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This week a Utah man named Kenneth Tebbs was sentenced to six and a half years in federal prison for operating a $49 million Ponzi Scheme in Salt Lake City. According to the article in the Salt Lake Tribune the investment scheme victimized more than 100 investors, many of them elderly people, family and friends.

This case is somewhat unique because civil charges were never filed by the Securities and Exchange Commission or the State of Utah. Instead, Mr. Tibbs filed for bankruptcy – but only after soliciting more investments from, among other, an elderly widow. According to her letter to Judge Sam, Tebbs had sat her a couch and held her hand while telling her an investment of practically all of her savings would be profitable and safe. Two weeks later, he filed for bankruptcy. Many of the victims “were victimized on the eve of bankruptcy, when the wheels of the filing of bankruptcy were in motion” according to the article.

So how could this tragic loss have been avoided? First of all, any investment, including an investment in real estate where investors are not actively involved in the management, should be sold by a person who is currently licensed to sell securities. According to FINRA’s BrokerCheck website, Mr. Tebbs was licensed at one time, but his license expired in 2006. The State of Utah’s Division of Securities also maintains a database that you can look at to see if the person soliciting the investment is licensed or has had problems with the State in the past.

In most cases an investment like this in a private company should have been accompanied by a Private Placement Memorandum and only made available to accredited, sophisticated investors. An attorney can help you evaluate whether the securities laws have been followed in an investment like this. Attorneys cost money, but when your entire life savings is at stake hiring an attorney to do due diligence is well worth it.

Second, although it would have been difficult for a typical investor to know that the company was on the verge of bankruptcy, a careful review of the current financials of a company like this may well have uncovered information about the company’s insolvency. Private investments like this are usually particularly fraught with risk and require a much more careful review. This page contains a variety of resources and links to assist with this process.

Finally, the terms of the investment itself should have been a red flag. Mr. Tibbs promised his investors that they would receive returns of up to 18 percent, plus an origination fee of up to 5 percent. High returns such as this should be subject to higher scrutiny. If it seems to good to be true, it probably is.

Copyright 2013 by Mark W. Pugsley.  All rights reserved.

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