Category Archives: Utah Fraud Issues

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.

Utah’s Little-Used Whistleblower Law Needs an Update

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Utah is one of only two states in the United States that has a whistleblower act (Indiana is the other). Utah’s statute was written and passed by a young ambitious politician named Ben McAdams in 2011. Ben asked me to assist with the drafting and to provide testimony in support, which I gladly did. We hoped at the time that this new statute would provide powerful incentives for whistleblowers to come forward and help combat Utah’s unusually high Ponzi scheme problem. And that it would be a model for other states to follow.

The statute passed easily, but unfortunately other states have not followed suit. Making matters worse, Utah’s Whistleblower Act has never really been used much — they have only paid out one award so far. I can personally attest to the fact that there have been many applications for whistleblower awards filed with the Division of Securities (because I have filed a bunch of them), so why haven’t they paid out more awards?

Paying big awards with a press conference would be a great way to publicize this little-known program. Paying awards will incentivize people with knowledge of fraud to file whistleblower tips, which would stop more fraudulent schemes and put more fraudsters in prison. So why haven’t they done that?

I actually have no idea.

Whistleblower Programs are a Good Thing

I think it is fairly noncontroversial for me to say that whistleblower laws are a good way to expose and stop fraudsters. They provide financial incentives to individuals with knowledge of fraud to report that knowledge to state or federal securities (and tax) regulators.

Whistleblowing can be really bad for your career and can even put you in physical danger, so understandably people are not terribly excited about sticking their neck out. But the prospect of receiving a financial award can change that calculus in a big way. These programs really do work!

The SEC’s Whistleblower Program was created by Congress on July 21, 2010 and can be found in Section 922 of the Dodd-Frank Act.  In its most recent report to Congress, the SEC reported that since the program’s inception they have imposed over $2 billion in total monetary sanctions as a result of whistleblower reports, of which almost $500 million has been returned to harmed investors.

In 2019, the SEC received its second largest number of whistleblower tips ever and paid out its third largest award to date – $37 million. The SEC’s Office of the Whistleblower paid out a $50 million award in March 2018 and a $39 million award in September 2018. Clearly, massive whistleblower awards like that provide a powerful incentive for those with knowledge of fraud to come forward.

The CFTC also has a very successful whistleblower program. In its 2019 report to Congress the CFTC reported that since the inception of its whistleblower program it has issued 14 awards totaling approximately $100 million, and that enforcement actions initiated as a result of those tips have let to sanctions totaling more than $800 million.

The IRS whistleblower program has also paid out millions in awards – from billions in collections. Since 2007, the IRS Whistleblower Office has paid out over $931.7 million based on the collection of $5.7 billion in additional taxes. In 2019 alone the IRS handed out 181 awards totaling $120,305,278. According to IRS whistleblower expert (and friend) Dean Zerbe the IRS program has been very successful:

“For all the talk that fills Washington about making sure people pay their fair share, this little program of awarding whistleblowers … has punched far above its weight in terms of successfully going after big-time tax cheats.  Any country (or state) that wants to get serious about tax evasion should take note.”

IRS Reports Ten-Fold Increase in Tax Whistleblower Awards: $312 Million, Forbes Magazine

How a Whistleblower Stopped the Rust Rare Coin Ponzi Scheme

Utah’s largest Ponzi scheme, Rust Rare Coin (RRC), would still be ongoing today if not for a brave whistleblower who was an employee at the company, and an investor. He stumbled upon information that led him to be highly skeptical of the outrageously high profit claims that were being made by RRC’s owner Gaylen Rust and began to investigate.

The whistleblower’s suspicions grew as he observed unusual business activities and the total lack of financial controls RRC had.  What began as observations of odd and unusual business practices quickly let to serious concerns about outright fraud.  By early 2018 the whistleblower concluded that the RRC businesses were operating fraudulently, that investor money was being commingled with other company funds, and that Gaylen Rust was likely running a massive a Ponzi scheme. 

Once he became convinced that the company was a scam he reported his concerns to the FBI and began meeting with the state and federal securities regulators. Eventually the SEC, CFTC and State of Utah filed coordinated complaints, froze all of RRC’s assets and shut the whole scheme down.

There were at least 430 victims of the RRC Ponzi, and their collective losses were at least $200 million. But it could have been much worse if not for the actions of this brave whistleblower. The court-appointed receiver Jonathan Hafen is now in the process of trying to unwind the whole mess and return money to the victims.

NOTE: I know this story because the CFTC filed a very detailed declaration from the whistleblower with their complaint.

NASAA’s Model Whistleblower Act

Because of the demonstrated success of the SEC, CFTC and IRS whistleblower programs the North American Securities Administrators Association (NASAA), which is comprised of state securities regulators in all fifty states, seems to have decided that more states should follow Utah’s lead.

