1. Utah Fraud Problem
About four years ago, Utah con artist Val Southwick was shipped off to a state penitentiary for running
one of the largest fraud schemes in the history of Utah. Today, he sits in his cell quietly while he serves
many consecutive sentences in Gunnison. While he showed remorse and gave a guilty plea, he
continues 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 has
remained much the same. Something about the state just makes it a breeding ground for various types
of white collar crimes, especially when it comes to fraud.
Keith Woodwell, Director for the Utah Division of Securities, believes that the message just “hasn’t
sunken in deep enough yet.” Apparently this problem has yet to be addressed as the volume of cases
presented to the Division of securities has done nothing but rise, with a fairly significant peak between
2009 and 2010.
A lot of investment fraud stays out of site when the economy is in good shape and only becomes visible
when it collapses in a down economy. This may be the main reason for the increase in Utah around
2008-2010, as Ponzi schemes collapsed under their own weight in a broken economy. Though, the main
thing that surprises Woodwell is how many new complaints have emerged as the economy begins to
repair, despite the many new actions taken by law enforcement.
“We believed that the numbers would begin to drop. We thought this would mean fewer complaints
and fewer actions by enforcement would be filed. Unfortunately, this hasn’t been the outcome. We
aren’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 for
Ponzi-related fraud, next to places like: New York, San Francisco, Los Angeles, and Dallas. The Salt Lake
City FBI office reported over $1.5 billion lost to fraud in 2010, and Special Agent Jim Malpede says that
this figure has grown to about $2 billion today.
Malpede says, “This figure is actually astronomic. San Francisco cases are on a much smaller scale, when
you take the size of our population into account. The values of loses die to con men here are much
worse per capita than San Francisco,”
Vulnerability among Utah’s Citizens
So, what is it that makes Utah so susceptible to fraud? Law enforcement believes that trust, greed, and
gullibility are to blame. Malepede and Woodwell claim that con artists will use all three of these to their
advantage, paying careful attention to building a level of trust with their victims through some form of
common 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 know
who their neighbors are, providing a lot of room for trust,” says Special Agent Malepede. “While this
really makes Utah a wonderful to be, it also makes the population much more vulnerable to acts of
fraud.” People in Utah just don’t assume that those neighbors offering nothing but kind words and
gestures could also be forming schemes to empty their savings accounts.
2. This issue of trust isn’t only in Utah either as con artists, like the infamous Bernie Madoff, have proven
over 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 of
close-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. He
defrauded a woman by simply claiming a revelation from God revealed that his current mission was to
manage her finances. Being sent by God was a very powerful argument for these people. “If this person
has 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 Abuse
Those that pray upon the trust of Utah’s citizens really bother Ben McAdams, securities attorney and
Ohio State Senator. “It really infuriates me,” he says. “People in Utah love to socialize and often make
friends quickly. Utah is just a friendly state, and we shouldn’t have to change that because of the current
circumstances. It’s who we are, but there seem to be many lurking in our communities only to take
advantage of these good qualities.”
He goes further to equate fraud with child abuse, saying that they’re both situations where a person
who is given trust by default uses this advantage to victimize innocent people. For this reason, McAdams
has supported many bills in the State Legislature in hopes to stop much fraud in its tracks. He says, “The
plan 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 investments
for his company. Under the current law, there has to be a high amount of proof that these people were
aware that they were selling a fraudulent product or that they were reckless in screening. “This tends to
be 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 it
a case on negligence. In particular, a situation in which the promoter has used trust or a position of
authority to solicit the product, and showed negligence in determining the fraudulent nature of the
investment.
“It’s a lot easier to prove that a person or company was negligent, than to prove their previous
knowledge or level of recklessness.” McAdams explains. “Putting more responsibility on the shoulders of
third parties, should eliminate a good amount of fraudulent activity. These promoters are much better
equipped than law enforcement to recognize a fraudulent investment, and it will also increase the
likelihood 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 law
enforcement is currently understaffed and finding it quite difficult to sort through the financial fraud
cases that are piling up at an alarming rate. Special Agent Malpede states that even the FBI is short on
resources and unable to bring in all of the parties involved in these large schemes.
3. McAdams hopes to address this issue as well, by pushing a bill that will dedicate $2 million to create a
special unit for the prosecution of fraud under the Utah Attorney General’s Office. The money was
gained from a mortgage settlement involving many major banking firms, and will provide enough to hire
up to five people. Plans have been made to hire a couple investigators, a prosecutor, financial analyst,
and a paralegal.
Victims Con Themselves
The 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 off
vibes that they are extremely well off, or are hiding some fantastic secret to success. Victims take note
of this and approach the scammer themselves for advice. It always someone that you think you knows
very 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, they
lead 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., and
there just being a good Samaritan and helping you out. This way, people don’t even realize they’re being
conned 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 skeptical
or 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 to
your neighbor or friend. The Utah Division of Securities or even the FBI are here to check out anything
you’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 to
check the investment thoroughly,” says Woodwell. “Make absolutely sure you know every detail of what
you’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 are
licensed, and if any previous complaints have been filed. They also have complied and published a large
amount 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. The
first one is to never shove all of your savings in one investment opportunity, and the second is to never
give 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 out
legitimately, but turn to fraud if the financial situation of the business makes a turn for the worst. Owner
may then start building new investments to cover their returns. “More than half of all Ponzi schemes
4. evolve in this way. Owners just stopped being honest with new clients,” states Woodwell. “So it’s very
important 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 is
certain 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 most
important thing that can be offered to investors, and leads a yearly even called the Fraud College. He
worked as a Fraud Buster for quite some time and grew tired of watching businesses crumble and
families become destroyed over financial fraud. So, he turned to his friends and colleagues to form the
annual educational event, and it’s received a large amount of support. Each year, over 400 former
fraudsters, law enforcement officials, and victims come together to offer a crash course for Utah’s
public.
The FBI and the Utah Division od Securities are also in pushing many public service campaigns to get the
word out about spotting financial fraud. Many billboards and TV spots were created to spread
awareness among the public about the red flags of investment offers.
Utah’s Black Eye
Despite the efforts to change matters, the level of fraud across Utah has really given the state a black
eye.
“Utah is now infamous when it comes to the subject of fraud, and it’s really unacceptable. Losing over a
billion dollars to fraudulent activity basically negates the impact of our economy,” says Baker. “It’s not
just hurting individuals either, legitimately run businesses that are in need of capital are becoming
victims 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 big
moves 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.”
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