die. Here’s why:
There will always be people who want the benefits of hard work without having to do any hard work themselves. It’s human nature to follow the path of least resistance. However, what stops most people from doing this is a sense of morality, empathy, and respect for other people and their money.
But what about the people who don’t have any scruples? For aspiring thieves, the next biggest hurdle is intelligence. That’s because most people with money work very hard to protect it from thieves, con artists, and criminals. This is why there are thriving industries of professionals like Certified Internal Auditors, whose jobs involve searching for and preventing fraud.
However, there are some people who not only lack moral character but are also intelligent enough to successfully fulfill their devious desires. These are the rare people who are bold enough (and smart enough) to exploit professionals and institutions who are otherwise extremely competent. And the most successful method of doing this —both now and in the last century— has been to run a Ponzi scheme.
What Isn’t a Ponzi Scheme?
In order to understand what a Ponzi scheme is, and how to avoid falling for one yourself, it’s important to understand what a Ponzi scheme isn’t.
A Ponzi scheme isn’t a pyramid scheme. Also known as a multi-level-marketing or MLM scheme, this involves generating money by charging new members who then attempt to recruit other people so they can make money. Although similar in terms of recruitment, MLM is different from Ponzi schemes in terms of structure and payouts.
A Ponzi scheme also isn’t aninvestment bubble. Although Ponzi schemes take the form of investments, and people can lose their life savings due to an investment bubble, the two are not the same. Investment bubbles don’t necessarily involve fraud; they’re simply a case of assets being priced artificially high, usually due to high demand, and then being corrected by the market.
Despite being fundamentally different from both, a Ponzi scheme can resemble an investment bubble or a pyramid scheme. In fact, this confusion is usually a key factor in pulling off a successful scheme, and it’s also why they can be so difficult to catch.
What IS a Ponzi Scheme?
Put simply, a ponzi scheme is a scam disguised as an investment. Victims are convinced to “invest” their money into funds or businesses —that usually aren’t real— with the promise of extremely high returns. In reality, the only money being generated by these schemes are from new “investors,” which are constantly being recruited by the scammers. Essentially, it’s a flavor of securities fraud.
Another reason why Ponzi schemes are so deviously successful is that they can actually pay out to some investors. In order to prevent bad publicity, many practitioners of this scheme will pay out some of their early investors with a small portion of the money gathered by new ones. At the same time, clever social engineering can dissuade other investors from asking for payouts, allowing the scam to continue.
Confused? Take a look at some of the biggest Ponzi schemes in the past century and you should start to see the big picture.
Biggest Ponzi Schemes of the 20th Century
What Do 20-Century Ponzi Schemes Have in Common?
While this is far from a complete list of all Ponzi schemes perpetrated in the 20th century, it is essentially a list of the greatest hits. Hence, drawing comparisons between these six scams can help us identify some key factors that go into successful frauds. That way, you can hopefully avoid falling for the next one!
So what are some similarities between these Ponzi schemes? Here are a few worth mentioning:
They’re Backed by “Experts”
Many successful Ponzi schemes are perpetrated by individuals and companies that have the appearance of authority in their industry. These figures and institutions tout their expertise in the fields of finance and business, promising to leverage these assets for their investors to yield high rewards.
In the case of Moneytron, the scam’s ringleader Jean Pierre Van Rossem appealed to investors by touting his academic education in economics; he was often referred to as a “stock market guru.” Towers Financial Corporation’s owner Steven Hoffenberg boasted a similar level of expertise in the field of business, since he previously made a high-profile attempt to purchase the New York Post in order to save it from bankruptcy.
However, the most surprising example of a scam’s successful appeal to expertise is in the case of MMM, the biggest Ponzi scheme of the 20th century. Even after being exposed as a scam, Russian citizens were still interested in investing because of how good MMM was at scamming people!
They Appeal to Charity
When it isn’t possible to run a fraudulent enterprise from a position of expertise or authority, the next best method used by schemers is charity. This is textbook manipulation right out of Niccolo Machiavelli’s playbook:
Appealing to people’s moral compass is how Gerald Payne was able to run a wildly successful Ponzi scheme through Greater Ministries International. He invoked religious imagery by quoting Bible verses in order to convince over 20,000 churchgoers to hand over their mortgages, retirement funds, and life savings.
