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Does Utah lead the nation in Ponzi schemes?

By Robert J. DeBry | Posted - Feb 15th, 2019 @ 9:00pm



In 2009, Bernie Madoff pleaded guilty to operating the largest Ponzi scheme in history. Over 17 years, he bilked thousands of investors out of billions of dollars. An Investopedia article notes Madoff blamed his actions on the investors.

"Everybody was greedy, everybody wanted to go on and I just went along with it," he told journalist Steve Fishman in an interview from prison.

Although Madoff was not from Utah, this state has witnessed more than its share of Ponzi schemes and investment fraud. In fact, Utah is so well-known for this type of scam that a 2011 CNBC report called Utah “Ponziland.”

“A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors,” explains the U.S. Securities and Exchange Commission. “Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk.”

Is Utah number one?

Do an online search for “Utah Ponzi scheme” and you can easily find dozens of frauds in recent years totaling hundreds of millions of dollars. One of the latest examples involved more than 200 investors and assets exceeding $170 million, according to information from the Utah Attorney General’s office.

All of which leads to the question: Does Utah lead the nation in Ponzi schemes?

The answer is no, but it is regularly near the top. For example, according to ponzitracker.com, in 2016 Utah had six Ponzi schemes totaling $244 million. That trailed California, which had nine cases, but the total value of those was just $145 million. New York also had six cases, with a value of $1.078 billion. Florida had just four cases, but the value topped $370 million. Oregon had just one case worth $350 million.

Utah doesn't have the most Ponzi schemes, nor does it have the biggest. But the states that top those categories have far more residents than Utah. So on a per-capita basis, Utah might be at the top.

Friends, faith and fraud

In Utah, Ponzi schemes almost always involve affinity fraud.

“Financial crimes based on bonds of trust … occur throughout the United States but are especially prevalent in Utah, where members of The Church of Jesus Christ of Latter-day Saints too often are victimized by savvy fraudsters who claim to be just like them,” according to information from the FBI.

In the same statement from the FBI, Special Agent Michael Pickett, a veteran white-collar crime investigator in the bureau’s Salt Lake City Division is quoted as saying, “Within the Mormon population, there is a well-known sense of trust. Unfortunately, that trust can sometimes take the place of due diligence, and that’s when individuals are more susceptible to being victimized.”

Pickett noted that Utah consistently ranks among the top five states for the FBI’s most significant white-collar crime cases.

In an article for CNBC, Jenice Malecki, a New York securities lawyer who specializes in affinity fraud cases, said: "If you're getting information about investments at a church, that should be the first red flag that something isn't right."

In a February 2008 letter read to congregations in the U.S. and Canada, the First Presidency of The Church of Jesus Christ of Latter-day Saints urged members to be prudent in managing financial affairs.

“We are also concerned that there are those who use relationships of trust to promote risky or even fraudulent investment and business schemes. While all investments carry an element of risk, that risk can be managed by following sound and proven financial principles: first, avoid unnecessary debt, especially consumer debt; second, before investing, seek advice from a qualified and licensed financial advisor; and third, be wise.”

Greed and distrust

One of the more surprising aspects of Utah Ponzi schemes is that even knowing the state’s reputation for fraudulent financial ventures, so many people continue to invest money into scams that should raise multiple red flags.

Distrust of Wall Street by investors who have been burned in traditional investments could be one reason people opt to invest in complex financial ventures that turn out to be Ponzi schemes. A Fortune article on exotic investments explains that some investors hurt by the 2008 financial crisis have vowed never to go back to the stock market.

“The revolt can be seen in the ... exodus by some frustrated investors out of mutual funds, stock and bonds … and into what are often called alternative investments,” writes James Sterngold. “These include a broad array of choices: foreclosed homes, personal mortgage loans, promissory notes, tax-lien certificates, foreign-exchange funds, private partnership interests, precious-metals trading pools, and so-called viatical settlements (other people’s life insurance policies acquired in the hopes that the insured will depart quickly so that the investor can cash in).”

Too good to be true

These alternative investments are frequently difficult to understand — something the SEC warns should be a red flag to potential investors.

The original strategy that gave this type of fraud its name was an alternative investment. In 1919, Charles Ponzi recognized an arbitrage opportunity in price differences of postal stamp coupons issues by various countries. He started a company to exploit this opportunity and began promising investors returns of 50 percent in 45 days or 100 percent in 90 days, according to Investopedia.

“Instead of actually investing the money, Ponzi just redistributed it and told the investors they made a profit,” explains the Investopedia article. “The scheme lasted until August of 1920, when The Boston Post began investigating [Ponzi's company]. As a result of the newspaper's investigation, Ponzi was arrested by federal authorities on August 12, 1920, and charged with several counts of mail fraud.”

The most convincing Ponzi schemes are run by people who appear to be successful professionals and offer generous, but not unbelievable returns. Madoff was highly respected on Wall Street and in 1990 served as chairman of the National Association of Securities Dealers — the organization charged with protecting the securities industry from the type of fraud he was perpetrating.

Many of the people convicted of operating Ponzi schemes in Utah have been prominent businessmen, respected local religious leaders, or both.

“These perpetrators, with a smile on their face and a twinkle in their eye, approach with a handshake and a hug, with intent and with persistence, to violate the trust of their victims and to take their life’s earnings,” said John Huber, U.S. Attorney for the District of Utah.

Because of Utah’s propensity for Ponzi schemes and other types of financial fraud, in 2015 the state legislature passed a law establishing the White Collar Crime Offender Registry, which publishes the names, photographs, and criminal details of individuals convicted of financial fraud crimes in the state going back a decade. At present, there are more than 200 individuals listed on the registry.

Robert J. DeBry

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