Utah Fraud ProblemAbout four years ago, Utah con artist Val Southwick was shipped off to a state penitentiary for runningone of the largest fraud schemes in the history of Utah. Today, he sits in his cell quietly while he servesmany consecutive sentences in Gunnison. While he showed remorse and gave a guilty plea, hecontinues to decline any media attention, refusing to give the public any clues about his tactics.Even after Southwick’s imprisonment and a huge crackdown on many con men in Utah, the state hasremained much the same. Something about the state just makes it a breeding ground for various typesof white collar crimes, especially when it comes to fraud.Keith Woodwell, Director for the Utah Division of Securities, believes that the message just “hasn’tsunken in deep enough yet.” Apparently this problem has yet to be addressed as the volume of casespresented to the Division of securities has done nothing but rise, with a fairly significant peak between2009 and 2010.A lot of investment fraud stays out of site when the economy is in good shape and only becomes visiblewhen it collapses in a down economy. This may be the main reason for the increase in Utah around2008-2010, as Ponzi schemes collapsed under their own weight in a broken economy. Though, the mainthing that surprises Woodwell is how many new complaints have emerged as the economy begins torepair, despite the many new actions taken by law enforcement.“We believed that the numbers would begin to drop. We thought this would mean fewer complaintsand fewer actions by enforcement would be filed. Unfortunately, this hasn’t been the outcome. Wearen’t seeing any shortage of fresh cases being brought in,” Woodwell says.At the same time, the Federal Bureau of Investigations lists Salt Lake City among the top 5 hot spots forPonzi-related fraud, next to places like: New York, San Francisco, Los Angeles, and Dallas. The Salt LakeCity FBI office reported over $1.5 billion lost to fraud in 2010, and Special Agent Jim Malpede says thatthis figure has grown to about $2 billion today.Malpede says, “This figure is actually astronomic. San Francisco cases are on a much smaller scale, whenyou take the size of our population into account. The values of loses die to con men here are muchworse per capita than San Francisco,”Vulnerability among Utah’s CitizensSo, what is it that makes Utah so susceptible to fraud? Law enforcement believes that trust, greed, andgullibility are to blame. Malepede and Woodwell claim that con artists will use all three of these to theiradvantage, paying careful attention to building a level of trust with their victims through some form ofcommon ground, like attending the same church or country club.“The community here in Utah is much different than other places. Even in larger cities, people knowwho their neighbors are, providing a lot of room for trust,” says Special Agent Malepede. “While thisreally makes Utah a wonderful to be, it also makes the population much more vulnerable to acts offraud.” People in Utah just don’t assume that those neighbors offering nothing but kind words andgestures could also be forming schemes to empty their savings accounts.
This issue of trust isn’t only in Utah either as con artists, like the infamous Bernie Madoff, have provenover the years. Madoff began his fortune swindling communities of wealthy Europeans and Jews,serving as a chairman for the NASDAQ before being busted in 2008. However, Utah’s abundance ofclose-knit communities, friendly neighborhoods, and church congregations makes it an easy target.One Utah con man in particular chose his prey from the Church of Jesus Christ of Latter-day Saints. Hedefrauded a woman by simply claiming a revelation from God revealed that his current mission was tomanage her finances. Being sent by God was a very powerful argument for these people. “If this personhas done nothing but show themselves as good, and they share something with their victims like faith,its easy to understand how strategies like this would be effective,” says Woodwell. “And, of course,they gut just stole her money right there.”Financial Fraud and Child AbuseThose that pray upon the trust of Utah’s citizens really bother Ben McAdams, securities attorney andOhio State Senator. “It really infuriates me,” he says. “People in Utah love to socialize and often makefriends quickly. Utah is just a friendly state, and we shouldn’t have to change that because of the currentcircumstances. It’s who we are, but there seem to be many lurking in our communities only to takeadvantage of these good qualities.”He goes further to equate fraud with child abuse, saying that they’re both situations where a personwho is given trust by default uses this advantage to victimize innocent people. For this reason, McAdamshas supported many bills in the State Legislature in hopes to stop much fraud in its tracks. He says, “Theplan is to give fraud victims to access to the assets of third-parties, or those close to the con artists.”In the case of Val Southwick, for example, there were many third-parties that promoted the investmentsfor his company. Under the current law, there has to be a high amount of proof that these people wereaware that they were selling a fraudulent product or that they were reckless in screening. “This tends tobe a hard thing to prove, and most don’t come to justice,” McAdams states.The new legislation aims to make it easier for a victim to collect damages from a third party, by making ita case on negligence. In particular, a situation in which the promoter has used trust or a position ofauthority to solicit the product, and showed negligence in determining the fraudulent nature of theinvestment.“It’s a lot easier to prove that a person or company was negligent, than to prove their previousknowledge or level of recklessness.” McAdams explains. “Putting more responsibility on the shoulders ofthird parties, should eliminate a good amount of fraudulent activity. These promoters are much betterequipped than law enforcement to recognize a fraudulent investment, and it will also increase thelikelihood for a victim to cover their losses.”These new measures look promising, and it couldn’t come at a better time for Utah. The state lawenforcement is currently understaffed and finding it quite difficult to sort through the financial fraudcases that are piling up at an alarming rate. Special Agent Malpede states that even the FBI is short onresources and unable to bring in all of the parties involved in these large schemes.
