Category Archives: Civil Litigation

Another Utah Ponzi Scheme? The SEC’s lawsuit against Marquis Properties

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Last month the Salt Lake Regional office of the US Securities and Exchange Commission filed a lawsuit and obtained an asset freeze against Marquis Properties, LLC, its CEO and President Chad R. Deucher, and the company’s Executive Vice President, Richard (“Rick”) Clatfelter.  In its complaint the SEC alleges that these men orchestrated a $28 million Ponzi scheme that defrauded more than 250 investors throughout the United States.  The complaint contains the following allegations:

  • That from March 2010, Marquis, through Deucher and Clatfelter, orchestrated a scheme to defraud unwitting investors by inducing them to invest in notes and investment contracts collateralized by real estate.
  • That Marquis represented that it would use investor funds to purchase real properties and that investors would receive guaranteed profits and return of principal upon sale of the properties. Marquis represented that investments were safe and low risk because the notes and investment contracts were 100% collateralized by valuable real property.
  • That Marquis failed to purchase properties with investor funds, however, and properties offered as collateral were often not owned by Marquis, were substantially encumbered, or were in uninhabitable or blighted condition.
  • That rather than using investor funds as represented, Marquis used investor funds to pay returns to earlier investors, in a classic Ponzi scheme. Marquis could not have paid returns to earlier investors without the influx of new investor money.
  • That Deucher caused Marquis to use investor funds to pay personal expenses of Deucher and directed Marquis to provide investor funds to his wife.

The SEC’s complaint charges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The complaint also charges Deucher and Clatfelter with violation of Section 15(a) of the Exchange Act, and names Jessica Deucher as a relief defendant. The SEC is seeking injunctive relief, disgorgement, prejudgement interest, and civil money penalties from Marquis, Deucher, and Clatfelter.

The SEC’s investigation has been conducted by Scott Frost and Cheryl Mori and supervised by Richard Best. The litigation will be led by Amy Oliver.

If you are a victim of the Marquis Properties fraud and have a story to tell about it, please do so in the comments below.

Mark Pugsley’s Recent Interview on Mormon Stories

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I was recently interviewed by John Dehlin who runs the “Mormon Stories” Podcast about affinity fraud in Utah.  This episode is available in audio only through John’s podcast, or you can watch the video below.

Episode 606: Mormonism and the Culture of Fraud with Attorney Mark Pugsley

by John Dehlin • 

Ponzi-scheme-1In this episode we interview Utah attorney Mark Pugsley.  Mark is a commercial litigator at Ray Quinney & Nebeker, is the founder of the web site UtahSecuritiesFraud.com, and has handled civil disputes, investment fraud cases, securities arbitrations, whistleblower cases and regulatory investigations for over twenty years.

In this episode, Mark discusses the culture of financial fraud (e.g., ponzi schemes) within Utah Mormonism.

For those interested, a list of past Mormon-related cases will be assembled here.  Please feel free to share links to other stories in the comments below.

Fraud Cases discussed in the podcast:

    1. Val Southwick of Ogden, Utah (SEC Complaint was filed in February of 2008). Southwick left $180 million owing to investors when his company collapsed and was put into receivership.  This Ponzi scheme lasted over 20 years.
    2. Jeffrey Mowen of Lindon, Utah (SEC Complaint was filed in September of 2009). Raised approximately $41 million promising bank-backed CDs from a New Zealand bank that paid returns as much as 33% per month.
    3. Roger Bliss of Bountiful, Utah (SEC Complaint filed in February of 2015). Investors incurred losses of $3,299,689 relating to an “investment club” he ran out of his large Bountiful home. He told investors that he had achieved annual returns of between 100 to 300%.
    4. Dean Udy of Brigham City, Utah (Sued by State of Utah in August of 2012). Udy scammed approximately 1,500 investors who suffered a total  estimated loss of $20 million. He was a former stake president and regional representative in Brigham City, Utah.
    5. Travis Wright of Holladay, Utah (SEC Complaint was filed in 2010). He raised $145 million from 175 investors promising returns of 24% per year.
    6. John S. Dudley of Sandy, Utah. (US Attorney obtained a 17-count criminal indictment in May 2011) Investors suffered $6.8 million in losses, promised returns of 5-10% per month.
    7. Shawn Merriman of Denver Colorado (SEC Complaint filed in April of 2009). He was sentenced to 12½ years in federal prison for defrauding 67 victims out of $21 million.  Merriman was a Bishop in the LDS Church in Colorado and raised the money from friends, neighbors and fellow church members.  The government seized roughly $4 million in fine art, antique cars, sports memorabilia and animal trophies collected on his safari trips when they arrested him.
    8. Wendell Jacobsen of Fountain Green, Utah (SEC Complaint was filed in December of 2011, Utah AG’s office brought criminal charges earlier this year)  Allegedly raised $200 million from more than 400 investors promising returns of 12-15% per year returns by investing in apartment complexes.
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The SEC’s New Whistleblower Program Has Proven to be a Game Changer