They just released a Model Whistleblower Act, which is modeled on Utah’s law and has some nice improvements. Thomas Brady, Director of the Utah Division of Securities, tells me that he was involved in the drafting process.

Many of the provisions are based on Utah’s statute:

  • The Model Act creates a civil cause of action for a whistleblower who is retaliated against with powerful remedies including reinstatement, two times back pay with interest, actual damages, litigation costs, or “any combination of these remedies.” Utah Code Ann. § 61-1-105(5); MWA § 9-6
  • The Model Act provides that rights and remedies contained in the act cannot be waived contractually. Utah Code Ann. §61-1-108(2); MWA §9-9
  • The Model Act provides that the regulator cannot disclose information that could reveal the identity of the whistleblower. Utah Code Ann. §61-1-103(2)(a). MWA § 9-7

However, the NASAA update also includes some much-needed protections that are not currently included in the Utah law, including the following:

  • A specific prohibition on retaliatory behavior, including terminating, discharging, demoting, suspending, threatening, or harassing a whistleblower. MWA § 9-1.
  • A 10 year statute of limitations for a claim against an employer for retaliatory behavior. MWA §9-5. (Utah’s is currently only 4 years)
  • A provision that employee non-disclosure (NDA) or confidentiality agreements cannot be used to prevent or discourage communications with the securities regulator about possible securities law violations. MWA §9-8.

I think that all states should seriously consider enacting this model statute. NASAA’s Model Whistleblower Act provides a robust framework for protecting whistleblowers, and substantial financial incentives for them to come forward.

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

How to Blow the Whistle on Bank Fraud

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The Federal Government offers potentially significant rewards to whistleblowers who provide information to the government that helps protect financial institutions by “deterring would-be criminals from including financial institutions in their schemes.” United States v. Serpico, 320 F.3d 691, 694-95 (7th Cir. 2003).

The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the Financial Institutions Anti-Fraud Enforcement Act (FIAFEA) enable the Attorney General to investigate and bring a civil suit against a perpetrator for criminal conduct which “affect[s] a depository institution insured by the Federal Deposit Insurance Corporation or any other agency or entity of the United States.” 12 U.S.C. § 4202(2).

Whistleblowers who provide information to the government that leads to a successful investigation and prosecution could be eligible to receive an award of up to $1.6 million. FIRREA reports can involve any of the following types of conduct involving financial institutions:

  • Giving corrupt gifts, offers, or promises
  • Stealing, embezzling, or misapplying by bank officer or employee with the willful with intent to injure the bank
  • Making of false entries, reports, or transactions (including FDIC transactions)
  • Making false statements for loan and credit applications, renewals and discounts, or crop insurance
  • Fraudulently obtaining loans or credit through false pretenses, representations, or promises
  • Making false statements, entries, overvaluation of securities, embezzlement, concealment, or misrepresentations
  • Making false, fictitious, or fraudulent claims to the Government
  • Concealing assets from a conservator, receiver, or liquidating agent
  • Conducting mail or wire fraud

This includes conduct where the financial institution is either the victim or perpetrator of the fraud. See Paul Lawrence, Whistleblower Cases Involving Securities and Financial Fraud, American Association for Justice Annual 188, (2012).

The fraud is reportable if it happened in the last ten years.

To be eligible for a reward, your report must lead the government to recover money. Whistleblowers get 20-30% of the first million dollars recovered, 10-20% of the next four million dollars recovered, and 5-10% of the last five million. There is a maximum bounty of 16% of 10 million – or $1.6 million.

In addition, the Department of Justice may award money to a whistleblower when there is either a criminal conviction or where the government is able to acquire funds or assets that were based in whole or in part on the information you provide.

HOW TO SUBMIT YOUR CLAIM

To submit a whistleblower claim, you must file a “Declaration of Violation,” under oath, which explains the fraud in detail. This declaration must contain specific facts regarding the fraud, the basis for that knowledge, and at least one new fact that was unknown to the government. This declaration cannot be based on information that has been publicly disclosed, unless you are the original source of the public information. During the investigation, the declaration you submit will remain confidential.

Do you think you have information that might qualify for an award? Contact our legal team to help you navigate this complex process and ensure that your claims are handled correctly.

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.

Discussion of Investment Fraud in Utah on KSL’s Sunday Edition with Doug Wright

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Editor’s note: I was interviewed on KSL’s Sunday Edition with Doug Wright last week. The discussion about Ponzi Schemes and affinity fraud in Utah happens at 8:18. I appreciate KSL Television’s willingness to engage in a frank discussion about why affinity fraud is a particularly vexing problem here in Utah, and to help get the word out on how to prevent these scams.

Religious Freedom, Treasures of the Spike 150, and Avoid Becoming a Victim of a Ponzi Scheme