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. 

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.