UTAH FRAUD BLOG

A discussion of investment scams and how they affect people in Utah

UTAH FRAUD BLOG

Category Archives: Whistleblowers

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.

Did you send me a letter? Call me!

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I know this is an unusual post but someone recently sent me a copy of an unsigned whistleblower letter to the SEC.  This post is for that person:

To the person who sent me an unsigned letter involving a company with the initials TEG or EA (I don’t want to identify the company here) please call me or email me immediately.  I can help you!

You have a very interesting whistleblower case, but it appears from your letter that you are still working with the company which is the subject of your report.  Understandably, you are concerned about protecting your identity and your job.  I get it.

The good news is that the SEC’s whistleblower rules provide attorneys with powerful ways to protect your identity, and from retaliation by the company – but there is a catch.

In order to submit a tip submit anonymously you must have an attorney represent you in connection with your submission.  For my whistleblower clients I typically prepare a lengthy submission with a detailed description of the illegal conduct and the statutes that have been violated, and then I transmit it to the SEC on their behalf.

In some cases my clients prefer to remain anonymous.  In those situations my client’s name does not appear on the submission and remains unknown to the SEC staff – and to the company.  The identity of the whistleblower is known only to me and will be protected from disclosure by the attorney-client privilege.

And if the company eventually figures out who you are I can help protect you from retaliation.  The law is clear: employers may not discharge, demote, suspend, harass, or in any way discriminate against you for providing information to the SEC under the whistleblower program, or assisting in any investigation. In fact, retaliation against a whistleblower will likely lead to a separate enforcement action by the SEC against a company and a civil lawsuit (filed by me).  Also, under the Sarbanes-Oxley Act, you may be entitled to file a complaint with the U.S. Department of Labor if you are retaliated against for reporting possible securities law violations.  We can help with that too.

The good news is that individuals who provide original information that leads to an SEC enforcement action with $1,000,000 in fines and penalties will likely qualify for an award.  Awards are between 10% and 30% of the money collected by the SEC – and if the fraud is significant the numbers can be huge.   The SEC’s Office of the Whistleblower recently announced that it has paid a record award of nearly $50 million to two whistleblowers, and a third whistleblower was paid more than $33 million.

There are significant benefits to whistleblowers, so you absolutely want to be in a position to apply for an award.  But you have not done enough to qualify for a whistleblower award at this point.  More needs to be done.

So please, call me!

Mark Pugsley

Direct: 801-323-3380

Email

 

A New Podcast Interview

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For those who are interested in the intersection between the LDS Faith and the epidemic of affinity fraud and Ponzi schemes in Utah and the LDS community worldwide,  take a listen to this podcast in which I was interviewed by the brilliant scholar Gina Colvin who manages the A Thoughtful Faith Podcast.  This was a fascinating and wide ranging interview that was quite enjoyable for me!

A warning to those with extra sensitivity on issues relating to the LDS Church:  This discussion is not particularly faith affirming or promoting and includes some criticism of the church and its policies.

267: The Church of Jesus Christ of Latter-day Saints and Affinity Fraud: Mark Pugsley

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Mark Pugsley is a lawyer in Salt Lake City Utah who specializes in recovering money lost by investors due to bad advice or misconduct.  He has represented victims of investment fraud and unsuitable investment recommendations in civil litigation, whistleblower cases, and receivership (claw back) cases for over twenty years.

Mark reports that Affinity Fraud is a big problem in the Church of Jesus Christ of Latter-day Saints community and he’s repeatedly called on leaders of the LDS Church to be more proactive in warning church members that they need to carefully evaluate investment opportunities on their merits, regardless of who is pitching them.

Mark hosts the Utah Securities Fraud website which can be found and contains all of the latest on investment fraud cases in Utah.

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The Deseret News’ Three Part Series on Affinity Fraud in Utah

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hotspotsMy friend Dennis Romboy is a great reporter over at the Deseret News who put together a very detailed two-part story on affinity fraud that was published over the weekend.