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SEC Chair Mary Jo White gave a speech at the Northwestern University School of Law on April 30, 2015 on the SEC’s new Whistleblower Program.  She called it a “game changer.”  She said that despite criticism, whistleblowers provide “an invaluable public service” the SEC increasingly sees itself as the “whistleblower’s advocate.”

Whistleblower Statistics

After just four years the SEC’s program has seen significant successes:

  • The number of tips they have received is high and has increased by more than 20 percent.
  • In 2014, the SEC received over 3,600 tips (about ten a day), which is up from about 3,200 tips in 2013.
  • In the first quarter of this year, they have seen the numbers increase by more than 20 percent over the same quarter last year.
  • Tips have come from whistleblowers from all fifty states and sixty foreign countries.
  • The tips span the full spectrum of federal securities law violations.

The program is still fairly new, but so far a total of seventeen whistleblowers have received awards.  Payouts have totaled nearly $50 million and the SEC has made individual awards in excess of $1 million three times.  The highest award to date is over $30 million.  In the last fiscal year, the Commission issued more awards to more people for more money than in any previous year – and that trend is expected to accelerate.

Retaliation

Chairman White also stated that the SEC is “very focused” on cracking down on retaliation against whistleblowers and wants whistleblowers and their employers to know that employees are free to come forward without fear of reprisals.  The statute provides that employers cannot “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower” to provide information or assistance to the SEC.

If they suffer retaliation whistleblowers can sue the company directly, and the SEC may also bring an action for retaliation against an employer.  The SEC believes that strong enforcement of the anti-retaliation protections is critical to the success of the SEC’s whistleblower program and bringing retaliation cases will continue to be a high priority.

The Bottom Line

The SEC’s Whistleblower program is intended to create powerful financial incentives for individuals to provide real evidence of fraud or any wrongdoing that harms investors to the SEC.  She stated that the ultimate goal of the whistleblower program is to deter further wrongdoing.  She admitted that it is “too early to draw conclusions about whether the program has altered corporate behavior and reduced wrongdoing.  But we certainly hope it has and will continue to do so.”

Copyright 2015 by Mark W. Pugsley.  All rights reserved.

Receiverships: Recovery Can Be More than Pennies on the Dollar

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http://www.dreamstime.com/stock-image-pennies-dollar-image3195441By Jared N. Parrish

 “Once a receiver takes over you won’t see a dime.”

“The lawyers for the receiver will just take all the money and leave nothing for investors.”

“Don’t file a claim because there won’t be any money available anyway.”

These are some of the most common statements I hear from investors who put money into a financial fraud that is later placed in receivership. The modern lexicon of Ponzi schemes and financial fraud cases is wrought with pessimism and a seeming presumption that no money will flow from a judicially-created receivership estate to the defrauded investors. This is a dangerous misconception which is not borne out in practice. However, the misconception continues to lead many victims of financial fraud to the conclusion they should not pursue their claim against the receivership estate.

Recently, two major Utah receivership cases have returned 100% of losses to the investors who filed claims. Most recently in the Securities and Exchange Commission’s enforcement action against Management Solutions, Inc., U.S. District Court Judge Bruce Jenkins approved a distribution plan which will repay all investor claimants all of their principal losses. In his address to the Court during the distribution plan hearing, Daniel Wadley, the lead trial counsel for the Securities and Exchange Commission, noted that the biggest fear he had heard from investors early in the case was that the receivership was going to suck up all the money in legal and other professional fees. Over 400 claims were filed in that receivership.

