Self-Directed IRA Fraud: Are You A Victim?

What Are Self-Directed IRAs?

Self-directed IRAs are a type of financial instrument which allows a person to invest in a larger range of assets than a traditional IRA. Many of us are familiar with IRAs that invest in stocks, bonds, mutual funds, and certificates of deposit, but self-directed IRAs expand from these more traditional investing avenues, and also allow someone to invest in promissory notes, real estate, precious metals, private placement securities, tax lien certificates, and other investments which may not be registered.

This type of IRA is becoming increasingly popular in the United States, with about $94 billion of retirement funds invested in them. They are completely legal, when used correctly. However, some of the inherent characteristics of this financial instrument have not only attracted legitimate investments, but in addition scammers and fraudsters who use the patina of the self-directed IRAs legality to defraud investors of their life savings.

What Are The Inherent Characteristics Of Self-Directed IRAs That Make Them Susceptible To Fraud?

As with all IRAs, a self-directed IRA must be held by a trustee or custodian. However, with the more traditional IRAs the custodians are typically banks and broker-dealers who only allow investment in firm approved stocks, bonds, mutual funds and CDs. However, with a self-directed IRA the trustee or custodian has no responsibility to investigate the securities offered for investment, or the background of the promoter. Further, they also do not need to keep accurate records or perform audits. With these laxer requirements it is easy to see why those wishing to engage in fraud would be interested in using this financial instrument to perpetrate it.

The fact that this type of IRA allows investment in a broader range of assets can increase the likelihood of fraudulent behavior. For example, unregistered securities are permitted in this type of IRA. There is typically less investigation into this type of security, with less information easily available, and further there is no guarantee that any information provided has been audited. Therefore, in a situation in which more due diligence is typically required there is less opportunity to review accurate information to perform that due diligence.

In addition, the broader range of assets allowed for self-directed IRAs can create unique risks for investors that should be considered, such as lack of liquidity and difficulty in valuing assets. The result of the characteristics of these assets means that the self-directed IRA custodians will often list the value of the assets as the original purchase price, plus any gains as determined arbitrarily by the promoter. These values that are told to investors may not reflect the true value of the investment if sold on the open market. Further, because the custodians don’t have to evaluate the quality or legitimacy of the investments, and have no responsibility for investment performance, these self-promoting statements may go unchecked and unquestioned.

Finally, the fact that self-directed IRAs are a tax-deferred account can impact psychologically how much oversight an investor has over this type of investment instrument. The fact that there is a financial penalty for early withdrawal means people tend to invest in these types of accounts for the long term, when more prudent investors in these types of investments may more actively manage such accounts. This same mind set may also allow the person committing the Ponzi type scheme or other fraud to conduct their fraud longer before their misdeeds are detected.

Scott Starr, a partner in this firm, has stated, “Some of these investment advisors and stockbrokers are clearly committing malpractice and breaching their fiduciary duties” when directing individuals to invest in these self-directed IRAs. Further, he states that “It is not uncommon for these individuals to place their clients in investments that are either too high risk, carry a time horizon that is too far in the future, or fail to properly diversify these portfolios.”

Examples Of Self-Directed IRA Fraud Close To Home

Although fraudulent actions surrounding self-directed IRAs can, unfortunately, happen anywhere in the country the state of Indiana, and surrounding states, have had several instances of this type of fraud coming to light.

1.     Randell Morrison - Indiana

One of the most recent cases of self-directed IRA fraud reported in Indiana is the case of Randell Morrison, which has been reported extensively in the  Fort Wayne, Indiana Journal Gazette. http://www.journalgazette.net/article/20111120/LOCAL/311209934 On November 10, 2011, Mr. Morrison was sentenced to six years in prison, followed by a year of home detention and then one year of probation for bilking 15 investors in Indiana, mainly in the Allen County area, out of $1.4 million.

