Category Archives: Seniors

Another Sad Story of Affinity Fraud Within the LDS Community in Utah

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Editor’s Note: I often write about the dangers of trusting people in your LDS ward or religious community who are pitching investments, but real stories are sometimes more effective. Below is a CLASSIC example of how members of the LDS Church are targeted for fraud.

This story was published in the Deseret News on Sep 16, 2020 by reporter  Dennis Romboy.

St. George man gets prison term for stealing from fellow Latter-day Saints in financial scam

SALT LAKE CITY — A St. George man who took advantage of a couple in his Latter-day Saint congregation in a financial scam is headed to federal prison.

Gregory Moats Sampson, 46, will spend two years behind bars after pleading guilty to wire fraud and money laundering.

U.S. District Judge David Nuffer enhanced the sentence because the scheme put substantial financial hardship on the couple. The judge also ordered Sampson to pay $250,000 in restitution and to serve three years probation after his prison sentence.

Sampson met the couple, identified in court documents as J.S. and K.S., in 2012 when he was their real estate agent. They had $250,000 to invest after selling a home in Australia. Sampson told them he had invested funds for others in the past and could help them, according to court documents.

J.S. and K.S. were not sophisticated investors and believed they could trust Sampson based on the relationship they had with them, prosecutors said. He told them they could earn $1 million in eight to 10 years and that they would receive stock in a company. He also told them that because they were friends, he would not charge them for their investment.

Instead of investing the money, Sampson spent it all within a month of receiving it, including $98,000 to pay off a personal loan, $82,000 to a company his brother owned, and $20,000 to a company that had nothing to do with the investment, according to court documents.

When the couple asked for a portfolio of their investment, Sampson did not provide one but regularly told them it was performing well.

The couple eventually confronted Sampson and demanded documentation or their money back.

According to court records, he told them: “And you know who gets screwed in the deal? You do … and it’s not to say that I’m trying to protect my own (expletive) because I’m not going anywhere, I promise you. If I need to disappear, I would have already been gone. I’ve got enough money that I can disappear if I need to. …”

Chris Parker, executive director of the Utah Department of Commerce, said affinity fraud continues to be a problem in Utah.

“Scammers will use any social connection available to gain your trust and take your money,” he said.

While federal fraud cases typically focus on losses in the million of dollars, scammers in smaller cases also face stiff penalties, said U.S. Attorney John Huber.

“There is no sweet spot in fraud loss where schemers can fly under the radar and get away with it,” he said. “Once again, we remind Utah investors to beware of the risks associated with big promises from purported friends and neighbors.”

Top Ten Ways to Avoid Losing Money in a Financial Scam – Tip #1

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Investment fraud is a big issue here in Utah, largely due to our close-knit social and religious communities, which can be prime targets for “affinity fraud.”  “Affinity fraud” is a scam that is perpetrated by someone you trust. Scammers use relationships to build trust and legitimacy for their “pitch.” Those relationships can be with family members, neighbors, friends or — especially in Utah — members of your church community.   It is important to be aware of the potential for scams and aware of how to protect yourself against them. For example, rushing into an investment because you “trust” your neighbor or friend can lead you to set aside the type of scrutiny you would apply if a stranger was asking for your hard-earned money. 

That can be a dangerous mistake.  

There are concrete ways to mitigate the risk that you may face in this type of situation. To raise awareness and help people avoid the often life-altering financial losses associated with affinity fraud, I’ve created a list of the ten most important ways to avoid investing in a financial scam. The following tip is the first installment in this series:

Tip #1 — SLOW DOWN

Spotting scammers can be difficult, as they are often someone you know and trust. Do not send out personal information in response to an unexpected request, whether online or in person. 

Do not fall for claims of urgency in an investment opportunity. Slow down.  If its a legitimate opportunity it will be there tomorrow, and next week. Research the company online, ask lots of questions, search the for lawsuits and enforcement cases, review the legal and financial history of the individuals involved and, if possible, visit the company office. Ask the difficult questions before committing to anything.

In particular watch out for aggressive sales pitches and “deadlines” to invest. Many victims of fraud report that they were told the investment opportunity was a limited-time opportunity and that they needed to move quickly before someone else takes it. Scammers will often try to push you to invest before you have an opportunity to do your research. This should be a red flag.

Finally, retain a lawyer with expertise in financial investments at the outset to help you evaluate the proposed investment.

The bottom line: If an offer sounds too good to be true, it likely is. Don’t fall prey to high-pressure sales tactics or people demanding money immediately. When it comes to financial investments it is critical to slow down and take the time to do your due diligence! 

