Why Is Utah Home To So Many Ponzi Schemes?

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.

By SONJA HUTSON DEC 30, 2019

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. 

To help victims of Ponzi schemes, Utah Congressman Ben McAdams has introduced a bipartisan bill that would give more power to federal investigators seeking to recoup their financial losses. 

“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.”

Utah Effort to Help Fraud Victims

McAdams’ bill, which passed the House overwhelmingly last month, would extend the statute of limitations for federal regulators to recover victims’ money from five to 14 years.

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.

The Woodbridge Group of Companies – Another Ponzi Targeting Utahns

The Woodbridge Group of Companies was run by a flashy promoter in Los Angeles named Robert Shapiro.  Woodbridge marketed promissory notes (which were in reality unregistered securities) to an estimated 7,000 retail investors throughout the United States, including Utah.  Investors were told their funds would provide a safe, secured return from short-term real-estate loans.

In reality, investor money was used to fund real-estate purchases made by shell companies run by Shapiro himself, including high-priced luxury homes in Los Angeles according to the SEC lawsuit filed in December of 2017.  The SEC alleged that investors received monthly interest checks that were actually funded by money from newer investors, which is a classic Ponzi scheme.

This story about the case appeared in the Wall Street Journal today, and is a follow-up to the WSJ’s fascinating article about the case from February:

 

Woodbridge Bankruptcy Spotlights CEO’s Luxury Spending

The money for his lavish lifestyle came from the pockets of thousands of people, from an 89-year-old widow in a memory care facility in Tennessee to ABC news anchor George Stephanopoulos, according to the Securities and Exchange Commission, which has accused Mr. Shapiro of running a Ponzi scheme.

“Like many others, I was a victim of Woodbridge and now must deal with the consequences of its bankruptcy,” Mr. Stephanopoulos told The Wall Street Journal. Woodbridge filed for chapter 11 bankruptcy protection on Dec. 4, a few days after Mr. Shapiro stepped down from the chief executive spot and, according to court papers, spent $16,000 of company money at Macy’s.

He expected to stay on as a $2 million-a-year consultant, but the arrangement didn’t last long: Woodbridge cut ties to him after the SEC sued him and the company for fraud on Dec. 20.

 Mr. Shapiro denies running Woodbridge as a Ponzi scheme and is fighting the SEC case in federal court in Florida. However, his former company has said it would admit to running a Ponzi scheme, and is providing details with new bankruptcy court filings that sketch a picture of a troubled company with tangled finances.

Woodbridge promised investors safe returns on short-term notes, which were to be secured by valuable real estate in some of the priciest markets in the country, from the Holmby Hills area of Los Angeles to Aspen, Colo.

An SEC fraud case filed in federal court in Florida alleges the real estate was bait to draw investors into Woodbridge’s $1.2 billion Ponzi scheme. Cash that came in from new investors was recycled to pay older investors, according to the civil fraud complaint and bankruptcy court testimony from an SEC expert.

The SEC lawsuit was the culmination of a year-long federal investigation into Woodbridge, which sold unregistered securities, often through unlicensed agents. Securities authorities in Arizona, California, Iowa, New Jersey, Oregon, South Carolina and Colorado were also looking into Woodbridge, court papers say.

Now in the hands of legal and real estate professionals, Woodbridge continues to operate under the watchful eyes of the SEC and a bankruptcy judge. The first order of business: start selling Woodbridge’s portfolio of more than 130 properties which are estimated to be worth more than $650 million and start paying off investors.

Estimates are that investors could get from 45% to 76% of what they are owed, if things go according to plan in Woodbridge’s bankruptcy proceeding. That recovery estimate doesn’t include what Woodbridge might be able to recover from lawsuits against its ex-chief executive and brokers that sold the notes, court papers say.

Mr. Shapiro invoked his Fifth Amendment right not to testify against himself during the SEC probe, and in the face of questions from creditors. His lawyer didn’t respond to a request to discuss Woodbridge’s spending.

In addition to paying Mr. Shapiro’s credit card bills, country club dues and other expenses, Woodbridge transferred $3.8 million to his wife, Jeri, in the year before the company’s bankruptcy filing, most of it through a media-buying company she owned, court records show. Others in the Shapiro circle—a nephew, an uncle, a brother-in-law, a stepson—profited as well, according to court records.

Investors such as Mr. Stephanopoulos could also come under scrutiny for possible clawback lawsuits. Mr. Stephanopoulos received $2.5 million in investor payments from Woodbridge in the 90-day period before the bankruptcy, court papers say. By that time, the SEC had gone public with its probe of Woodbridge. Court papers didn’t say how much Mr. Stephanopoulos invested.

 In many Ponzi schemes, the chief recovery for investor victims is suing other victims on the premise that the financial pain of the fraud should be shared equally.

“I will pursue any valid claims I have and will comply with all proper rulings of the bankruptcy court,” Mr. Stephanopoulos told the Journal.


Lessons to be Learned

Overall, I think there are a number of lessons to be learned from this very large (alleged) Ponzi scheme.

First, regardless of what you are told, Woodbridge Notes are securities under federal and state law.  All investments – including the purchase of promissory notes – must be made through a licensed stock broker or registered investment adviser.   Insurance salesmen are not able to solicit or recommend these investments unless they have the proper securities licenses.  If you want to find out if your “financial planner” or “retirement planner” has a securities license run their name through FINRA’s BrokerCheck database.

Second, there is a reason why it is very difficult to find investments that pay high monthly returns on a consistent basis; it’s just not sustainable.  Investments that pay monthly interest at above-market rates are, in my opinion, very likely to be a Ponzi scheme — or to turn into one eventually.  There just aren’t many businesses that can generate returns like that on a consistent basis.

Third, if your financial adviser recommends an investment like this make sure he or she has a big errors and omissions insurance policy, because that may be your only way to get your money back.

For more ideas on how to avoid losing money in a Ponzi Scheme, check out my Top Ten Ways to Avoid Losing Money in an Investment Scam.

I am working on a number of cases involving the Woodbridge Group of Companies, if you lost money and would like to discuss your legal options please contact me.

 

Copyright © 2018 by Mark W. Pugsley, All Rights reserved.