Broker Imposter Scams: Remember To Ask And Check

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Editor’s note: This is re-post of an investor alert that recently appeared on FINRA’s website. This is a good reminder of the need to “trust but verify” the credentials of your investment professional.

FINRA recently issued an investor alert on fraudsters impersonating FINRA executives, offering bogus investment “guarantees” to investors as part of an advance-fee scam. But regulators are not the only ones who need to worry about someone trying to steal their good name.

We are aware of a recent scheme that involved an unregistered individual impersonating a registered investment professional to lure in potential investors. This scammer created a fake version of a public FINRA BrokerCheck® report of a legitimate broker—picking an experienced broker with a spotless regulatory record.

The doctored BrokerCheck report was emailed to potential “clients” using the name and CRD number of a registered investment professional, and a company that is not registered as a broker-dealer with FINRA. The solicitation included other documentation and a request for investors to respond with a photo of their driver’s license and other personal information. Here are some of the red flags we spotted on the doctored report:

Broker Imposter Scams: Red Flags of Doctored BrokerCheck Report

Here are six tips to keep your money and personal information safe from these types of scams.

1. Go to the source. FINRA encourages investors to “ask and check” by using BrokerCheck before investing with an investment professional. Don’t assume that the information you receive in an investment pitch is legitimate. Go directly to the sources that collect the regulatory information to produce these reports, including FINRA’s BrokerCheck, the SEC’s Investment Adviser Public Disclosure, and state registration databases. You can search both professionals and firms not only by name, but also by their registration number—known as a CRD number.

2. Look for things that appear out of place. Compare whatever BrokerCheck report or other documentation you receive from an individual or firm soliciting your business with the real reports you obtain yourself from BrokerCheck or the sources in Tip 1. Be wary of typos, and look for differences in the reports. For instance, in a recent scam, the doctored information was in fonts that were different from fonts used in other parts of the report, items appeared to be pasted into the document, and the state of the branch office address was not included in the list of states where the individual was licensed.

3. Verify information with an internet search. Take a few moments to use a common search engine to type in the name of the individual who is soliciting your business and the firm name, and see what comes up. Does it match the information provided to you, including the contact information? If something doesn’t look right, do a little more digging, including a map search on the address or a reverse lookup on the phone number. Be sure to check all this information against a reliable source such as BrokerCheck. When scanning LinkedIn profiles, be aware that scammers often copy select information from a registered person’s LinkedIn profile to create the appearance of legitimacy.

4. Do not send money or personal information without verifying the recipient. In the scam described above, investors were asked to send a driver’s license photo and other personal information in response to an email solicitation. Don’t ever send money or personal information, such as your driver’s license, passport, social security number, date of birth, or bank account information, until you verify who contacted you, as described in Tip 3.

5. Beware of the use of personal contact information. Sometimes a scammer will ask you to send money or personal information to a personal (not firm) email address or to respond to phone numbers that are not listed as official firm contacts. One general rule all investors should follow: if you invest through an account at a financial firm, use BrokerCheck to verify that the firm is registered and send all deposits directly to the financial firm. If an individual pitches an investment opportunity that requires you to write a check directly to him or to a third party, proceed with caution.

6. Be alert to the red flags of fraud. Be cautious of guarantees, unregistered products, overly consistent or high returns, complex strategies, missing documentation, account discrepancies and pushy salespeople. The vast majority of investment professionals are trustworthy individuals, but there are always exceptions who might look to take advantage of your trust. Practice spotting the persuasion tactics that con artists use, and always exercise healthy skepticism. For instance, be wary of sales pitches that make exaggerated claims about performance. This is a red flag of fraud.

If you are suspicious about information you receive from an individual or firm soliciting your business, contact FINRA or another regulator BEFORE you send any personal or financial information. If you are an investment professional and have concerns that someone is using your name or information as part of a potential scam, contact your firm’s compliance department, and alert FINRA by calling our BrokerCheck hotline at (800) 289-9999, or emailing BrokerCheck@finra.org.

Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.

More Legal Trouble for Zane Jeppeson

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This is actually the third post I have written about a guy named Zane Jeppeson of Garland, Utah. My prior posts can be found here and here. Today’s update comes to us courtesy of The Leader out of Tremonton, Utah. Apparently Mr. Jeppeson is having a hard time getting his restitution paid and may go back to jail. Kudos to Judge Royal Hansen for keeping his feet to the fire.

