Editor's note: This is the second in a two-day look at the ongoing problem of affinity fraud in Utah, and the push for solutions.
SALT LAKE CITY — Nearly everyone who loses money in a scam says they missed red flags that could have saved them from being taken for a ride.
Many put their trust in a broker or financial adviser — someone they often have a personal relationship with — rather than carefully scrutinizing the offer or investment. They fail to do even a simply Google search to see what might pop up.
"You look back in hindsight and think how you should have been a whole lot smarter," said Suzanne Rengers, who along with her father lost more than $50,000 to a man they considered a friend.
But those signs are sometimes hard for people to see, especially when they're dealing with someone they believe in and who promises to make them money.
"They are silver-tongued devils," says Utah U.S. Attorney John Huber. "Utah fraudsters are pretty good at what they do."
Affinity fraud, particularly among members of The Church of Jesus Christ of Latter-day Saints, is rampant in Utah.
But any religious or community group could be targeted. 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.
"It really makes me angry, frankly," said Keith Woodwell, director of the Utah Division of Securities.
"It's one thing to steal people's money. But when you're doing it through affinity fraud, to me there's another level," he said. "You're not only damaging their finances, you're damaging their faith in their fellow human beings."
The reason it works is because people want to believe that others who they think share their same views, beliefs or faith will have their best interests at heart, he said.
Those close-knit relationships also hinder authorities' ability to root out fraud.
The inner circle of an affinity fraud is very difficult for law enforcement to penetrate because unsuspecting investors place such a loyal trust in the perpetrators, said Richard Best, the U.S. Securities and Exchange Commission's regional director in Salt Lake City.
"Even when red flags are apparent, it's like they don't want to believe something bad is happening and don't report it to law enforcement," he said.
Scams involving foreign currency trading, real estate, commodities, gold and advance fees have flourished in Utah at one time or another. State investigators are now focused on unlicensed financial advisers who dole out investments to buy or sell, or roll over an account.
The internet is the new frontier.
"We're seeing an evolution in traditional Ponzi schemes spreading from clicks of the mouse instead of by word of mouth," Best said.
The SEC recently went after a Murray-based company called Traffic Monsoon. Charles Scoville allegedly corralled 162,000 investors worldwide for his internet traffic exchange and pay-per-click program.
Best said the company created the illusion that it was a successful advertising business rather than merely robbing Peter to pay Paul.
Types of fraud
- Ponzi schemes: paying off initial investors with money from new investors
Oil and gas scams: opportunities to "strike it rich" are often frauds
Promissory notes: investors agree to loan money to a company for a period of time exchanged for a fixed return
Prime bank fraud: using investor funds to buy and trade prime bank financial instruments or other high-yield investments on clandestine overseas markets to generate huge returns.
Federal and state authorities say they devote a lot of resources to fight white-collar fraud. The U.S. Attorney's Office, FBI, SEC, Utah Attorney General's Office and Utah Division of Securities meet regularly to collaborate on investigations and talk about coming scams or trends.
Utah Attorney General Sean Reyes said it takes a cooperative effort among the various government agencies, private entities and the public to combat the problem.
Criminals are preying on what is good about Utah and twisting it and taking advantage of it, according to Woodwell. But, he said, that isn't residents' fault.
"It's a good thing that we have a culture where we want to know our neighbors and we tend to be trusting of our neighbors. There's nothing wrong with that," he said.
"But when it comes to our money and our investments, sadly I think we have to have a healthy dose of skepticism because there are people who want to take financial advantage of us."
So, what can people do to protect themselves from affinity fraud?
The old saying that if it sounds too good to be true, it probably is should ring in potential investors' heads before they open their bank accounts, said Mark Pugsley, a Salt Lake attorney who represents fraud victims in civil lawsuits.
Con artists promise unrealistic and unsustainable returns. They offer big money on "risk-free" investments. Securities officials say there's no such thing.
"If they're offering ridiculous amounts of money, run. If they're not giving you any paperwork, run. If you can't see their financials, done. If you can't verify that they exist with the division of securities, that doesn't mean that they're good people. It just means they haven't been caught yet."
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.
People hand over their nest eggs not based on an analysis of the merits of the actual investment. They don't vet the business or offering. Instead, it's based on the relationship with the person: We go to church together. She is a friend of a friend. Others in the community have invested with him.
"It's crazy to me how many people will write a $200,000 check from their life savings to some guy and get nothing, no documents, no investment materials, no PPM (private placement memorandum), no stock certificate," Pugsley said.
Con artists will often try to bring in a local leader such as a pastor or rabbi, someone who carries weight in the community. They will even make sure that person gets or at least appears to get a return on the investment to perpetuate the fraud.
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."
Fraudsters, he said, will use terms like "blessings" instead of "benefits" when talking about returns on an investment. They'll talk about success coming from righteous living.
A number of federal, state and local agencies have resources to educate potential investors. They are talking about reviving Fraud College, a conference that teaches people how fraudsters operate. The state securities division also does presentations throughout the year.
Law enforcement officers have also taken steps to get tough on fraud, though it is difficult to root out and investigations move at a glacial pace because of the complex schemes and winding paper trails.
And as cases crawl along, the legal clock ticks.
Securities or investment fraud has a five-year statute of limitations in both the federal and state criminal justice systems. State administrative actions can be filed within 10 years.
"The good criminals are hard to catch. They layer their conspiracy, so it's hard to figure out what they're doing. We don't have trouble catching the dumb ones," said Huber, who has more attorneys assigned to white-collar crime than any section in the U.S. Attorney's Office.
But victims, too, can hinder an investigation. Some hesitate to come forward or cooperate. Some get mad when authorities step in because they cling to the hope of getting their money back and see investigators as ruining any chance of that.
