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Christopher M. Lee
Private Party M&A Outlook
A New City
Count Us In
Taking the Plunge
Utah’s Legacy of Innovation Continues
State of Fraud
On the Horizon
It’s a Wrap
It’s been about four years since Val Southwick, the Bernie Madoff of Utah con artists, received his ticket to the state penitentiary for the biggest fraud scheme in Utah history. Today, Southwick sits quietly in a cell in Gunnison, serving out his nine consecutive sentences. Although he pled guilty and expressed remorse at his sentencing, he routinely declines media interviews and is mum about his fraud conviction and the tactics that supported his grand deception.
Despite the imprisonment of Southwick and other con men like him, much has remained the same—Utah is still fertile soil for all sorts of white-collar crimes and, especially, for affinity fraud.
“We haven’t learned our lesson,” says Utah Division of Securities Director Keith Woodell. “The message hasn’t sunk in deep enough.” This is apparent, as the case volume at the Utah Division of Securities, along with the number of complaints and enforcement actions, went up significantly in 2009 and 2010 and are still “stubbornly high.”
Many fraudulent investment deals fly under the radar when the economy is good and investors are plentiful, only to collapse when the economy turns sour. Such was the case in Utah from 2008 to 2010, when numerous Ponzi schemes couldn’t support their own weight in the bad economy and the stream of new investors dried up. But what has surprised Woodell is the number of new enforcement actions and complaints that have emerged since the economy began to improve.
“We thought maybe the numbers would drop back down and we would see fewer complaints and fewer enforcement actions that we were filing. That has not been the case. We have no shortage of new cases coming in the door,” he says.
Meanwhile, the FBI says Salt Lake City ranks among the top five Ponzi scheme hot spots in the nation, rubbing shoulders with the likes of Los Angeles, New York, Dallas and San Francisco. And the $1.4 billion in fraud losses the Salt Lake City FBI office reported in 2010 has since grown closer to $2 billion, according Special Agent Jim Malpede.
“That’s huge. By comparison, our cases in San Francisco were much smaller. The point is, given our small population, the dollar volume of losses from con men in Utah, comparing apples to apples, is worse on a per capita basis than in San Francisco,” Malpede says.
Gullibility, Greed and Trust
What makes Utah such fertile soil for financial fraud? The propensity for Utahns to fall victim to fraud, and especially affinity fraud, is often due to a trifecta of gullibility, greed and trust. Both Woodell and Malpede say con artists prey on all three, but especially on a relationship of trust, where victims have some type of “affinity” or common ground with the con artist that elevates the level of trust, such as membership in the same church, club or professional circle.
“In Utah, we tend to know who our neighbors are. It is a very different community dynamic with a lot of inherent trust,” Malpede says. “It makes Utah a great place to live but also makes us vulnerable to this type of activity.” Indeed, most Utahns don’t presume that the neighbor bringing them lasagna or offering to help them move in is also scheming to steal their life savings.
Other con men, like Madoff, have proven that the trust problem isn’t unique to Utah. For example, Madoff’s empire swindled wealthy Jews, Europeans and country-club types. But Utah’s culture of tight social networks, close-knit church congregations, friendly neighbor-hoods and communities does make for easy pickings by con men.
Woodell describes one con artist who defrauded a woman in his Church of Jesus Christ of Latter-day Saints (LDS) church congregation by saying he had come from the LDS temple, that he had been very blessed in his life and that he had prayed about what he should be doing now. “He told her, point blank, he had received a revelation that his mission in life now was to help people like her with their finances. Essentially, he said ‘I have been sent by God to help you.’ That’s a powerful argument. If you feel like this is a good person, and you share the same faith, you can understand why that kind of strategy sometimes succeeds. The guy ended up just flat out stealing her money.”
Analogous to Child Abuse
The penchant to prey upon people’s trust infuriates State Senator Ben McAdams, who is also a securities attorney.
“It enrages me,” says McAdams. “In Utah, we are quick to make friends. We are a genuinely friendly state, but the people of Utah shouldn’t have to trust less. That’s who we are, but there are people in our communities that take advantage of our greatest qualities and turn them against us.”