In November 2018, the Securities and Exchange Commission filed a lawsuit against a local business and its owner, alleging a Ponzi scheme that defrauded friends, colleagues, and fellow church members out of at least $200 million. If the allegations are true, this is just the latest of many Ponzi schemes perpetrated in Utah based on bonds of trust – also known as affinity fraud.
What is Affinity Fraud?
Affinity fraud is a scam in which the perpetrator prays on members of identifiable groups, such as a religious organization. The perpetrator is, or claims to be, part of the identifiable group. The scam exploits the trust and relationships that exist within the group. Ponzi-related affinity fraud often uses new investor money to pay returns to earlier investors. The early investors often end up making money, which allows the scheme to appear legitimate and successful. Early investors who make money may then unknowingly perpetuate the fraud by persuading other individuals to invest with the perpetrator.
Utah and its Affinity Fraud History
Affinity fraud is particularly prevalent in Utah where members of the Church of Jesus Christ of Latter-day Saints, Utah’s predominant religion, are often victimized by perpetrators who exploit victims’ trust because they are, or claim to be, members of their church. For example, in February 2017, Dee Allen Randall of Fruit Heights, Utah, was sentenced to 30 years in prison for running a Ponzi scheme that defrauded investors out of $72 million. Randall used his position as a respected Latter-day Saint leader and teacher and used marketing materials designed to appeal to church members by “focusing heavily on the biblical concept of the ‘Abundant Life.’”
The State of Utah recognizes this widespread problem and is working to fight affinity fraud by establishing the Stop Fraud Utah campaign. Utah has a white-collar crime registry in which investors can search for names of convicted perpetrators in Utah.
Can I Recover Money if I’m a Victim?
Unfortunately, once a Ponzi scheme has been uncovered, there is rarely enough money or assets left to pay back all the investors. Although you could file a lawsuit against the perpetrator and get a court judgment, recovery of the judgment is unlikely.
Once a Ponzi scheme is discovered and civil or criminal action is taken against the perpetrator, the judge will select a “receiver” for the case. A receiver works under the direction of the court to attempt to “claw back” money that the Ponzi scheme paid to investors. If an investor made money in excess of his or her investment, he or she is considered a “winner” in the Ponzi scheme. The receiver will attempt to collect from the “winners” and equitably distribute funds to those who lost their full investment.
If you believe you’re a victim of a Ponzi scheme, you should file a complaint with the Utah Division of Securities.
How to Avoid Becoming a Victim
- Be skeptical. Be skeptical of anyone who tries to persuade you to give them large amounts of money. If someone makes any guarantee of a return, especially a high return, it is a red flag. All investments carry risk.
- Verify a license before you invest. An individual who sells securities must be licensed. Work with a licensed stock broker or financial investment advisor. Verify the license through FINRA’s Broker Check.
- Exercise due diligence. Research the individual and the company. Review the company’s financials. Hire an attorney to help you perform due diligence and ensure the investment is properly structured and complies with federal and state laws.
- Get it in writing. Always have proof of your investment in written form. Hiring an attorney to draft a contract will help protect you. Legitimate investments are almost always in writing.
- Don’t invest money with neighbors, friends, or fellow church members. Investing with a licensed broker or advisor is generally safer. Affinity fraud perpetrators are talented con artists who will exploit your trust and relationship to encourage you to invest with them.
If you believe you are a victim of affinity fraud or you want assistance exercising due diligence on an investment, contact Kesler & Rust.