April 1, 2012

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State of Fraud

Why is Utah Rife with Fraudulent Investment Schemes?

Gaylen Webb

April 1, 2012

McAdams says affinity fraud is analogous to child abuse: a person in a position of trust victimizes another individual who has trusted them in good faith. Hence, McAdams has pushed bills through the State Legislature to bolster the state’s ability to crack down on fraud, especially affinity fraud. “My legislation creates a private remedy, saying victims can go after the assets of third-party individuals surrounding the perpetrator,” he says.

For example, in Val Southwick’s case, there were alleged third-party promoters out soliciting investments for Southwick’s company, Vescor. “What happens to them?” McAdams asks. “Did they know the investment they were promoting was a fraud? Under current law, a victim of a financial fraud may only recover treble damages (actual damages multiplied by three) against a participant in a fraud—but only if it can be shown that the individual had actual knowledge, or was reckless as to whether the investment was a fraud. This is a high burden to meet.”

Through his latest legisla-tion, an individual may now recover treble damages against a third-party promoter of a fraud if it can be shown that the promoter exercised undue influence by using a relationship of trust or position of authority, and the promoter was negligent about the fraudulent nature of the underlying investment.

“Negligence is a much easier burden to satisfy than actual knowledge or recklessness,” he explains. “This opens up an avenue to go after third-party promoters. They have a higher burden of responsibility and can’t be negligent as to whether the investment is real or a fraud. Third parties are in the best position to ascertain if the investment is real. It also opens the door to help victims recover losses.”

Such measures are noteworthy and move Utah forward in its fight against fraud, especially since understaffed enforcement offices often have a difficult time keeping up the caseload. Malpede admits that the FBI just doesn’t have the resources to go after many of the down-line, third-party promoters of fraud schemes.

McAdams addressed that problem at the state level this year by sponsoring a bill that appropriates $2 million in onetime money to create a fraud prosecution unit in the Utah Attorney General’s Office. The money, which comes from a recent mortgage settlement with major banks, will allow the AG’s office to hire as many as five additional people, including a financial analyst, two investigators, a paralegal and a fraud prosecutor.

We Con Ourselves
One of the reasons affinity frauds are often successful is because standard rules of investing generally don’t get applied. Woodell says the good con artists out there help us con ourselves.

“The best scammers don’t give you a high-pressure sales pitch. In fact, what they do expertly is make the appearance that they are doing extremely well. They talk about how great things are for them, and you then approach them. It is somebody you know—it’s your friend, it’s your neighbor, it’s somebody you go to church with—and so you ask, ‘What is it you are doing? I see you
just bought a new Porsche. Where are you getting all this money?’ And they talk a little bit about it and of course dangle in your face what a great business opportunity they have going on,” he explains.

“They will dangle the investment in such a way that you feel like it was your idea to invest with them; they are doing you a favor by letting you in to this fantastic opportunity. And so in that sense, people feel like they are not being conned into something. And of course, we all want to believe at some point our ship is going to come in and we will have the opportunity to get rich. So if somebody does a good job of dangling that out there and making us think this investment is it, this is our chance, we’ll jump on it, without asking all of the questions we should, or maybe being as skeptical as we should.”

It would be nice if people would just pick up the phone and check out the investment before they part with their money, Woodell says. “It is very different investing with Charles Schwab verses a neighbor or friend. If they will just call the Utah Division of Securities or the FBI and explain what they are looking at investing in, we will check it out for them.”

Vetting an Investment
The key to safe investing is to do your research first. Check the investment out, Woodell says, and “make sure you know what you are getting into before you put your money in.”

Woodell’s office can determine if the investment and its offeror are licensed in the state and if there have been any complaints filed. Further, a significant amount of information concerning scams and how to avoid them is published online by both the Utah Division of Securities and the FBI.

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