Mr. Morrison was a businessman in the community, and used his personal associations with fraud victims, including being a friend of the family, and attending country clubs, churches and social clubs with them, to gain their trust over several years. He then convinced these investors to roll their more traditional IRAs and life insurance proceeds into a self-directed IRA custodial company, called Equity Trust, with which he was associated. His victims thought they were investing their money in conservative and traditional investments, but instead once he gained control of the money he used it for his own personal use and for his businesses.

The Indiana Secretary of State, Charlie White, said, “Randell Morrison preyed on those who considered him a friend. He didn’t just gamble with their life savings, he squandered their life savings.” Many of the victims of this scheme were close to retirement age, and have now lost their entire retirement account and life savings. They have suffered not only financial losses, but also emotional and even physical distress because of the fraud perpetuated against them.

2.     Jerry Smith and Jason Snelling - Indiana

Another case in Indiana that is currently pending involves Jerry Smith and Jason Snelling, who are accused of conducting a long-running Ponzi scheme, defrauding investors in three states, Indiana, Ohio and Kentucky, of over $4.5 million. Smith and Snelling were allegedly selling unregistered securities, and neither was licensed to sell them.  

In this case the accusation is that investors were convinced and encouraged to roll over their traditional IRA accounts into self-directed IRAs at a trust company. Then, Smith and Snelling allegedly took the funds from the accounts and used them for their own personal use. The investors had no idea their money was no longer available, since they still received regular statements from the trust company, and even were billed fees on the accounts.

Smith and Snelling are charged with over 50 counts of violations of the Indiana Uniform Securities Act, and charges are pending in both Franklin County and Dearborn County, Indiana.

Things To Consider To Determine If You May Be A Victim Of A Fraudulent Self-Directed IRA

The U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA) and the North American Securities Administration Association (NASAA) have jointly issued an Investor Alert about the potential risks associated with investing in self-directed IRAs. You can find this short PDF here. http://www.sec.gov/investor/alerts/sdira.pdf In addition, here is information you should consider if you’re concerned you may be a victim of self-directed IRA fraud.

• Verify the information in the self-directed IRA. Many of the investments that can be purchased through one of these financial instruments can be hard to value, since they are illiquid. Therefore, the statements provided will often state their value as the price you paid for it, or what the promoter is valuing it at. However, that does not necessarily reflect what the investment could actually be sold for on the open market, which may be a much lower amount.

• Was your choice to get a self-directed IRA the result of an unsolicited investment opportunity from a total stranger, or even a friend? As stated previously, self-directed IRAs are legal and there are some which may produce high rates of return for investors. However, if someone, unsolicited, asked you to invest in such a financial instrument red flags should be raised to determine if they are a legitimate individual, or instead a fraudster.

• Were you promised a guaranteed gain or rate of return, or a low-risk, high reward investments? Similarly, when someone promises you something too good to be true, it usually is. Almost nothing in life is guaranteed, and if there were legitimate low risk, high reward investments out there lots more people would be rich than are today. Too good to be true promises such as these should also raise red flags in your mind, to investigate further about whether you are the victim of self-directed IRA fraud.

• Is the self-directed IRA promoter registered in the state they are doing business, and in addition are the investments they are selling licensed? Many states, including Indiana, have laws and regulations in place which require those selling securities to be registered with the state. Further, only certain types of investments are deemed registered securities. While unregistered securities are permitted to be included in self-directed IRAs they are much riskier, and their inclusion may still violate state law, if not federal law. It is best to make sure what you are purchasing through your self-directed IRA is licensed, and the person you’re purchasing it from is registered to sell you these types of products.

• Have you contacted another professional yet for a second opinion, such as an investment advisor or attorney? Many of the investments that can be purchased through a self-directed IRA are not ones that can be purchased through a traditional IRA, generally for the reason that they are even more inherently risky, illiquid, or complex. Therefore, before investing in such financial instruments it is a good idea to get a second opinion from an independent professional, such as an investment advisor or attorney, to help you determine whether this is a good investment for you.

If You Think You May Be A Victim Of Self-Directed IRA Fraud Call A Securities Fraud Attorney

If you think you may be a victim of fraud using this financial instrument you should act quickly to try to minimize further losses, and potentially try to reclaim money you’ve lost already. To do this, it is best to contact a knowledgeable securities fraud attorney in your area to see if you have a case, and determine the best course of action for you.