In another example, U.S. District Court Judge David Nuffer approved a distribution plan in the Securities and Exchange Commission’s action against Impact Payment Systems and John Scott Clark which also returned 100% of principal losses to all claimants. Impact Payment Systems was a payday lending operation based in Logan, Utah which was operated as a Ponzi scheme. The Receiver, Gil A. Miller of Rocky Mountain Advisory, has disbursed over $18 million to investors.

A receiver’s principal duty is to marshal and protect the assets of the companies under his or her control, and to determine whether those companies can continue to operate lawfully after the principals have been removed. Receivers are uniquely suited to recover money and other assets that have been transferred by the principals of a financial fraud to others, so that those assets can be distributed to the defrauded investors. Federal and state laws protect receivers from traditional legal challenges which face other types of parties in litigation and in the administration of companies in receivership, making the path to recovery of assets easier.

The investor, not the receiver, bears the duty to pursue their claim in a receivership. This means it is the responsibility of the investor to keep informed about the receivership, to file a claim form, and to prosecute that claim if they disagree with the receiver’s distribution plan.  A receiver will not simply look to a company’s internal records to find investors and send money to them. If an investor who has lost money in a financial fraud does not file a claim in the case they will receive nothing. I have spoken with dozens of investors who failed to file claims in receivership cases and are rendered ineligible for a distribution. The excuses range from, “I didn’t think there would be any money” to “my investment adviser told me not to file.” An investor who does not file a claim form, but subsequently wishes to receive a distribution, must file a motion with the receivership court and demonstrate “excusable neglect” for their failure to file. The rationale, “I didn’t think there would be any money,” is not excusable neglect.

The perception that investors will receive nothing once their investment is placed in receivership is generally wrong, and acts as a deterrent to filing a claim. Equity receivers work very hard to generate the highest possible return to as many investors and other claimants in a receivership as possible. Failing to timely file a claim with a receiver is a mistake which can cost defrauded investors a return of much, if not most, of their principal losses.

While an investor typically does not need the assistance of counsel to file a claim in a receivership, it is very helpful to have an experienced lawyer who can keep better apprised through the Court’s notification system regarding the status of the case and who can analyze the distribution plan and claim classification decisions by the Receiver.

Jared N. Parrish is a member of the firm’s Receivership and Securities Litigation practice groups. His practice is devoted to matters involving securities litigation, federal equity receiverships, compliance, state and federal regulatory investigations and enforcement actions. He has represented equity receivers and claimants in some of Utah’s largest financial fraud cases.

 

UPDATE: Would you Invest in the Candwich?

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Update #3: Today Judge Clark Waddoups rejected the plea bargain that Wright had negotiated with prosecutors concluding that the deal appeared too light given the magnitude of how Wright had “intentionally deceived and misled people.”  The defendant will now be forced to negotiate a new plea bargain with the U.S. Attorney’s office — or go to trial.  The judge’s decision appears to be based primarily upon the letters he received from angry investors.

UPDATE #2: Last week Travis Wright pleaded guilty to one count of fraud, admitting he operated a massive Ponzi scheme that owed investors at least $44 million when it went bust in 2009.  He will be sentenced after the judge hears testimony from the victims.

UPDATE:  My friend Tom Harvey reported yesterday in the Salt Lake Tribune that Travis Wright, who ran Waterford Funding, entered a plea of not guilty before U.S. Magistrate Paul Warner to the charge of mail fraud.  The article can be found here.

On July 7, 2010 the New York Times ran a story about the SEC’s recent lawsuit against Travis Wright and Waterford Funding.  The SEC’s press release about the case can be found here.   Among other things, the SEC’s lawsuit alleges that Wright lied to his investors saying he was investing their money in hard money loans secured by real estate, when really he was funneling most of their money to the inventor of the “Candwich” (who also planned to offer Pepperoni Pizza Pockets and French toast in a can).  Yum.

This is the part that is really baffling to me about this case.  Did he really think the Candwich would be more profitable than real estate?  Given the current state of the real estate market it may be the case — but not between 2001 and 2007 when the fund was really going strong.  The SEC also alleges that he used $15 million of investor funds for personal use, including the purchase of a $5 million home on Walker Lane from former Jazz legend Jeff Hornacek, which he completely renovated and imported cobblestones from France for the driveway.   But it was probably pretty trashy after Hornacek moved out.

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