Copyright © 2020 by Mark W. Pugsley.  All rights reserved.

The SECURE Act: A New Way to Avoid Increased Taxes on Your Inheritance

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With so much market volatility, many are scrambling to plan for their uncertain future. If you are planning on leaving your IRA, ROTH IRA, or Qualified Plan to your heirs, you may want to rethink how you plan your estate.

Congress passed the SECURE Act in December 2019, in pre-Covid-19 America. The goal was to incentivize businesses to start offering retirement savings plans, including to part time workers. In addition, the bill was aimed at increasing retirement wealth by eliminating an age cap for contributions to IRAs and raising the age of mandatory withdrawal.  

Now that Covid-19 has slowed the global economy, Americans are taking a closer look at the SECURE Act, and its long-term effects in a volatile market. The SECURE Act eliminated stretch IRAs, which will increase taxable revenue on inheritable retirement plans. If you were a non-spousal heir, you used to be able to take out minimum distributions from an inherited IRA over time based on your life expectancy. This would allow you to have some control over your taxable income each year, and potentially not raise your tax bracket.

Note that under the SECURE Act, you must now make all withdrawals of inherited accounts within 10 years. “There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year.” This means that beneficiaries are required to take out large sums of taxable income, often at times when it is least needed.  

What Can You Do?

  • Get a life insurance policy which can offset your tax burden after death, even if it means cashing out your IRA and Qualified Plan.
  • Covert your retirement plans to ROTH over your retirement years, when your tax rate is lower.
  • Withdraw portions of an inherited account each year to spread out and potentially mitigate the associated tax burden.
  • Review and update your estate plan (i.e., your wills and trusts) and coordinate your estate plan with your retirement plans’ beneficiary designations.
  • Contact an estate planning expert to help you navigate this complex process.

In an uncertain economy with short-term health struggles and a long-term recession pending, make sure that you plan for your estate to maximize the security of your heirs. Visit this calculator to see how the SECURE Act may affect your inheritance.

Copyright © 2020 by Mark W. Pugsley. All rights reserved.

Note: This article was written with the assistance of Lydia Rytting, who is student at the University of Utah, S.J. Quinney College of Law.

Finally It’s Confirmed: Utah Has More Ponzi Schemes Per Capita Than Any State in the Country. By Far.

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I frequently speak to groups about investment fraud and one of the questions I often get asked is whether it’s true that Utah has the highest rate of Ponzi schemes and affinity fraud in the country.

In the past I haven’t been able to say for sure.  There aren’t any good studies that have reached that conclusion, and so I have to just rely on anecdotal evidence. 

Well, now we have proof.  Jordan Maglich, who runs the website PonziTracker.com, just released an epic ten-year survey of Ponzi schemes in the United States.  He found that there were over 800 Ponzi schemes reported publicly from 2008-2018 and that they collectively caused a jaw-dropping $60 billion in financial destruction.  I believe this is the first database compiling publicly-reported Ponzi schemes and sentences during the “Madoff Era.”

And the survey contains very bad news for Utahns.  Utah had the sixth-highest number of Ponzi schemes despite ranking 31st in population.  So when I ran a per-capita analysis of the numbers Jordan reported it turns out that Utah has the highest rate of Ponzi schemes per capita in the country by far, at 1.35 Ponzi schemes per 100,000 people.  And the next highest state (Florida) is nearly two thirds lower at .51 per 100,000 people.  (Chart)

If you take out the massive Madoff Ponzi scheme in New York ($17 billion), Utah also has the highest loss per capita of $502 per person – which is more than double the next highest state! 

Overall, Utah investors lost over $1.5 billion to these schemes in the last ten years.  And that number does not include other affinity frauds and other investment scams which undoubtedly account for another $500 million in losses to Utah residents over the last ten years (at least). 

How would $2 billion benefit our economy?  What is the collateral impact of these scams?  Here are a few thoughts:

  • Millions
    in state and federal resources are consumed by the victims of fraud who no
    longer have means to support themselves in retirement, including paying their
    medical bills and other living costs.
  • The
    families of fraud victims often have to step in to house and support their
    parents or children who have been wiped out financially.
  • Banks,
    investment advisors and stock brokers lose significant revenue when people
    liquidate their IRAs and 401K to invest with some unlicensed scammer.

The list goes on… 

Why is Utah’s problem so much worse than any other state?

