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).
I want to be clear that giving an investment pitch in someone’s home is not necessarily improper, but you need to be careful. They do this to leverage the trust of the people whose home you meet in. The idea is if you trust the homeowner you will be more likely to invest.
But wait! Just because you trust your friend or ward member DOES NOT mean that you can trust the person soliciting the investment. Just because you are meeting in the home of someone you trust does not mean that the investment is sound. Just because your neighbor thinks so-and-so is a “good guy” or a “good member of the church” does not mean that you should invest.
Your neighbor may have invested and may even be making tons of money. But even Ponzi schemes make money — at first that is. Past returns are not a valid indicator of future performance, you need to do your homework.
In this case Dudley sat in Utah living rooms and told potential investors that he was an experienced and successful investor. He said they could expect monthly returns of 5-10 percent, that he had not suffered a trading loss since 1978 and had never made less than 5 percent per month over the last 30 years. Those statements alone should have caused investors to run for the exit!
Like Bernie Madoff, Dudley allegedly told investors that investing with him was an “exclusive opportunity” with only a limited number of investors allowed to invest with him at one time, and he encouraged people to take out home equity loans on their homes to invest with him. Always a good plan.
He told investors that he would generate these returns by investing their money in a foreign exchange trading program, mining speculation, European and domestic stock options and commodity trading — all of which are extremely speculative investments.
So what did he actually do with investors’ money? He is accused of using it to pay earlier investors (a classic Ponzi scheme) and for his own personal use, including the purchase of two homes, a ski boat, meals, airline tickets, and gifts for his family. Not such a good investment after all.