Jeppesen granted more time to pay restitution

By Cari Doutre Leader County Editor Feb 13, 2019

Garland resident Zane Jeppesen has been given more time by a judge to pay restitution to victims in the amount of $488,830, extending his time to March 14, 2019. Jeppesen appeared before Third District Court Judge Royal Hansen on Thursday, Feb. 7, 2019, for an evidentiary hearing on one count of pattern of unlawful activity, a second degree felony.

On April 4, 2016, Jeppesen was charged with 11 counts of securities fraud, two counts of theft and one count of pattern of unlawful activity, all second-degree felonies. On July 7, 2017, Jeppesen entered into a plea deal with the state and plead guilty to one count of pattern of unlawful activity and the remaining charges were dismissed.

On Dec. 8, 2017, Jeppesen was sentenced to one to 15 years in the Utah State Prison but the term was suspended. Instead, he was sentenced to 30 days in jail, which he served. Jeppesen was also ordered by the judge to pay restitution to the investors in the previously mentioned cases in the amount of $488,830 within six months of his release, which would have been June 2018.

Jeppesen failed to make a court appearance on Sept. 28, 2018, an order to show cause. On Oct. 1, 2018, on an outstanding bench warrant issued by Third District Court in Salt Lake City. Jeppesen arrested and taken into custody in Box Elder County but was released later that day on a $25,000 cash only bail.

According to a probable cause document, from 2010 to 2014 Jeppesen raised approximately $555,000 from at least four investors and issued promissory notes to those investors. Jeppesen sold promissory notes on land in Saratoga Springs and Payson with the promise that the land was worth value and offered a promissory note and trust deed as security for the real estate development.

Court documents show that Jeppesen failed to tell these investors that he filed for bankruptcy in 2005 and was unable to pay back prior investors. The money from investors was spent on “Ponzi like payments to other investors” as well as transfers to family members, credit card payments, transfers to other bank accounts, electronic stores and bank fees.

The probable cause statement added that Jeppesen has never held a securities license and that Jeppesen’s company, Jeppesen Land and Property, has never been licensed or registered with the Utah Division of Securities.

Documents state that Jeppesen, in connection with the offer of sale of security, directly or indirectly, and made untrue statements or omitted facts in an act, practice or course of business which operated or would operate as fraud or deceit in violation of Utah state laws. The theft charges stem from Jeppesen’s allegedly obtaining or exercised unauthorized control over the property of another with a purpose to deprive them thereof.

This isn’t the first time Jeppesen has been charged with securities fraud. According to court documents Jeppesen was employed through Beverly Hills Development Corporation, a real estate development enterprise ran by Michael J. Fitzgerald of Utah County, from April 1998 to May 2004. In that time Jeppesen obtained a total of 134 Utah investors, many in Box Elder County, and raised approximately $8 million for Beverly Hills Development. During that time he was paid $986,563 in compensation from the company for his work raising investment funds.

There were at least 100 investors from Box Elder County, many of which from Tremonton and Garland that invested with Jeppesen before 2005. Investments ranged from as little as $380 to as much as $467,000.

In June 2018, the Utah Division of Securities of the Department of Commerce filed three different reports against Jeppesen, a Stipulation and Consent Order, an Order of Adjudication and a Findings of Fact, Conclusions of Law and Recommended Order, all highlighting Jeppesen’s pattern of securities fraud from six different investors starting in 2010 while adding two other incidents that left many Box Elder County residents out of millions of dollars.

According to these documents, the Division determined that Jeppesen, with Jeppesen Land and Properties, are subject to a $300,000 fine. In the stipulation and consent order, it states that JLP is a business entity that was incorporated in Feb. 2011, and is currently an active entity registered with the Utah Division of Corporations with LaDene M. Jeppesen, 92, (Jeppesen’s mother), listed as the registered agent and manager. Jeppesen Land and Properties has never been registered with the Division as an issuer of securities and found no records showing securities registration, exemption from registration or notice filing in any manner for JLP, according to these documents.