Even witnesses who agree to wear a wire to get the suspected fraudster to spill the beans are ready to invest more because they continue to trust the person, said FBI supervisor special agent Mike Pickett, who heads the white-collar crime unit in the Salt Lake field office.
"These guys are great used car salesmen," he said.
The types of schemes change periodically.
Six or eight years ago, foreign currency scams, particularly with the Iraqi dinar, were all the rage. Now in vogue are advance fee schemes where a victim pays money to someone in anticipation of receiving something of greater value, but it doesn't come. Unlicensed financial advisers giving investment advice are common. Scams involving real estate and gold are a constant.
Greed drives scammers, but there can be more behind it than that. For some it's a sense of power. Others like the thrill of pulling off a con.
"I think the one thing that is consistent with people who perpetrate these kinds of crimes is they tend to be sociopaths in the clinical sense, in the sense that they don’t really feel empathy for their victims," Woodwell said. "You're not killing or raping or maiming people, but financially you're doing serious damage."
It's easier to keep financial scams going when the economy is doing well. Scammers can recruit new investors and bring in new money to keep a Ponzi scheme running. When the economy dips and things get tight, investors want their money back.
And that's when regulatory agencies start getting complaints.
"If you're running a Ponzi scheme when the tide goes out, you see who is really naked," Woodwell said.
What can I do to avoid being scammed?
- Ask questions and check out the answers
Research the company before you invest
Know the salesperson
Never judge a person's integrity by how he or she sounds
Watch out for salespeople who prey on your fears
Be wary of unsolicited offers
Don't lose sight of your investments
Question why you cannot retrieve your principal or cash out your profits
Never be afraid to complain
Utah is the only state in the nation with a white-collar crime registry. The Utah Legislature created the online registry in 2015, and the Utah Attorney General's Office maintains it.
Similar to a sex offender registry, the website lists offenders' names, aliases, physical descriptions, mug shots and the crimes for which they were convicted. Those placed on the registry must be convicted of at least a second-degree felony count of a number of financial crimes, including securities fraud, theft by deception, insurance fraud, mortgage fraud, communications fraud and money laundering.
There are currently at least 200 people on the registry, and they will stay there for 10 years from conviction or a lifetime on a third conviction. Only those convicted in state court, not federal court, appear on the list. But Pickett, the FBI agent, said he would like to see it expanded to include federal criminals.
Reyes said it's difficult to measure how effective the registry is, but it provides another tool to at least warn potential investors whom to avoid.
Utah is also one of two states (Indiana is the other) with a program that offers a reward for information that leads to successful prosecution of securities fraud or other securities law violations. If the state collects at least $50,000 from an offender, the whistleblower may get up to 30 percent of the proceeds as a reward.
Lamond Syphus, a 38-year St. George financial adviser who suspected an 88-year-old widow might be the target of investment fraud, received the first whistleblower reward from the state securities division under the 5-year-old law in 2014.
Syphus met the woman after she had already invested $70,000 with Richard A. Loveday, a Canadian national living in Alpine. She told him she was getting a 14 percent return but he had left her no materials or business card. She talked about something offshore and a Las Vegas casino — all red flags to Syphus.
Syphus reported it to the state securities division, unaware of the whistleblower law. Investigators found that Loveday used the money for personal expenses and paid the woman $875 a month out of her own money.
The woman was initially upset with Syphus and refused to cooperate with investigators because she considered Loveday a friend. Loveday swindled another $30,000 from the woman in the meantime, including while she was recovering from a broken hip.
Eventually Syphus and the woman's daughter convinced her to talk to investigators. Loveday was convicted and deported to Canada.
Syphus, to his surprise, received a $15,000 check a couple of months later.
"I'd never heard of it before," he said of the whistleblower program. "For me, it was just a matter of doing the right thing."
Woodwell, who oversees the program, said the main benefit is that it encourages people to identify wrongdoing as it's happening, not after the fraud has occurred and recovering any money is unlikely.
The Securities and Exchange Commission has also had a whistleblower program since 2011. It has awarded more than $111 million to 34 whistleblowers nationwide.
LDS Church advice
The LDS Church has periodically cautioned members over the pulpit or through local congregations to be wary of financial scams.
The church sent a representative to speak at the Fraud College conference the state securities division put on in 2012.
Now retired church public affairs managing director Michael Otterson said at the conference that the church recognizes the problem and the harm it causes in the community. He called crimes that target those who are trusting, elderly and defenseless "reprehensible."
"As the threat of affinity and other fraud has surfaced in recent years, the church has increased its efforts to teach its members and to encourage them to live by sound financial principles, as well as to avoid the dangers of financial predators," he said.
In 2008, reports of fraud schemes and unwise investments prompted the church to counsel members to use prudence in managing their financial affairs.
"We are concerned that some church members ignore the oft-repeated direction to prepare and live within a budget, avoid consumer debt and to save against a time of need," according to a letter from the church's First Presidency.
"Consideration should also be given to investing wisely with responsible and established financial institutions. We are also concerned that there are those who use relationships of trust to promote risky or even fraudulent investment and business schemes."
At the church's April 2001 general conference, Elder M. Russell Ballard of the Quorum of the Twelve Apostles warned about members driving themselves into debt and seeking risky investments to make up for it.
"There are no shortcuts to financial security. There are no get-rich-quick schemes that work. Perhaps none need the principle of balance in their lives more than those who are driven toward accumulating 'things' in this world," Elder Ballard said.
"Do not trust your money to others without a thorough evaluation of any proposed investment. Our people have lost far too much money by trusting their assets to others."
Twitter: dennisromboy; DNewsCrimeTeam