If you have lost money in a fraudulent investment scheme involving a self-directed IRA or a third-party custodian or trustee, or have information about one of these scams, you should contact Starr Austen & Miller LLC to learn more about the self-directed IRAs and report your experiences. Our attorneys, Mario Massillamany and Mark Fryman are available for direct live chat every Wednesday at 5 pm.

Indiana Law Firm Investigating Securities Fraud Stemming From Self-Directed IRA Schemes

Fishers, IN, January 3, 2012 - Mario Massillamany of the Indiana law firm of Starr, Austen & Miller, LLP, announces an investigation into securities fraud scams involving self-directed IRAs.  A self-directed IRA is an IRA held by a trustee or custodian that permits an investment in a broader set of assets than is permitted by most IRA custodians. 

Most IRA custodians are banks and broker-dealers that limit the holdings in IRA accounts to firm-approved stocks, bonds, mutual funds and CDs.  Custodians and trustees for self-directed IRAs, however, may allow investors to invest retirement funds in other types of assets such as real estate, promissory notes, tax lien certificates, and private placement securities.  $94 billion of IRA retirement funds are held in self-directed IRAs making them a favorable scam for fraud promoters

Fraud promoters who want to engage in Ponzi schemes or other fraudulent conduct may exploit self-directed IRAs because they allow investors to hold unregistered securities.  Additionally, the custodians or trustees of these accounts have no responsibility to investigate the securities or the background of the promoter.  Furthermore, self-directing IRAs do not typically require the trustee or custodian to keep accurate records or perform audits.

"Some of these investment advisors and stockbrokers are clearly committing malpractice and breaching their fiduciary duties in the way they are advising their clients to invest in their self directed retirement programs such as IRA’s and 401k’s," said attorney Scott Starr.  “It is not uncommon for these individuals to place their clients in investments that are either too high risk, carry a time horizon that is too far in the future, or fail to properly diversify these portfolios."

The self-directed IRA custodial process gives the aura of protection for the investor but it is elusive. A few ways to avoid fraud with self-directed IRAs is to verify information in self-directed IRA account statements, avoid unsolicited investment offers, ask questions from the promoter, be mindful of “guaranteed” returns, and seek advice from a trained professional. 

About the law firm:

The law firm of Starr Austen & Miller LLC has over 90 years of experience in securities and class action litigation. The firm has earned a national reputation among litigators by handling cases ranging from personal injury caused by exposure to toxic chemicals to mass and class actions against national brokerage firms for securities fraud.

Legal Resources for Impacted Investors

If you have lost money in a fraudulent investment or scheme involving a self-directed IRA or a third-party custodian or trustee, or have information about one of these scams, you should contact www.starrausten.com to learn more about the self-directed IRAs and report your experiences.

Source/Contact:

Mario Massillamany

574-722-6676

mario@starrausten.com

Schrenker v. State, 919 N.E.2d 1188 (Ind. Ct. App. 2010)

In Schrenker v. State, Michelle Schrenker and her husband Marcus were the subjects of an action by the Indiana Securities Commissioner.  Marcus Schrenker was registered as an investment advisor with the Indiana Securities Division, and he and Michelle were principals in investment firms called Heritage Wealth Management (HWM), Heritage Insurance Services (HIS), and Icon Wealth Management (Icon).  The offices were leased to both Marcus and Michelle, and Michelle kept the books and was chief financial officer (CFO) for the three firms. She was paid $ 11,600 monthly, and the State asserts she “did not consider her position as CFO to be simply a title”  She was the majority shareholder and a director of HWM.  She handled the books, recordkeeping, and accounting for HWM and Icon, and had the authority to write checks and withdraw money from the HIS account.

