UPDATE: Would you Invest in the Candwich?

Posted on by Mark Pugsley

Update #3: Today Judge Clark Waddoups rejected the plea bargain that Wright had negotiated with prosecutors concluding that the deal appeared too light given the magnitude of how Wright had “intentionally deceived and misled people.”  The defendant will now be forced to negotiate a new plea bargain with the U.S. Attorney’s office — or go to trial.  The judge’s decision appears to be based primarily upon the letters he received from angry investors.

UPDATE #2: Last week Travis Wright pleaded guilty to one count of fraud, admitting he operated a massive Ponzi scheme that owed investors at least $44 million when it went bust in 2009.  He will be sentenced after the judge hears testimony from the victims.

UPDATE:  My friend Tom Harvey reported yesterday in the Salt Lake Tribune that Travis Wright, who ran Waterford Funding, entered a plea of not guilty before U.S. Magistrate Paul Warner to the charge of mail fraud.  The article can be found here.

On July 7, 2010 the New York Times ran a story about the SEC’s recent lawsuit against Travis Wright and Waterford Funding.  The SEC’s press release about the case can be found here.   Among other things, the SEC’s lawsuit alleges that Wright lied to his investors saying he was investing their money in hard money loans secured by real estate, when really he was funneling most of their money to the inventor of the “Candwich” (who also planned to offer Pepperoni Pizza Pockets and French toast in a can).  Yum.

This is the part that is really baffling to me about this case.  Did he really think the Candwich would be more profitable than real estate?  Given the current state of the real estate market it may be the case — but not between 2001 and 2007 when the fund was really going strong.  The SEC also alleges that he used $15 million of investor funds for personal use, including the purchase of a $5 million home on Walker Lane from former Jazz legend Jeff Hornacek, which he completely renovated and imported cobblestones from France for the driveway.   But it was probably pretty trashy after Hornacek moved out.

Continue reading →

Yet Another Local Ponzi Scheme Indictment – Newport Financial

Posted on by Mark Pugsley

Michael Smith and his son Quintin Smith have each been charged with six counts of securities fraud and one count of pattern of unlawful activity, all second-degree felonies, in connection with a furniture loan company they owned called Newport Financial.  According to a Salt Lake Tribune article published today they have been accused of “bilking investors of hundreds of thousands of dollars — one while serving as counselor to an LDS stake presidency — in a fraudulent furniture-financing scheme that targeted, among others, a prominent University of Utah football coach.”

The indictment alleges that the Smiths promised a return of 18 percent to gain investments of at least $1.8 million from 18 victims.  Their biggest investor was Norm Chow, the offensive coordinator for the University of Utah’s football team, who invested $500,000. Continue reading →

VesCorp – The Largest Ponzi Case in Utah History – Nears Conclusion

Posted on by Mark Pugsley

As reported on the website Law360, A Utah federal judge on Wednesday approved a $125.6 million final judgment that settled the U.S. Securities and Exchange Commission’s case against Vescor Capital Corp.  This judgment apparently relates to the company, not Val Southwick who pled guilty to nine counts of securities fraud in 2008 and was sentenced to serve nine consecutive 1 to 15-year prison terms.

But if you are an investor hoping to get you money back, don’t hold your breath.   According to the article Vescor’s receiver, Robert G. Wing of Prince Yeates & Geldzahler, has stated publicly that the money may never materialize.  “They did not get $125 million, they got a judgment,” he said.  Mr. Wings expects to be able to recover only a small fraction of the money Vescor allegedly took from investors.  In his most recent report to the court, Wing said he had recovered just over $5 million, and the legal and accounting fees continue to mount, the Receiver’s lawsuits to recover money from third parties will continue.

Bottom line:  nobody wins in a Ponzi Scheme — except maybe the lawyers.

Family Home Evening with a Fraudster

Posted on by Mark Pugsley

Last week the U.S. Attorney’s Office filed a 17-count indictment alleging money laundering, wire fraud and bank fraud in connection with an alleged Ponzi scheme that was run by John S. Dudley, age 56, of Sandy, Utah.