A similar story can be heard regarding the Caritas scam. The way that Ioan Stoica managed to attract investors to his scheme was by promising struggling Romanian citizens the ability to afford basic amenities and household appliances. He even went so far as to name his company after the Latin word for charity!
They Keep Going Up (Until They Don’t)
Even the most secure financial investment in the world won’t see perpetual gains. Any legitimate business enterprise is going to encounter ups and downs as a reaction to competitors, overall economic health, and other forces out of their control. However, Ponzi schemes only go up until they’re exposed— which is usually followed by declaring bankruptcy.
The European Kings Club scheme perpetrated by Damara Bertges promised investors consistent returns of 70% annually. That means investors were promised to increase their investment by 70% every year with no dips.
Compare that to the performance of 2019’s top-rated mutual funds. These are generally considered to be the safest and best-performing investments, and they only provide average annual returns of 15-20% over ten years. This means much smaller gains over a much longer period of time, accounting for the aforementioned market forces out of the fund manager’s control.
A general rule with any investment is that high risk is an instrumental aspect of high reward. Hence, it’s a good idea to assume that any investment promising high rewards also guarantees high risk. However, if they offer high rewards with little to no risk, it’s almost definitely a scam!
Now let’s take a look at how these schemes have changed over time.
Largest Ponzi Schemes of the 21st Century
What Do 21st-Century Ponzi Schemes Have in Common?
Just like before, this list is far from complete. However, it does showcase the most notorious and noteworthy examples of modern Ponzi schemes. Before going into the ways these scams compare and contrast to ones in the past, here are some things these six have in common:
They Incorporate New Strategies and Technologies
In order to successfully pull the wool over the eyes of shrewd investors who would otherwise have learned from the past, many of these modern scams involved unconventional investment techniques or cutting-edge technology. That way, any perceived inconsistencies with their business strategy could be excused as a layman’s misinterpretation of a highly technical and complex system.
Take Bitconnect for example. One reason why this scam was able to exist in the first place was due to the “wild west” nature of cryptocurrency. With the hyper volatility of currencies like Bitcoin, and a general public lacking adequate knowledge of blockchain technology, the staggering gains promised by this company seemed more reasonable. Furthermore, the lack of regulation makes it fertile ground for all kinds of scams.
Another common strategy for modern Ponzi schemes is to disguise themselves as lesser-known business and investing strategies. In the case of Mutual Benefits Company, Peter Lombardi was able to scam investors through an obscure (and morally questionable) practice known as viatical settlements. By cashing out life insurance policies early at a fraction of their value, this scheme capitalized on business ignorance and desperation to generate its money.
They React Poorly To Recessions
Eventually, Ponzi schemes will fall apart on their own as the perpetrators either successfully skip town or get busted by law enforcement. However, there doesn’t seem to be a set lifespan for a Ponzi scheme, although it’s rare for them to last longer than a few years.
That being said, one thing that clearly stops a scam like this dead in its tracks is an economic recession. Because they only have enough money to pay off a select few investors, the massive rush of people trying to cash out will lead to a premature collapse.
For example, look at the biggest Ponzi Scheme in U.S. history. Bernie Madoff’s financial racket only began to unravel as a result of the 2008 market downturn. As former Madoff investor Burt Ross stated in a PBS Frontline documentary, “He easily could’ve gone through his life without this being found out. The only reason that this ended was because… the economy did so badly that people wanted —needed— to get money out of Madoff’s investments.”
Although this can’t be confirmed, it’s possible that this same financial crisis was the catalyst for Tom Petters’ Ponzi scheme to unravel as well. After all, his co-conspirator Deanna Coleman cooperated with law enforcement in 2008 to expose this fraudulent scheme, as reported by the U.S. Department of Justice. Although she hasn’t confirmed this in any subsequent interviews, it’s entirely possible that she turned herself in because she could see the scheme unraveling due to the recession in a similar manner to Madoff’s.
They’re Hard To Stop
No matter how clever the perpetrator of a scam may be, there’s always going to be skeptics pointing fingers before the jig is up. Especially with such a rich history of Ponzi schemes in the past, it’s fairly common to hear accusations of fraud directed toward many successful business ventures. However, accusations are one thing; convictions are another.