If he fails to make the payments to investors he may be sentenced to addition time in jail and/or prison. It has not been stated in court records if Jeppesen has made any restitution to victims.

Top Ten Ways To Avoid Losing Money In A Financial Scam*

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Every week Utah residents lose money by investing with friends, family or neighbors – people they knew and trusted. Investment fraud is a big problem here in Utah, largely because our close-knit communities are a prime target for “affinity fraud.”  Our state has a long history of financial scams and Ponzi schemes, many of which have been perpetrated by members of the LDS church on members of their ward or stake.  It’s heartbreaking.

I have seen people who borrowed money against their homes or liquidated retirement accounts in order to fund risky investments based on pitch by someone they trusted.  Unfortunately by the time they call me, the money is long gone – and so is the person who took the money. Because I specialize in helping people recover losses in investment fraud cases I often get asked for advice on how to avoid needing me.  So, at the risk of all my work drying up, here is my TOP TEN ways to avoid investing in a financial scam:

10. Slow down.  According to the Insider Monkey blog, many people invest after only hearing the pitch; watch out for promoters who try to commit you on the spot.  Don’t do it!  Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy.  Be very wary of aggressive sales pitches and deadlines.  Ask the hard questions before you hand over your money, not after.

9.  Do your homework.  Run a simple Google search on the company and its managers, or the individual.  If it involves a company, ask for a private placement memorandum and company financials.  Hire an attorney to evaluate the investment and help you perform due diligence.  Attorneys have access to court databases to look for lawsuits and bankruptcies.  Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved.

8. Hire an attorney.  Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up.  A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes.  Your lawyer can review the offering materials and help you understand what the risks are.  Hiring a good attorney up front is an investment in your investment.

7.  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.  Don’t do it!  If things go bad later, proper documentation will be critical to me in my efforts to get your money back.  The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.  (See number 8.) In any private investment opportunity you should receive a detailed lengthy disclosure document called a private placement memorandum (PPM).  Take the time to review it before you invest.  It contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things.  If the company soliciting your money has not prepared a PPM, that should be the end of your discussions with them.

6.  Beware of guarantees.  If anyone tells you that your investment is “guaranteed” that should cause some you concern.  All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back. Even if you are approached to loan money and get a promissory note that is usually still considered to be an investment, and such loans can be very risky if not properly secured.  If you are told that the loan or investment is “secured” hire an attorney to document the security interest and verify the collateral.  (See Number 8.)

5.  Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals.  This could be an article all by itself.  Generally, avoid anyone who credits a highly complex or secretive investing technique or touts unusual success.  Legitimate professionals should be able to explain clearly what they are doing and how they make money.  And if the individual is really making as much money with their strategy as they say they are, they shouldn’t need yours.  These types of “alternative” investments nearly always involve extremely high risk, despite what you are told.

4.  Work through licensed stock brokers or investment advisors.  Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell you the investment, which regulator issued that license and whether the license has ever been revoked or suspended.  A legitimate securities salesperson must be properly licensed under most circumstances.  If you have any questions contact the Utah Division of Securities at (801) 530-6600.

3.  Don’t invest with friends and neighbors.  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.

2.  Keep church out of investing.  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.

1.  If it sounds too good to be true it probably is.  If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out.  The fact that others may have been getting their promised returns does not mean you will.  All Ponzi Schemes eventually implode, and you may be left holding the bag.

Note:  I wrote this article for The Enterprise  and it was published in their July 2014 issue.  Because their content is only available to subscribers I am posting it here.

Copyright 2014 by Mark W. Pugsley.  All rights reserved.

*This article is intended to address private investments, not those made through a licensed stock broker or registered investment advisor.

Securities Arbitration—Should You Hire an Attorney?

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Note: this is a re-post of an excellent article that was published on January 3, 2019 in FINRA’s Alert Investor newsletter. The article was co-authored by FINRA staff and The PIABA Foundation.

The vast majority of interactions between investors and investment professionals are positive. However, sometimes the relationship doesn’t go as planned, and the situation can’t be resolved by communicating directly with your firm or broker. In such a situation, you may find yourself considering arbitration or mediation.

There are many factors to consider as you proceed down these paths, one of which is whether to hire an attorney to help you out.