This is a complicated problem, and there is no clear answer.  But after helping people recover losses from investment fraud for 25 years my view is that people in Utah are simply too trusting, particularly when the person soliciting an investment is in their ward or shares their religious affiliation.

If someone pitching you an investment casually mentions that they used to be the bishop or in some other church position, watch out!  Church callings and temple worthiness are not relevant to investment decisions, so beware of those who bring these issues up in an investment pitch.

Also, it may seem like doing business with someone you know and trust would be safer, but that is simply not true.  All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good.  Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.

Finally, investment decisions should never be made based on feelings.  Just because it feels legitimate, or feels like a good idea does not make it so. 

Here are a few things you can do to avoid getting scammed:

Do your homework.  Run a simple Google search on the company and its managers, or the individual pitching the investment.  You might be surprised by what you find. 

Hire an attorney. An experienced lawyer can help you perform due diligence into the company and individuals offering a private investment.  You need to carefully evaluate the risks and determine whether the offering complies with state and federal statutes.  It is far cheaper to hire an attorney on the front end of an investment like this – when your money is gone it gets very expensive. 

Get it in writing.  I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake.  The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired. 

Read the Paperwork.  Investors in a private investment opportunity should receive a detailed lengthy disclosure document called a private placement memorandum (PPM).  Take the time to review it before you invest.  Like a prospectus, a PPM contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, and the terms and conditions of the private investment, among other things.  If you don’t understand these things, hire a professional who does.

Work through licensed stock brokers or investment advisors. Even private (unregistered) investments generally need to be sold by licensed stock brokers.  Every investor should look at the employment and disciplinary history of their broker or investment adviser, which is available on FINRA’s BrokerCheck website. 

And most importantly, if it sounds too good to be true it probably is. If you are thinking about putting money into an alternative, unregistered, or unusual investment that promises abnormally high returns (like anything higher than 10 to 15% per year), watch out.  And if someone promises you a “guaranteed” return on any investment that ought to be a red flag — investments are rarely guaranteed and investments that offer unusually high returns are more risky, not less. 

State Population Schemes Schemes per 100,000 people Total Losses Losses per capita
Utah 3,101,833 42 1.35 $1,558,325,000 $502.39
Florida 20,984,400 107 0.51 $5,893,496,000 $280.85
New York* 19,849,399 90 0.45 $21,707,050,000 $1,093.59
Illinois 12,802,023 53 0.41 $523,400,000 $40.88
Calif 39,536,653 151 0.38 $3,889,700,000 $98.38
Texas 28,304,596 76 0.27 $8,372,900,000 $295.81
*New York (without Madoff) 19,849,399 89 0.45 $4,307,050,000 $216.99

NOTE: The per capita analysis in this table is mine.  The underlying data comes from this website:  Ten Years After Madoff, Updated Ponzi Database Shows Schemes Are Thriving

Copyright © 2019 by Mark W. Pugsley. All rights reserved.

The Growing Problem With Sales of Unregistered Securities

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Recently I have been busy working to recover losses for a large number of investors who lost money in unregistered investments offered by Woodbridge and Future Income Payments or FIP. In many cases these investments were recommended by insurance agents who were not licensed to sell securities, and did not perform adequate due-diligence on these companies before they made the recommendation.

FIP offered pensioners upfront, lump-sum payments in return for a portion of their monthly pension payments over a specific term, often three to five years. FIP then used these pension payments to fund a monthly income stream back to the investors who put up the money for the lump-sum payments. In July of 2018 Scott Kohn, the 64-year-old felon who started the company, closed the doors and disappeared leaving investors with more than $100 million in losses.

Subsequently the SEC filed charges against thirteen individuals and ten companies who recommended and sold Woodbridge, including Utah-based Aaron Andrew and Live Abundant. Live Abundant and its agents were not licensed to sell securities, and yet they recommended both FIP and Woodbridge to hundreds of people here in Utah and throughout the western United States. Our lawsuits against Live Abundant and the individuals and entities who perpetrated this scheme are ongoing.

The common link between these two fraud schemes is that investments in FIP and Woodbridge were not registered with the SEC. These are sometimes referred to as private placements or unregistered offerings.  Generally, a company may not offer or sell securities in the United States unless the offering has been registered with the SEC or an exemption from registration is available. For more information about exempt offerings I recommend you look at this article on the SEC’s website.

Below is a repost of an article from Investment News that highlights some of the challenges for individual investors from these investments, and for the firms that offer them.

