Posted by Mark Pugsley.

Yesterday William J. Hammons, 66, was convicted of seven of nine criminal charges by a jury in St. George, Utah. Hammons was one of the largest finders or feeders of investors to Val Southwick and his company VesCor, which is now known as the largest Ponzi scheme in Utah history. He recommended the investment to members of The Church of Jesus Christ of Latter-day Saints in Las Vegas, where Hammons served as a bishop, and in St. George, Utah. The St. George investors included neighbors, church members, Hammons’ partner and his parents-in-law. What he did not tell these people was that in exchange for these referrals he received substantial “referral fees” or commissions from Val Southwick.

In his defense, one of the Fresno defense attorney, Clifford Dunn tried to convince the jury that Mr. Hammons was just an innocent bystander. According to the Salt Lake Tribune, Hammons testified “that he was unaware that VesCor was a fraud, that he didn’t seek out investors and never officially worked for the company. Instead, he cast himself as just another investor who was paid only referral fees.”

Hammons and his attorney tried very hard to distance him from his friends, ward members and neighbors’ decisions to invest with VesCor. His lawyer said an investment of one of the investors came just from a casual conversation on the street on which they lived, and Hammons was not acting as a licensed agent. But that argument demonstrates that his defense team did not understand the law — and in any event the jury didn’t buy it. These people in St. George and Las Vegas probably wouldn’t ever have heard of VesCor or Val Southwick unless one of their friends and church leaders (who appeared to be very successful) had recommended it.

According to several investor witnesses who he convinced to invest, Hammons told them that he was letting them in on a deal that returned 14 percent to 16 percent annually “because he was their friend.” He also told them that he didn’t receive commissions for the referrals, but that was false. In fact Hammons was paid very well for these referrals. Gil Miller, an accountant with PriceWaterhouse, and a well-known expert in these cases, testified at the trial that “Hammons got a 200 percent return on a $1.2 million investment of other people’s money in six months, plus more than $200,000 in commissions. He also received a Mini Cooper car and a Rolex watch.”

But, what if he hadn’t gotten rich off these referrals, would he be out of the woods? Probably not. If you take fees for recommending or referring investors to a company then you are probably selling securities, and you need to be licensed to do that. Even if you are doing it because (1) you want to help people, (2) these are just your close friends and family, (3) you are an investor and are just trying to help the company, or (4) you genuinely believe it is the best investment since the candwich, you STILL need to have a securities license in order to sell securities. And if you are getting paid a commission or some other compensation for referring investors then you are probably selling securities.

There are exceptions for people who are principals of the company and where the issuances are through a properly registered private placement memorandum, but you really need to hire an experienced securities attorney to help you navigate this regulatory minefield. If you are interested, here is a good article on the problems small businesses and start-up companies face when using unregistered finders to raise investment capital.

Hammons now faces 1 to 15 years in prison on the conviction of three counts of securities fraud and pattern of unlawful activity, and up to 5 years in prison on conviction of four counts of not being licensed to sell securities. This verdict was rendered after five hours of deliberation by a jury of five women and three men, the trial lasted two weeks.

© 2011 Mark W. Pugsley, all rights reserved.

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