In the case of Bernie Madoff, one financial investigator named Harry Markopolis had accused him of foul play as far back as 1999. From that point, a lengthy battle between private investigators and the SEC vs. Madoff’s team of personal auditors and bribed associates ensued for nearly a decade before arrests were made.
To add insult to injury, sometimes the reason for these schemes taking so long to bust is negligence or sabotage. This was apparently the case with regards to the second biggest Ponzi scheme in U.S. history. Although Allen Stanford was arrested in 2009 and convicted in 2012, one SEC inspector alleged that the federal agency was aware of misconduct as early as 1997, but didn’t act for so long due to internal issues.
How Do I Avoid Falling For a Ponzi Scheme?
Now that you’re well aware of the concept, practice, and most notable cases of Ponzi schemes, the only thing left is to learn how to avoid falling for one yourself. Here are some general tips that should help you avoid falling for this century-old trap:
Do Your Research
If you’re approached with a tempting investment opportunity based on cutting-edge technology, unconventional business practices, or philanthropy, don’t take the pitch at face value. These cases don’t necessarily indicate a scam, but they should be grounds for skepticism. Avoid putting any money down if you can’t find satisfactory answers to these questions:
Does this charity have a well-documented financial history that’s free of any accusations of fraud?
Does this technology have documentation (like a whitepaper) that clearly explains how it works and how it makes money?
Do the people running this unconventional business strategy have a history of successful enterprises, even during a recession?
Another common way for all kinds of scammers to trick victims into giving up their money is by exploiting logical fallacies. These arguments and justifications may seem rational at first, but won’t hold up if you really break them down. Analyze any interesting business investment pitches for fallacious arguments like these:
Appeal to authority: Although it’s a good sign that a business is affiliated with an expert in their field, that shouldn’t be their only selling point. See Bernie Madoff and Moneytron for examples of this fallacy at work.
Bandwagon: It means nothing if a large number of people are investing in one business. Popularity has absolutely nothing to do with legitimacy; just look at MMM and Bitconnect for examples.
Appeal to emotion: Just because an investment pitch tugs on your heartstrings, it doesn’t mean it’s legit. This was the case with Caritas, Mutual Benefits Company, and Greater Ministries International.
Contact The Authorities
If you’ve examined a business or organization and have a strong suspicion that it may be a Ponzi scheme, tell someone!
Speaking out sooner rather than later can prevent more people from losing their life savings. It may take a long time for justice to be served, and it may even be a false alarm. Regardless, it never hurts to be careful. Consider contacting one of these organizations if you’re suspicious:
FBI: If you go to the Federal Bureau of Investigation’s Tips page, you don’t have to provide your name when reporting someone you suspect is committing a federal crime. However, you may have to provide some extra information; additionally, submitting multiple false claims on purpose can have consequences.
IRS: If you or someone you know has already invested in a Ponzi scheme, the Internal Revenue Service has a page with forms you can fill out in order to claim your losses and request restitution. They also have a detailed Q&A section with more details.
SEC: After the embarrassingly drawn-out situation with Bernie Madoff, the Securities and Exchange Commission now takes accusations of Ponzi schemes very seriously. In fact, submitting a legitimate tip through their Whistleblower program could even earn you a monetary reward.
EDITOR’S NOTE: This is an excellent article that appeared in the New York Times today. I am posting it here because it contains some information about some of the new tactics that perpetrators of these schemes are using to avoid detection. They are offering products not typically associated with a Ponzi, such as financial services, insurance and real estate, and offering lower returns in order to avoid detection.
But some things haven’t changed at all. Schemers still raise money through friends, family and acquaintances, and victims still rarely get their money back. The good news is that the SEC is bringing more Ponzi cases and prosecuting them more aggressively.
The S.E.C. has prosecuted 50 percent more Ponzi cases in the last 10 years. Those scams cost their victims $31 billion.
By Angela Wang. Published Sept. 22, 2019
It has been more than 10 years since Bernard L. Madoff was caught running the biggest Ponzi scheme in history, a case that became a cautionary tale for investors and a call to action for regulators. The Securities and Exchange Commission made changes in its enforcement division to better detect fraud, established specialized teams and even revamped its system for handling tips from the public.
