Remember the ancient art of alchemy? Self-proclaimed “alchemists” would claim that they could turn base metals into gold. People were fascinated with the process and often believed it to be true, although we know today that the practice was fabricated.
In Utah, we saw a similar case with much more sophistication involved.
Four individuals from Utah and California were recently sentenced to prison in an $8 million telemarketing scam. According to the Department of Justice, the fraudsters claimed to develop technology that “used environmentally friendly means to pull microscopic particles of gold from dirt.”
The technology was apparently well-received by investors. The individuals involved in the scam reportedly cold-called victims across the country to pitch their investment opportunity. According to court documents, the individuals also claimed that they owned an 80-acre mining property which the company would use to extract the particles of gold at a production rate of 20 times better than traditional mining companies. Investors were also told that they would double their investment within a year.
The scam began as early as 2014 and totaled nearly $8 million in investor funds. The fraudsters seemed to target older investors, as the majority of victims were over 65 years old. The fraudsters used more than half of the money for personal expenses and commissions for telemarketers, while less than half of the money actually went to the development of the business and the proposed technology.
To make matters worse, two of the fraudsters involved in this scam had met in prison prior to starting this fraudulent venture. Ironically, these two individuals were serving sentences for previous charges of mail fraud and telemarketing fraud. One of these individuals had run a $50 million telemarketing scam before starting his next scam here.
Although salespeople can be quite persuasive, it is crucial to complete your own (or independent third-party) due diligence on any investment or business idea.
Often times, people who invest in these types of scams fail to consider the risks because the salesperson on the other side of the table provides all the potential benefits. Additionally, salespeople are often trained under the ABC method of sales: Always Be Closing. Some take this to mean “sell by any means necessary.”
This blinds victims of the potential risks inherent in any business or investment, which certainly exist in virtually every industry. There is no risk-free investment, and anyone who tells you otherwise is not acting in your best interests. As the saying goes, there is no such thing as a “free lunch.”
Thus, we see three major red flags in this case:
- Too good to be true. The investment opportunity certainly sounds too good to be true based on the proposed benefits of the investment. The fact that the fraudsters pitched this idea as 20x faster than traditional mining companies should be cause for concern. Additionally, investors were told that their money would double in a year. It is incredibly rare to find a legitimate investment opportunity that would yield 100% returns in a year without extreme speculation and risk.
- Criminal history. Two out of four individuals involved in the scam have been convicted of prior crimes that are quite similar to their current purported business opportunity. While they did hide their prior convictions from investors, a complete due diligence and investigation into the individuals would have likely yielded results of their prior criminal records.
- Unregistered securities. According to court documents, the fraudsters were not registered with the Securities and Exchange Commission to sell securities. This is a major red flag, since many transactions of this type require issuers of securities to register with the SEC.
As Benjamin Franklin says, “An ounce of prevention is worth a pound of cure.” Had these red flags been noticed beforehand, it would have saved millions of dollars for investors. Approximately 140 investors were victims of the fraud, which comes to more than $57,000 per investor on average. One individual reportedly invested hundreds of thousands of dollars in the venture. Proper due diligence, background checks, and other similar cautionary measures could have prevented such drastic losses.
Call our firm today at (239) 319-4434 for a confidential, no-cost consultation if you suspect investment fraud in your portfolio. Vernon Litigation Group represents clients across the nation in a full range of financial litigation matters, including securities litigation, investor representation, business litigation, real estate litigation, and more.