An attorney that represents you during arbitration or mediation proceedings can provide experience, direction and advice. Brokerage firms are generally represented by an attorney in an arbitration proceeding, so even if you choose not to hire an attorney, there might be one representing the firm or individual on the other side.

Securities Arbitration Basics

Arbitration is similar to going to court, but is usually faster, cheaper and less complex than litigation. It is a formal alternative to litigation: two or more parties select a neutral third party, called an arbitrator, to resolve a dispute.

The arbitration process goes something like this. A FINRA arbitrator or panel (consisting of three arbitrators) will listen to the arguments set forth by the parties, study the testimonial or documentary evidence, and then render a decision. The arbitrator’s decision, called an award, is final and binding, and all parties must abide by the award. FINRA does not have an appeals process through which a party may challenge an award. However, under federal and state laws, there are limited grounds on which a court may hear a party’s motion to vacate an award.

The size of the claim will determine how the arbitration process works. Claims involving more than $100,000 require an in-person hearing decided by a panel of three arbitrators, with one chairing the hearing. Smaller claims up to $50,000 can be decided by a single arbitrator in one of three ways: a regular hearing where evidence is presented in person; a phone hearing that incorporates many aspects of a standard arbitration hearing; or a “paper” hearing where an arbitrator makes a decision based solely on the documents submitted.

To Hire or Not to Hire

FINRA’s Code of Arbitration Procedure states that parties are entitled to be represented by an attorney at any stage of the arbitration proceeding. Here are some things to consider when you are trying to decide whether to hire an attorney to represent you in securities arbitration or mediation.

  • The process governing arbitration proceedings will likely be unfamiliar to you. Hiring an attorney with experience in these matters might be a comfort to you and help you appropriately present your case to the arbitrators.
  • Arbitration can be faster, less expensive and more streamlined than litigation, but some arbitrations involve complex legal and regulatory issues or large claims for monetary damages. You might benefit from legal guidance if your case falls into these categories.
  • An attorney can provide guidance even before the arbitration process begins. An experienced attorney can assist aggrieved parties in determining whether they have a viable claim for arbitration. This can be critical so that parties do not waste money or time filing a case that does not have a good chance for success.
  • FINRA provides identical randomly-generated lists of proposed arbitrators to both parties, along with a detailed report on each arbitrator’s background. An attorney can help you evaluate which arbitrators might be a better fit for your case.
  • Parties to an arbitration can come to the forum with a lot of emotion about what has transpired to this point. An attorney can serve as a detached third-party representative and provide legal advice to help you meet your goals.
  • Speaking with an attorney is confidential and protected by attorney-client privilege. This means that your attorney is not allowed to discuss what you tell him or her with anyone else, and that statements you make will be kept between the two of you. Attorney-client privilege helps both parties better understand the strengths and weaknesses of the case and establishes a relationship of trust that can lead to better guidance and decision-making.
  • If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.

A word about non-attorney representatives or NARs. Although NAR firms are an alternative to representation by attorneys, NAR firms are not subject to the same professional rules or guidelines, nor are they subject to malpractice insurance requirements. Investors may also not be aware of the absence of these protections, and therefore may not properly evaluate the benefits and costs of representation by NAR firms.

Finding an Attorney

Whether you decide to engage an attorney or not, a good resource to consult is An Investor’s Guide to Securities Industry Disputes published by The PACE Law School Investor Rights Clinic.

If you decide hiring an attorney is the right choice for you, the first step to take is to locate qualified candidates. The Securities and Exchange Commission (SEC) offers these tips:

  • Consult with your own attorney, if you have one, about your situation and whether you would benefit by an attorney who specializes in securities arbitration or litigation.
  • Contact the American Bar Association and the Public Investors Arbitration Bar Association (PIABA). Both allow you to search their member attorney directories for someone to represent you in your area. PIABA members have specific experience representing investors in disputes with the securities industry.

You can also check with your state, county or city bar associations.

If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.

Ask These Questions

Picking the right attorney is a personal decision that is often unique to your own needs and preferences. It’s a good idea to interview more than one attorney—and ask the following questions:

Do you have experience representing investors in securities arbitrations? Experience matters. Representation by someone with specialized legal knowledge of the investments sold to you and the procedures that apply to the arbitration process are important. Ask how long the attorney has been in business and how many securities arbitration cases he or she has handled.

