When a fraud is uncovered, the Securities and Exchange Commission no only wants to get the fraudsters, it also wants to get those who should have stopped the fraud. The SEC just brought an action against an IRA Custodian for ignoring red flags for its accounts that invested in Ponzi schemes.
The underlying fraud was conducted by Ephren Taylor with his City Capital Corporation investment fraud, and Randy Poulson with his Equity Capital Investments fraud. Taylor was convicted and was sentenced to 235 months in prison. Poulson has been indicted but is still fighting his case.
Equity Trust is a leading provider of self-directed IRAs. The firm pushes the laudable goal of seeking diversity outside of the stock market. It’s successful, with over 30,000 clients and approximately $12 billion of assets in custody.
According to the SEC complaint, the problem is that the firm’s salespeople have goals of opening accounts. That lead at least one unnamed salesperson to enter into a cozy relationship with Taylor and City Capital. Equity Trust’s accounts were a source of new capital for its Ponzi scheme and City Capital was a source of new accounts for Equity Trust.
The relationship was too cozy for the custodian from the view of the SEC. The salesperson was pushing its client accounts at Taylor and City Capital.
For example, in an email dated January 14, 2009, Salesperson A wrote to Taylor that he learned that the broker of an Equity Trust customer recommended to the customer that she not invest in Taylor Notes. Salesperson A then told the customer, “‘how can you comment on something you know nothing about….how can this broker comment on real estate when he has never done it.’” The customer responded, “‘great point’ let’s do it.” Salesperson A concluded his email to Taylor stating: “I am on it…I will close it.” The customer then invested more than $500,000 in Taylor Notes.
The salesperson trained City Capital on the use of self-directed IRAs. The firm even hosted a webpage for potential investors. The City Capital notes came in poorly documented and started having repayment issues. The firm began escalating holds and added City Capital to the “do not process” list. The firm continued to process existing accounts and collect fees. But did not inform the account holders of the problems with City Capital.
A similar story occurred with the Poulson’s investment fraud. Accounts were open and investments made, but the documentation was poor or missing. During one review, 25 out of 25 accounts were missing proper documentation. But Equity Trust continued to process to new accounts. It was only a year later that the firm put a stop on new investments.
The description above comes from the SEC charges which Equity Trust is contesting. The SEC also re-issued an investor alert on self-directed IRAs and the risk of fraud.
In my reading of the complaint, Equity Trust is charged with not acting quickly enough to stop investments in these two fraudulent schemes. At least one of the salespeople went too far and encouraged investment in the Ponzi scheme.
Sources:
- SEC Announces Charges Against Retirement Plan Custodian in Connection With Ponzi Scheme
- SEC order against Equity Trust
- Investor Alert: Self-Directed IRAs and the Risk of Fraud (September 2011)
Château de Crécy-la-Chapelle: Gate is by Baishiya 白石崖
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