McAdams hopes to address this issue as well, by pushing a bill that will dedicate $2 million to create aspecial unit for the prosecution of fraud under the Utah Attorney General’s Office. The money wasgained from a mortgage settlement involving many major banking firms, and will provide enough to hireup to five people. Plans have been made to hire a couple investigators, a prosecutor, financial analyst,and a paralegal.Victims Con ThemselvesThe main reason affinity frauds find great success is because standard investing rules often don’t apply.“Skilled con artists actually just assist us in conning ourselves,” states Woodwell.“These guys don’t have to give you a hard sell. Often times, they go great lengths to naturally give offvibes that they are extremely well off, or are hiding some fantastic secret to success. Victims take noteof this and approach the scammer themselves for advice. It always someone that you think you knowsvery well—a long-time neighbor, your best buddy, or a well-respected member of your local church.Then, you ask, ‘I noticed your new Mercedes. How are you making this money?’ And, of course, theylead in with a new business opportunity,” he continues.“They dangle the opportunity in front of you in such a way, that you’ll consider it your own idea., andthere just being a good Samaritan and helping you out. This way, people don’t even realize they’re beingconned until it’s much too late. Victims will simply wait it out, expecting to see a profit roll in eventually.This expertly crafted dangling routine, makes people jump on the opportunity, without being skepticalor questioning as much as they normally would.”“People would be much safer if they would just make a phone call before they invest their life savings,”says Woodwell. “Investing with a large reputable company is a much different matter than handing it toyour neighbor or friend. The Utah Division of Securities or even the FBI are here to check out anythingyou’re looking to invest in; all you have to do is call.”Evaluating a Potential Investment“The most crucial factor of safe investing is taking the time to do your research. Make every effort tocheck the investment thoroughly,” says Woodwell. “Make absolutely sure you know every detail of whatyou’re getting into before you lay your money down on the table.”The Utah Division of Securities and the FBI can find out if the investment and the person offering it arelicensed, and if any previous complaints have been filed. They also have complied and published a largeamount of information concerning financial fraud and how to identify them online.All investors are advised to follow the basic investment rules, no matter who is making you an offer. Thefirst one is to never shove all of your savings in one investment opportunity, and the second is to nevergive up more than you’re able to afford.Also be aware that a good portion of Ponzi schemes don’t start out that way. Many start outlegitimately, but turn to fraud if the financial situation of the business makes a turn for the worst. Ownermay then start building new investments to cover their returns. “More than half of all Ponzi schemes
evolve in this way. Owners just stopped being honest with new clients,” states Woodwell. “So it’s veryimportant to keep up on information about your current investments as well.”That the government can do about the prevention and prosecution is admittedly limited. Malepese iscertain that the education is the only factor that will lower the rate of fraudulent activity in Utah.Brent Baker, director of the Clyde Snow law firm and shareholder, also agrees that education is the mostimportant thing that can be offered to investors, and leads a yearly even called the Fraud College. Heworked as a Fraud Buster for quite some time and grew tired of watching businesses crumble andfamilies become destroyed over financial fraud. So, he turned to his friends and colleagues to form theannual educational event, and it’s received a large amount of support. Each year, over 400 formerfraudsters, law enforcement officials, and victims come together to offer a crash course for Utah’spublic.The FBI and the Utah Division od Securities are also in pushing many public service campaigns to get theword out about spotting financial fraud. Many billboards and TV spots were created to spreadawareness among the public about the red flags of investment offers.Utah’s Black EyeDespite the efforts to change matters, the level of fraud across Utah has really given the state a blackeye.“Utah is now infamous when it comes to the subject of fraud, and it’s really unacceptable. Losing over abillion dollars to fraudulent activity basically negates the impact of our economy,” says Baker. “It’s notjust hurting individuals either, legitimately run businesses that are in need of capital are becomingvictims as well.”“The Utah Division of Securities just wants people to be aware of the large issue with fraud in the state,and also that it can easily be prevented. All people have to do is start checking in before making any bigmoves on investments,” Woodwell says. “Take just a little more time to get that expert opinion now,and it will save you from a lot of pain and heartache later.”For more info about Shane Baldwin and Silverleaf Financial Visit http://silverleaf-financial.com/