In this case Dudley pitched investors at investment club meetings in people’s homes.  These were likely homes of people who are prominent in their local church or community, who then invited their friends and fellow ward members to hear a presentation. In some cases the hosts of the meeting may even have received a “finder’s fee” or other compensation if attendees invested (which is usually illegal).

Continue reading →

How Do Ponzi Schemes Get Started?

Posted on by Mark Pugsley

The Financial Times recently published a fascinating prison interview with Bernie Madoff.  Of course he spins the story, attempts to justify his actions and it wasn’t really his fault.  He claims that his company was legitimately earning profits until the early 1990, and that in the 1980′s he was “making plenty of legitimate trades.”

But then in 1992, he admits it became a Ponzi scheme when he began using money from new deposits to pay some returns.  As he told the reporter:

“The turning point was really about 1992 onwards. From then on, it started getting worse and worse.  I spend a lot of time thinking about it – it is almost like a blank to me now. I try to piece it together; why didn’t I say, ‘I cannot do it?’  Why didn’t I return the money to those four or five clients – and the others – and say, ‘I can’t do it.’  Why?”

Since 1994 when I began handling securities cases, I have been involved in many many lawsuits and receiverships involving Ponzi schemes.  I also have on occasion represented people who perpetuated these schemes.  As a result, people often ask me how they get started and whether I think people set out to run a Ponzi scheme.  I don’t think they do, at least not in my experience.  Ponzi schemes usually start when people promise unachievable minimum returns to investors, pay returns even when the profits are not coming in, or try to shield their investors from losses. Continue reading →

Lessons to be Learned from Jeffrey Mowen

Posted on by Mark Pugsley

Tom Harvey reported in the Salt Lake Tribune yesterday that Jeff Mowen finally pled guilty to one count of wire fraud and will spend ten years in prison.  I have not previously written about Mr. Mowen, but now that he has pleaded guilty I feel like I can write about it.  I met with Jeff Mowen several times when he was trying to hire me as his defense attorney.   He never actually hired me and he certainly never paid me a dime, but I am not going to reveal any potentially privileged communications in this post. Continue reading →

Thinking of investing in a hedge fund? Here are some tips for sniffing out potential fraud.

Posted on by Mark Pugsley

This is the text of a terrific article that appeared in the Wall Street Journal yesterday about how to sniff out potential fraud in a hedge fund:

Danger! Danger!

Thinking of investing in a hedge fund? Here are some tips for sniffing out potential fraud.

By ROB CURRAN

In the age of Madoff, small investors are rightfully leery of hedge funds with eye-popping returns and a low profile. But how do you size up the risk of fraud?

You might take some advice from professional investigators, who dig into hedge funds on behalf of potential institutional investors, searching for irregularities and trying to tell if the managers are trustworthy.

So, what warning signs do these investigators say you should watch for? Here are some of the biggest. Continue reading →

The Dangers of Being a “Finder” – Another Conviction in the VesCor Ponzi Scheme

Posted on by Mark Pugsley

Yesterday William J. Hammons, 66, was convicted of seven of nine criminal charges by a jury in St. George, Utah.   Hammons was one of the largest finders or feeders of investors to Val Southwick and his company VesCor, which is now known as the largest Ponzi scheme in Utah history.  He recommended the investment to members of The Church of Jesus Christ of Latter-day Saints in Las Vegas, where Hammons served as a bishop, and in St. George, Utah.  The St. George investors included neighbors, church members, Hammons’ partner and his parents-in-law.   What he did not tell these people was that in exchange for these referrals he received substantial “referral fees” or commissions from Val Southwick.

In his defense, his attorney, Clifford Dunn (who was an interesting choice because he is not an experienced criminal defense attorney), tried to convince the jury that Mr. Hammons was just an innocent bystander.  According to the Salt Lake Tribune, Hammons testified “that he was unaware that VesCor was a fraud, that he didn’t seek out investors and never officially worked for the company.  Instead, he cast himself as just another investor who was paid only referral fees.”   Continue reading →