Sales of Unregistered Securities are a Growing Problem That’s Harming Investors — and the Industry

By Bruce Kelly

To an investor, Castleberry Financial Services Group’s promise of up to a 12.2% annual yield on the alternative investment fund it was selling might have seemed awfully tempting. So might the assurance that your principal would be insured and bonded by well-known insurance companies CNA Financial Corp. and Chubb Group.

In promotional materials, Castleberry claimed to have invested almost $800 million in local South Florida companies and to have a portfolio of real estate holdings that was generating $2.8 million in rental income annually.

But in late February, the Securities and Exchange Commission went into court to shut the company down, claiming it was all a fraud, including the involvement of CNA and Chubb.

Before the SEC acted, though, it said that Castleberry had managed to raise $3.6 million from investors, some of which was used to pay the personal expenses of its principals. Other funds were transferred to family members or other businesses the principals controlled, according to the SEC.

By all indications, the marketplace for all types of private, unregistered securities, including private placements sold to wealthy investors and institutions, is thriving. But what’s growing alongside this legitimate, if risky, market is a seedy side of the financial advice industry. Investment funds promising above-market returns that employ networks of brokers, former brokers, insurance agents or others lurking on the fringes of the industry to sell their investments are taking advantage of unsuspecting investors.

Add in the ability to offer private securities over the internet and solicit clients via social media, and unregistered, private securities being sold to less-than-wealthy investors, many of them senior citizens, are becoming increasingly dangerous. Fraudulent securities are damaging the reputation of the legitimate financial advice industry,​ and the industry itself might serve as the best solution to safeguarding the investing public.

“I’m seeing more of it:​ the spike in the sale of nontraditional investments,” said David Chase, a former SEC staff attorney who’s now in private practice and based in South Florida.

Sales soar

The proliferation of potentially fraudulent schemes comes at a time when the sale of legitimate private securities, which are exempt from having to be registered if they meet certain SEC guidelines, has taken off. While the annual amount of public stock offerings has remained relatively steady over the past decade, the sale of new private stock offerings has soared.

The most popular of these, known as Regulation D offerings, have more than doubled, from 18,295 in 2009 to 37,785 in 2017. Those deals, along with other types of private offerings, raised a total of $3 trillion in 2017.

Brokers and advisers can sell private, unregistered shares to only the wealthiest clients; investors need a net worth of $1 million or an annual individual income of $200,000 to buy in. But the public disclosure is negligible, making the securities opaque, some sources said, and that is hazardous.

The game plan of the fraudulent unregistered securities schemes currently roiling the investment advice market is simple. An investment manager claims to have an alternative investment to the stock market that beats the return on bonds or bank deposits. The investments are heavily marketed with investment seminars, dinners, and ads on radio and in local newspapers.

James Park, securities professor at UCLA, said the internet is giving the promoters one more outlet to sell their fraudulent investments.

“It’s now possible to get investors from everywhere,” he said. “In the old days, brokers would have to call up people to convince them to invest or put on a road show. Now it’s normalized with online platforms.”

In one of the largest recent cases,​ the SEC said the owners of Woodbridge Securities raised $1.2 billion over a five-year period by claiming they were selling loans to real estate developers.Source: North American Securities Administrators Association

Promising returns of 10%, the scheme reeled in 8,400 investors, many of them senior citizens, with the help of a network made up mostly of insurance agents and former stock brokers, according to the regulator. Woodbridge’s owners kept the scam going, the SEC said, by using money from new investors to pay off old investors — a classic Ponzi scheme.

Without admitting or denying the allegations, Woodbridge and its former CEO Robert Shapiro settled with the SEC for $1 billion in disgorgement and fines. Ryan O’Quinn, a lawyer for Mr. Shapiro, did not return a call seeking comment.

Beyond FINRA’s reach

One of the reasons these cons take time to detect is because the agents selling them mostly work outside the supervision of licensed broker-dealers, who are under the purview of the Financial Industry Regulatory Authority Inc. This gives the fraud ample time to flower before the SEC or a state regulator gets a complaint from an investor, investigates and shuts it down.

“The largest Ponzi schemes in general are those that have tapped into a very successful and productive line of independent sales agents who typically have long-standing relationships with clients,” Mr. Chase said. “They sell the deal, and clients get defrauded.”

The SEC did a better job of shutting down what it said was a fraud in the case of Castleberry Financial Services Group after only a year in business. In February, the SEC was granted a temporary restraining order and temporary asset freeze against Castleberry and its principals.