How will you represent my interests? Aggrieved investors commonly do not understand, or cannot articulate, the extent of their harm. A critical component to effective representation is your attorney’s ability to communicate to you, the opposing counsel and, ultimately, the arbitration panel any underlying problems with the investments or actions at issue. Your attorney should also be expected to articulate the regulatory standards your investment professional is held to, and how those standards were breached.

How are you paid? Attorneys are paid under different arrangements. Many attorneys who specialize in representing investors in securities arbitrations do so on a contingent fee basis. This means the attorney is willing to advance their time with the hope and expectation of recovering money from the investment firm or professional. Read the fee agreement presented by the attorney to make sure that you understand the terms.

Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.

The Falls Event Centers; A Financial Scam Targeting Medical Professionals

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Editor’s Note: This is an excerpt from a guest post that I wrote for The White Coat Investor, a fantastic website that provides financial tips and education to medical professionals.  

I have represented a number of doctors and dentists over the years in disputes with their stockbrokers and in Ponzi schemes and investment fraud cases.

My medical professional clients are typically intelligent and savvy with respect to managing their money, but because they are often too busy to dig into the details they can often be taken advantage of by unscrupulous investment advisors, and in some cases, they fall victim to fraud.
Below are a couple of war stories.  Of course, most investment professionals are good and well-qualified – but not all of them.  A keen intellect cannot substitute for taking the time to read the documents carefully.  The devil may really be in the details

The Falls Event Centers

Utah-based entrepreneur Steve Down had been pitching investments in The Falls Event Centers since 2011.  He raised approximately $120 million from more than 300 investors – the majority of whom are dentists throughout the United States.

On May 11, 2018 Down and his event centers were sued by the Securities and Exchange Commission for defrauding investors.

So why did so many dentists fall for this scheme?  How did he do it?
Steve Down is a gregarious 61-year-old promoter who billed himself as an “an innovative entrepreneur and successful business owner, is passionate about creating companies and providing jobs.”

One of Mr. Down’s companies was called CE Select, a continuing education provider for dentists.  According to the detailed complaint filed by the SEC, dentists attending CE Select seminars were pitched an investment in The Falls during their lunch break.

I honestly cannot figure out how he managed to make a pitch for a wedding reception center investment seem like a normal part of a dental continuing education seminar.  But I digress.

The investment was basically a hard-money loan to fund the purchase and construction of more event centers and was supposed to pay returns of 10 to 14% per year to investors.

Down’s investment pitch remained essentially the same for years. The SEC alleged that Down made the following representations to his captive audience of unsuspecting dentists:

  • The Falls had 8 profitable locations and was growing at a rapid pace,
  • The Falls would have 200 event centers by 2022
  • After The Falls had 12 centers, it would be able to obtain institutional loans to replace the hard money loans,
  • Many of the event centers were profitable even before they opened, because they were accepting event bookings before they opened, and continued to be profitable after they opened,
  • Each event center would earn gross revenues of $1 million per year and cover expenses of approximately $650,000, leaving a profit of approximately $350,000, or 35% of revenue, per year.
  • The 200 projected centers would bring in net income of $70 million per year.
  • The Falls would be worth $2.8 billion by the time it had 200 centers in 2022.

The problem, according to the SEC, is that many of these representations were false, and Down allegedly knew it.

The Falls’ own accounting records showed that the event centers had never been profitable.  Down also allegedly knew that his business model was unsustainable because of crippling debts owed to investors and mortgage holders.  But he nevertheless kept on pitching this “profitable” investment to dentists and other investors until the SEC finally shut him down.

Down did not admit or deny the allegations in the SEC’s complaint, but he and The Falls did consent to the entry of a final judgment permanently enjoining them from future violations of securities laws and Down paid a civil penalty of $150,000.  A final judgment was entered against Down and The Falls on May 11, 2018, by United States District Court Judge Jill Parrish.

Despite all this, according to an article in the local paper, Down planned to continue building his wedding center empire, and “The Falls will continue to conduct business as usual.”

But that won’t happen – The Falls filed for bankruptcy soon thereafter.

What do you think? Have you been a victim of investment fraud? Why do you think doctors often fall prey to fraudulent investments? Comment below!