Part One of the series was called “Utah’s fraud ‘epidemic’: Victims share anger, embarrassment, hurt” and provided the details of how a number of Utahn’s have been victimized by individuals in their community.  Here are some interesting takeaways from the article:

  • FBI supervisory special agent Mike Pickett, who heads the white-collar unit in the Salt Lake field office, estimates the annual dollar amount of fraud in Utah now exceeds $2 billion.
  • Utah Attorney General said affinity fraud is “rampant” in Utah. He has also used the word “epidemic” to describe what’s happening in the state, and that is despite aggressive efforts to prosecute criminals and educate an unsuspecting public.
  • So far in 2016, federal criminal fraud cases have totaled $59.3 million in losses, according to the U.S. Attorney’s Office.
  • Utah is in the top five in terms of investigations, indictments, prosecutions and sentences for investment fraud.

A number of the individuals featured in this story are victims of the Thomas Andrews scam that was detailed in my prior post called “A Shocking Story of A Small Town Fraud.”  I applaud these individuals for their bravery in publicly talking about what happened to them in the hope that some people will read the story and avoid making the same mistakes.

Part Two of the series was about how to protect yourself from being defrauded.  The article lists a number of ways to protect yourself, including the following “Red flag warnings of fraud”:

  • If it sounds too good to be true, it is.
  • Guaranteed returns aren’t. Every investment carries some risk.
  • Beauty isn’t everything. Don’t be fooled by slick websites.
  • Pressure to send money RIGHT NOW.

The article quotes me a number of times, including “Pugsley has succinct advice for anyone who receives an offer that mentions religion. ‘If someone brings up the church in the context of an investment pitch, then that’s the end of the discussion and you leave the room because people try to conflate the two,’ Pugsley said. ‘There should be no connection between the church and investments. Period.'”

To round it all up the Editorial Board of the newspaper published an opinion on the need to “trust but verify” that I thought was worth reproducing here:

In our opinion: Utah must ‘be trusting but verify’ regarding affinity fraud

The bucolic land of eastern Ohio is home to sizable pockets of the Amish community. Known for their collective ethos, these tight-knit religious cooperatives thrive on high levels of trust and social cohesion. Yet, the same trust that produces a remarkable culture of burden sharing can be exploited to perpetrate fraud.

In 2012, Monroe L. Beachy, a trusted name within the Amish community, was sent to prison for orchestrating a scheme that defrauded some 2,700 investors, many of them friends and neighbors.

Of course, the Amish are hardly the only religious group that’s vulnerable. As the Deseret News reported in a two-part series this week on affinity fraud: “Bernie Maddoff’s $20 billion fraud targeted wealthy Jewish people in Florida and Israel. Allen Stanford went after Southern Baptists before his $7 billion empire fell.” And, according to the Economist, the state with the most affinity fraud per capita is thought to be Utah, where members of The Church of Jesus Christ of Latter-day Saints comprise some 60 percent of the population.

The common theme is communities with high levels of trust are particularly vulnerable to fraud. The solution then is a heightened scrutiny when mixing financial and religious relationship. Although there is unquestionably a role to play for government in preventing and punishing fraud, individual consumers must also take responsibility for how they spend their money.

As Utah Governor Gary Herbert told the Economist: “be trusting but verify.”

There are a variety of things consumers can do to fortify against potential affinity fraud. As noted, for starters individuals can exercise healthy dubiety, especially when an opportunity sounds too good to be true (spoiler: it probably is). Yet, this is easier said than done. The most effective schemes, for example, do not make extravagant claims. Bernie Maddoff was so successful because his “returns” were relatively modest, making his fraud more convincing.

As with Maddoff’s victims, in Utah there are many highly educated and discerning individuals who have been taken in. Thus, it’s important to look beyond the facade of an investment company to determine its validity, and be doubly cautious about mixing church and financial relationships. There is no substitute for doing your homework instead of relying on the word of someone you trust in other settings. Keeping these principles in mind can protect consumers from deceitful investment opportunities claimed by people they know.

There have always been those who seek gain at the cost of others. Yet, in a hyper-competitive economy with strong cultural status expectations, a heightened temptation may exist to cut corners and profit at the expense of others. In such an environment, it’s incumbent on individuals of sound mind — as well as governments and community leaders — to guard against fraud.

After all, without willing investors, affinity fraud is impossible.

Copyright © 2016 by Mark W. Pugsley.  All rights reserved.