April 1, 2012

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State of Fraud

Why is Utah Rife with Fraudulent Investment Schemes?

Gaylen Webb

April 1, 2012

Woodell also advises that investors remember the basic rules of investing, one of which is never put all of your money into one investment. Another is never investing more than you can afford to lose.

Of course, not all Ponzi schemes start out as such. Legitimate investments can turn fraudulent when a business’ financial situation turns sour and its owners use new investments to pay returns to previous investors. “At least half of the Ponzi schemes that we are looking at probably fit into that category. They didn’t start out fraudulent, but turned into fraud later on, when the owners were not honest with their new investors,” says Woodell. Hence, it is also important to stay active and involved with your investments.

In terms of fraud prevention and prosecution, there is only so much the government can do. Malpede believes the only thing that will make a real difference is education.

Brent Baker, shareholder and director at the law firm of Clyde Snow, agrees. “Education is the key component,” he says. That’s why Baker organized the Fraud College, which held its annual event in February. After working for the Securities and Exchange Commission as a fraud buster for many years, Baker was tired of seeing businesses ruined and lives destroyed. He started talking to his friends in law enforcement and the regulatory agencies about putting on an annual educational event and received overwhelming support.

Approximately 400 people attended this year’s Fraud College, which included Gov. Gary R. Herbert and LDS Church Public Affairs Director Michael Otterson as host speakers. The event brought together enforcement officials, victims and even former fraudsters to offer Utahns a crash course in how to detect bad investments and affinity fraud schemes.

The Utah Division of Securities and the FBI have also engaged in public service campaigns to educate investors about financial fraud. Woodell’s office ran a series of TV spots and billboards a year and a half ago based upon the “I am a con man theme” to create public awareness, and just launched a new TV/billboard campaign based upon its new “Red Flags” theme, trying to educate people about what the red flags are with regard to investment offers.

A Black Eye
Sadly, the state’s fraud climate has given Utah a black eye.

“Nationwide, Utah has a reputation for fraud, and that is unacceptable to me. When you get a billion and a half dollars lost in a year due to fraud, Utah’s fraud industry essentially negates the economic impact of our beautiful ski industry. And not only are individuals being victimized, but legitimate businesses that need to raise capital—they’re being hurt as well,” says Baker.

The message Woodell’s office is trying to get out is that fraud is a serious problem in Utah, but the good news is that it is usually preventable…if people will take the steps to do some checking, to do their due diligence before they invest. “It doesn’t hurt to do that extra check and get that extra opinion. It can prevent a lot of heartache and loss down the road,” he says.

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