But the prosecution of Mr. Madoff — who took investors for more than $50 billion — was not the Ponzi case to end all Ponzi cases. The S.E.C. brought 50 percent more Ponzi prosecutions in the decade after Mr. Madoff’s arrest than in the 10 years before, according to a New York Times analysis of the agency’s enforcement announcements.
Whether the increase is the result of enhanced enforcement or a proliferation of scammers, records show that Ponzi victims lost $31 billion in the decade beginning 2009, more than three times the amount lost in non-Madoff schemes in the previous decade. (The figures are not adjusted for inflation.)
Sioux Schaefer was one of those millions of victims, and her case demonstrates one of the ways scammers have changed tactics in hopes of ensnaring unwary investors: Instead of pitching secretive, market-beating stock strategies as Mr. Madoff did, schemers are more frequently selling esoteric investments like natural resource mining and cryptocurrencies.
Ms. Schaefer, a horse trainer and photographer from Santa Cruz, Calif., was recently widowed and wondered how to leave an inheritance to her daughter and grandson. A friend told her about investing in gold mines with Daniel Christian Stanley Powell, a gregarious Cornell graduate and the founder of a Los Angeles investment company, Christian Stanley.
As she spoke with Mr. Powell on the phone, they bonded over a shared love of horses. He promised her a 10 percent return on her money, and she gave him $175,000.
The payments Mr. Powell promised never came. Federal prosecutors said he had victimized Ms. Schaefer and dozens of other investors through false promises of profits from gold mines, coal leases and a business for which he had trademarked the term “reverse life insurance.” Instead, they said, Mr. Powell used new investors’ money to pay the old — skimming off a healthy cut to buy a luxury apartment, sports cars and other items — including $5,000 for cowboy boots.
“In my mind, in my spirit, it just knocked everything out of me,” Ms. Schaefer said. “How could I be so gullible?”
Life After Bernie
Bernard L. Madoff was accused of running a $50 billion Ponzi scheme on Dec. 19, 2008, a fraud so enormous that it prompted the Securities and Exchange Commission to reorganize its enforcement division. Since the start of 2009, Ponzi scheme prosecutions have increased by nearly 50 percent, with much greater losses.
301,000 investors in 195 cases
4.3 million investors in 291 cases
The S.E.C.’s enforcement announcements demonstrate how scammers’ offerings have evolved to take in people, like Ms. Schaefer, who might otherwise be wary of a pitch involving traditional investment funds. Half the 291 cases brought in the past decade involved schemes promoting untraditional products. In the decade before the Madoff case, about 38 percent did.
“Fraudsters are trying to wrap themselves in new products to garner the attention of investors,” said Jeff Boujoukos, director of the S.E.C.’s Philadelphia regional office.
It’s not the only way that scammers have sought to distinguish themselves. Some victims said they had been fooled by pitches offering modest returns, which made them seem more believable than promises of astronomical profits.
The scheme that Christopher Parris has been accused of running leaned on more traditional Ponzi pitch tactics; the investments were said to be in businesses including financial services, insurance and real estate. Jaleen Dambrosio of Rochester entrusted to him her life savings — $600,000 — and for a few years received steady returns that assured her that she had made the right investment.
But Mr. Parris and an associate, Perry Santillo, were actually running a Ponzi scheme that defrauded more than 600 investors, the commission said. The money Ms. Dambrosio had given him was gone, along with about $100 million that others had invested.
The men had spent lavishly on themselves, including commissioning a song that Mr. Santillo had performed at a party he threw at a Las Vegas nightclub, according to the commission. “Ten-thousand-dollar suits everywhere he rides,” the song went. “Pop the champagne in L.A., New York to Florida; buy another bottle just to spray it all over ya.”
“It was like somebody punched me in the face,” said Ms. Dambrosio, who had retired from Kodak, where she was a purchasing manager. “Everything stopped.”
