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Avoid being a victim of securities fraud

Avoid being a victim of securities fraud

Estimated read time: 4-5 minutes

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SALT LAKE CITY — Sometimes the people you trust the most turn out to be the least trustworthy — especially when it comes to money matters.

Last year, Layton resident Brian Miller, 34, learned that lesson the hard way. In January 2010, he was asked by a relative to invest about $15,000 in a business the relative was allegedly starting.

"He just needed our money for a short time to help him out with his business," Miller explained. "He promised us a guaranteed return of 20 percent on our investment."

He said lending the money "seemed like an easy thing to do to help out a family member." The relative even convinced other family members to invest as well, Miller said, in all, at least $65,000.

Several months later, Miller realized something was amiss when the relative, Troy Kotter, became evasive and was unable to pay the promised returns.

Miller filed a complaint with the state securities division and found out "that all of our money had been spent." Kotter never invested the funds in a business, but rather spent it to purchase "alcohol and pornography," Miller said.

Kotter was eventually charged and convicted of felony securities fraud.

Unfortunately, that was little consolation to Miller and the other family members who lost "every cent" of their investment.

With retirement funds bouncing up and down on a daily basis, seniors are concerned about their financial future which can make them vulnerable to fraud.

–- Keith Woodwell, division director

Such stories of deceit can serve as cautionary tales for other potential victims of fraud.

This week, the state Division of Securities issued a warning to Utahns — particularly seniors — to watch out for investment schemes that promise big returns in a down market as news of Wall Street distress continues to make financial headlines.

The division said it has received reports of investment scams where victims are told they could make money with little or no risk — with affinity used as the most common vehicle for fraud in Utah.

“With retirement funds bouncing up and down on a daily basis, seniors are concerned about their financial future which can make them vulnerable to fraud,” said Keith Woodwell, division director.

The agency Thursday released a top 10 list of products and practices commonly reported in fraud cases to warn senior citizens and others about ways they can protect their savings nest egg.

The message was simple, Woodwell said, “Don’t let (economic) fear pull you into a investment trap."

Top 10 investor traps: products and practices


Distressed real estate schemes: Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully.

Energy investments: Energy investments tend to be too risky for those planning for retirement and should be avoided by anyone who cannot afford to lose some or all of their investment. Investors should realize the distinct possibility that they could lose their total investment in legitimate ventures.

Gold and precious metals: Despite promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. Case and point: In the spring of 2011, silver’s value declined by 30 percent in a single three-week period.

Promissory notes: Investors seeking safety in uncertain economic conditions or those enticed by the promise of big returns through a private, informal loan arrangement may suffer deep losses investing in unregistered or fraudulent promissory notes. Unregistered promissory notes are often covers for ponzi schemes and other scams. Investors should check with state regulators to determine whether a promissory note and the seller/borrower are properly registered.

Securitized life settlement contracts: Life settlement contracts are investments in the death benefits of insurance policies that insure the lives of unrelated third parties. Legitimate investments in life settlement contracts involve a high degree of risk, and investors may be responsible for routinely paying costly premiums for policies that insure people who outlive their life expectancies.

Oil and gas schemes: Oil and gas investments tend to be highly volatile and unsuitable for traditional, smaller investors who cannot afford the risk.


Affinity fraud: Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for ponzi scheme operators and other fraudsters. A recent national study of ponzi schemes over the past decade found that one in four were marketed to affinity groups to increase the scheme's credibility and build the fraud. The most commonly exploited are the elderly or retired, religious groups and ethnic groups.

Mirror trading: Promoted as an automated trading platform that ensures investors will participate in real- time transactions placed or executed by a skilled and knowledgeable third party. Investors should recognize that unscrupulous traders and promoters may use trendy platforms such as mirror trading as a vehicle to launch fraudulent schemes or manipulate markets by lying about their qualifications, misrepresenting the success of their strategies, or concealing their motivations and conflicts of interest.

Private placements: Investors should be aware that, even in the case of legitimate issuers, private placement offerings are highly illiquid, generally lack transparency and have little regulatory oversight.

Securities and investment advice offered by unlicensed agents: State securities regulators have identified an increase in investor complaints regarding salesmen unlicensed as securities brokers or investment advisers giving advice or effecting securities transactions. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.

Jasen Lee


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