Investment scams: Utah has a long history of rip-offs -- shun offers

Deseret News (Salt Lake City), Jan 7, 2007 by Dave Anderton Deseret Morning News

Investment pitches that promise big returns, low risk and financial independence may end up stealing savings, stripping home equity and leaving investors in financial ruin.

Wayne Klein, director of the Utah Division of Securities, says if the offer sounds too good to be true, run away.

One does not have to look far to find such offers. A local radio advertisement recently promised a 25 percent return on money backed by Utah real estate. In 2006, a flier handed out in one Wasatch Front neighborhood guaranteed a 21 percent profit by handing over $10,000 and signing a promissory note.

"So long as there are greedy investors and people willing to tell lies to earn a living, we are going to have investment fraud," Klein said. "I don't see either of those conditions disappearing."

Brad Nielsen of Bluffdale knows firsthand what it is like to be defrauded by a friend.

In 2004, Nielsen was persuaded by Kevin Lawrence Wright to purchase a Bluffdale home for $590,000. Wright assured Nielsen that the home would appraise for $810,000. The equity in the home would be used, Wright told Nielsen, to help make mortgage payments and to invest in an offshore venture that promised high returns.

"I was going to take $75,000 and put it aside in case there was ever a problem and I needed to have a year's period

of payments," Nielsen said. "I was supposed to be getting the interest from that offshore account to make the house payments."

But Nielsen never saw any of the home's equity.

Instead, Wright and his business partner, Michael Stephen Hurst, filed a lien on the home and cashed out nearly all of the home's equity for themselves.

"At closing I was supposed to get a check for the full equity," Nielsen said. "Come to find out, they had invested the money into uncut diamonds. We don't know who ended up with the money."

Nielsen contacted the Utah Division of Securities.

An investigation by the state revealed that Wright had used part of the money to pay off a personal debt. Hurst used the funds for a diamond investment.

In July, the two men pleaded guilty to one third-degree felony count of securities fraud. Wright was ordered to serve 20 days in jail. Both men were placed on probation for two years and ordered to work 500 hours of community service.

"Utah's housing market is booming, and unfortunately con artists are eager to take advantage of people during this boom," Attorney General Mark Shurtleff said at the time the men were sentenced. "We are grateful that the prosecutors and investigators in this case did everything possible to make sure this crime did not pay."

Nielsen was able to recoup $143,410 in lost equity from Wright and Hurst, but it came more than two years after purchasing the home.

"It was a miserable time," Nielsen said. "I learned a lot of things in the whole process. A lot of times people think, 'My friend isn't going to take advantage of me.' In the loan documents, you want to make sure that all of the paperwork is there. You need to take the time and go down through each thing in the paperwork and make sure you understand it."

Nielsen's story is not new. Utah has a long history of investment rip-offs. In 2007, the state's residents can expect to see more schemes, with real estate scams topping the list, according to the division's top 10 investment scam predictions.

Real estate scams include:

-- Promoters who use credit scores of investors to buy and sell homes.

-- So-called "hard money" lending that is used to finance high- interest home loans.

-- Investment scams in which promoters solicit an investor's home equity to make an investment.

Klein said hard money lenders promise investors 2 percent to 4 percent interest per month, with the guarantee that the money is secured by property.

"They say it is secured by the property and yet if you go look at the county recorder's office your name shows up nowhere on the trust," Klein said. "It is a very big scam."

The second most popular scam Utahns appear to be falling for is note brokering, in which companies advertise on the Internet and on television infomercials about how to purchase real estate notes at a discount, list them on a Web site sponsored by the company and resell them at a profit.

The businesses that advertise note brokering charge steep fees for the courses, Klein said, but fail to tell people that they need to be licensed by the state.

"I would not do that, nor would I recommend anybody to be involved in those kinds of situations," said James Wheeler, senior vice president and assistant branch manager at D.A. Davidson & Co., a Montana-based brokerage firm with offices in Utah. "It appears that (companies) are making their money off the course."

Klein said: "If the investment is passive and you're relying on someone else's expertise, then it is a security and they need to be licensed. Anybody offering an investment has to be licensed."

Aside from the more mainstream scams, there is a flurry of computerized models and investment tools that promise money to investors by buying and selling options, Wheeler said.