​ Among other allegations, the SEC said the firm’s president, T. Jonathon Turner, formerly known as Jon Barri Brothers, had falsely claimed to have had extensive finance industry experience, an MBA degree and a law degree, while concealing that he had served 18 years in prison for multiple fraud, theft and forgery felonies.

Attorneys for Castleberry Financial and its executives did not return calls seeking comment.

State enforcement

In 2017, state regulators reported that enforcement actions against unregistered brokers and salespeople increased at a faster pace than actions taken against registered individuals. That means the risk from salespeople on the fringes of the financial advice industry is growing. And they are the type of people who often sell scams that are being marketed as unregistered securities.

“[The] enforcement survey reflects a large increase in enforcement actions against unregistered individuals and firms,” according to an October 2018 report from the North American Securities Administrators Association. Members of the group reported actions in 2017 against 675 unregistered individuals and firms — an increase of 24% over the prior year — and 647 registered individuals and firms — a 9% increase.

“The surge in cases against unregistered actors reversed a two-year trend in which registered individuals and firms in the securities industry, broker-dealers and investment advisers, had constituted the majority of respondents in state enforcement actions,” according to NASAA.

Perhaps the poster boy for selling phony unregistered securities is Barry Kornfeld, a leading seller of the Woodbridge Ponzi scheme.

The SEC barred Mr. Kornfeld from working as a broker in 2009. Regardless, he continued to sell private securities; he and his wife allegedly solicited investors at seminars and a “conservative retirement and income planning class” they taught at a Florida university, according to an SEC complaint.

From 2014 to 2017, he and his wife received $3.7 million in commissions after selling more than $60 million of the Woodbridge private securities, according to the commission. Mr. Kornfeld reached a settlement in January with the SEC, agreeing to be barred for a second time from the securities industry. Robert Harris, a lawyer for Mr. Kornfeld, did not return a call seeking comment.

Registered reps involved

Unregistered reps aren’t the only ones selling fraudulent securities. Registered reps working at broker-dealers also are involved.

“We’re starting to see more sophisticated means for registered reps within the broker-dealer space to get investors to invest in private securities,” Thomas Drogan, senior vice president at Finra, said in testimony last year about investor fraud before the SEC’s Investor Advisory Committee. “The challenge in that space has been reps encouraging their customers, for example, to send money from their brokerage account to their bank account. And once the money gets to the bank account, instructing the customer to then send the money to the individual reps’ outside business activity. This creates a problem. This creates a very big challenge for broker-dealers to conduct surveillance on.”

The practice, known as “selling away,” can be grounds for disciplinary action if the broker-dealer employing the broker has not approved the broker’s actions. Unregistered firms and individual topped the list of disciplinary actions by state securities regulators in 2017.

Advisers at independent broker-dealers are commonly paid 7% commissions when selling private placements, clearly on the high end of a broker’s pay scale.

“What’s driving this?” asked Adam Gana, a plaintiff’s attorney. “It’s commissions, commissions, commissions. Brokers think they can get away with selling whatever they want on the side.”

Even though these dubious private securities are creating havoc for investors and the financial advice industry, regulators may soon change the rules about how private securities transactions are supervised.

Simplify supervision?

Last year, Finra proposed rule changes that are intended to simplify how broker-dealers supervise a hybrid rep’s outside business activity and sale of private securities. The new rule focuses on the rep’s RIA firm and decreases some of the responsibility the broker-dealer has to watch over that separate line of business. It would cut costs for the firm and the broker. But some think these changes could prove dangerous.

William Galvin, secretary of the Commonwealth of Massachusetts and the most feared regulator in the securities industry, does not care for the Finra rule proposal.

“Finra claims that the proposed rule will strengthen investor protections, but it is not at all clear how investors will be protected by the removal of supervisory oversight,” Mr. Galvin wrote in a comment letter last April about the proposed rule. “The absence of proper oversight of outside business activities will increase the risk of fraud and abuse.”

Can financial advisers and the financial advice industry do anything to contain this problem?

Local investment advisers are often the best cops on the beat for detecting such frauds. Their knowledge often comes from clients who are being pitched such deals at “free” steak dinners that are provided to get them in the door for a presentation.

Advisers have the responsibility to report a suspicious private securities deal to their firm, said Mr. Chase, the former SEC attorney.

“If brokers get wind of these types of deals, they’ve got to go to the broker-dealer’s compliance department and report to the SEC or Finra,” he said. “They have the ability and obligation to report. There’s nothing wrong with putting these suspicious deals in front of regulators.”