Ms. Dambrosio — who has gone back to work, at a Walmart deli counter — lost an unusually large amount for a Ponzi victim. The average loss for Ponzi victims in the decade after Madoff was $150,000, according to an analysis of S.E.C. data, compared with $80,000 in the previous decade for non-Madoff scams.
Jane Naylon, who had taken music lessons from Mr. Parris’s father while growing up in the same Rochester neighborhood, contacted the S.E.C. after growing suspicious of Mr. Parris and Mr. Santillo. Some of the accusers have spoken to the F.B.I.
“Why are these guys walking around free?” asked Ms. Naylon, who declared bankruptcy after losing her $105,000 investment. “They froze their assets, but they still seem to have money.”
Lawyers for Mr. Santillo did not respond to repeated requests for comment. Court records do not list an attorney for Mr. Parris; messages and emails to him were not returned.
All Ponzi schemes — whether they make international headlines or minor headaches for a handful of investors — have the same basic shape: They use new investors to pay the old ones. That type of scheme long predates its current name, which comes from Charles Ponzi, whose 1920 investment scam brought in millions of dollars.
Perpetrators’ outreach methods are still often the same as they were in the days of Ponzi. Friends, family and acquaintances are common targets, and word of mouth helps recruit new investors — a trait that was on display in the cases involving Mr. Powell as well as Mr. Santillo and Mr. Parris.
“These are investors who didn’t even know where to begin doing due diligence,” said Scott Silver, a Florida lawyer who has assisted dozens of people who contend they were victims of Mr. Santillo and Mr. Parris. “A lot of the traits of this scheme have become very typical of what we’ve seen over the last decade.”
Another thing that hasn’t changed: Victims rarely get their money back.
Some accusers of Mr. Parris and Mr. Santillo — although not Ms. Dambrosio and Ms. Naylon — have sued Bank of America. They claim that the bank enabled the fraud by providing the defendants with dozens of accounts and facilitating transactions between them. The bank has asked a judge to dismiss the case, calling it “a misguided attempt to hold Bank of America responsible for the misdeeds of its customers.”
Ms. Schaefer, who was caught up in the gold-mine scheme, has less reason for hope. In 2015, Mr. Powell was sentenced to 10 years in prison and ordered to pay $4.4 million in restitution to his victims — a judgment that has yet to be fulfilled.
“He could have stayed out, for all I care,” Ms. Schaefer said. “Just as long as we got our money back.”
RQN lawyers Mark Pugsley and Aaron Hinton, together with their co-counsel Kevin Simonof Strachan Strachan & Simon, P.C, won a significant victory after a 5-day trial in Utah State Court. In a detailed opinion issued last week Judge Matthew Bates awarded their clients compensatory damages in excess of $3 million, $2 million in punitive damages, and attorney’s fees.
The case, tried in Third District Court for the State of Utah, involved allegations of fraud, constructive fraud, breach of fiduciary duty, negligent misrepresentation, promissory estoppel and unjust enrichment against the clients’ tax advisor.
In ruling in their favor, Judge Bates found that the Defendant “took Plaintiffs’ money under false pretenses, invested it in a way that benefited him substantially, and kept all the proceeds when the loan defaulted. He bore no risk and kept most of the benefit. Then at trial, he attempted to change the terms of the agreement. Despite the plain and unambiguous language of the emails he sent to Plaintiffs, [Defendant] claimed that Plaintiffs were purchasing property in Minden, Nevada, not investing in a secured construction loan. The torts that [Defendant] committed in this case were willful and malicious, and his conduct was intentionally fraudulent.”
Mark Pugsley said, “This case represents a vindication of our client’s position after many years of litigation. We appreciate Judge Bates’ professionalism and attention to the details of the case. We are thrilled that our clients have finally been able to obtain justice.”
Kevin Simon said, “I echo my co-counsel’s sentiments in every regard and I am thankful for Judge Bates’ hard work. This is a deeply satisfying result and goes a long way in correcting a devastating wrong.”
Editor’s note: I was interviewed on KSL’s Sunday Edition with Doug Wright last week. The discussion about Ponzi Schemes and affinity fraud in Utah happens at 8:18. I appreciate KSL Television’s willingness to engage in a frank discussion about why affinity fraud is a particularly vexing problem here in Utah, and to help get the word out on how to prevent these scams.