The Indiana Securities Commissioner sought the appointment of a receiver over Michelle Schrenker’s assets.  The trial court granted the appointment.  The appointment was premised on the trial court’s conclusion that the advisor materially aided her husband and his corporations in violating the Indiana Securities Act and she was jointly and severally liable with and to the same extent as her husband and his companies by virtue of her position as Chief Financial Officer of three companies.   The advisor had access to one of the company’s checking account.  There was a substantial casual connection between the advisor’s culpable conduct, in the form of withdrawing investor funds from one company account, and the harm the investors suffered in the form of lost money.  She materially aided her husband in violating the Securities Act.  The appellate court affirmed the trial courts appointment of the receiver stating that it did not abuse its discretion.

Police Report and Officer Testimony Admissibility in Indiana

Whenever you are involved in a truck accident a police report is typically created by an investigating officer. This report is made by an officer who is only at the scene after the accident occurs. He or she interviews witnesses, takes down information about the accident itself, and may or may not make a conclusion as to who caused the accident and/or issue a citation to the person that he or she concludes was at fault.

As you can imagine, the conclusions of a police officer as to who caused an accident can be quite persuasive to a jury, convincing them a defendant caused the accident, or conversely that it was plaintiff’s fault and he or she should not receive damages from the defendant. Therefore, there is often litigation concerning whether the police report, the conclusions it draws, and the investigating officer’s testimony, are admissible evidence in a truck accident lawsuit, and what each side argues is typically related to who the officer says caused the accident.

Investigative Reports by Police and Law Enforcement Personnel Are Hearsay

Although a general exception to Indiana’s hearsay rule is for public records and reports Indiana Rule of Evidence 803(8)(a) makes an exception to the exception, declaring that “investigative reports by police and other law enforcement personnel” are still hearsay. That means that these accident reports, and the evidence they contain, are typically not admissible into evidence in Indiana.

However, the investigative officer is often called to testify in car and truck accident lawsuits, meaning that there are typically some parts of the officer’s testimony which are admissible. Below are some examples of the types of things an officer can testify about, and what he cannot. What follows discusses some general rules of law, but there are always exceptions and factual distinctions between cases which could result in a different outcome. This is especially true in evidentiary law, some of which is based on the discretion of the court regarding the issue of undue prejudice, which is why an experienced truck accident attorney should be consulted.

Officer Can Testify As To Observations He or She Made At Accident Scene but Generally Not the Cause of the Accident If They Didn’t Observe It Personally

One of the reasons courts have given for not allowing an officer to testify about the issue of causation, i.e., who caused an accident, is because they did not typically observe the accident themselves. Typically, investigative officers come to the scene of the accident only after it has occurred, and rely on eye witness statements to make their conclusions. That is exactly what a jury is supposed to do, so since they didn’t actually see it themselves police officers aren’t generally allowed to share their conclusion about who caused the accident, or how the accident occurred.

On the other hand, an investigating officer is often asked to testify about what he did observe at the scene of the accident as a neutral third party. This can include the position of the vehicles and other post-accident information. In addition, there may be questions about observations the officer made of the injured parties, and what they said about how they felt right after the accident, such as any complaints of pain and in what areas of their body.

Often statements of the witnesses are considered hearsay, and the officer cannot testify about them. However, there are quite a number of exceptions to this hearsay rule, and if one applies an officer may testify as to those statements too. One of the most common of these include when a person admits fault for an accident. Since this an admission against interest, and a statement by a party opponent, it is not considered hearsay at all and an officer can testify about what a party said on this subject.

Sometimes Police Officers Can Be Qualified As an Expert and Provide Conclusions about Causation

There is one exception, when an officer is qualified as an expert witness, when he or she is able to testify as to his or her conclusions about who caused the accident. Typically, the court will consider the officer’s years of experience and any training he has had in accident reconstruction in determining whether he can be qualified, and it is in no way guaranteed that all officers will qualify.

If a police officer does qualify as an expert witness he can provide opinions as to the ultimate issue of fact before the jury – who caused the accident. Typically, the opinions of the police officer as an expert cannot be based solely on witness statements, because a jury can decide based on those statements without a police officer’s opinion. Instead, the police officer’s expert opinion must be based on more, such as his own observations at the accident scene, such as by examining the skid marks, the weather and light conditions right after the accident, etc. This information, plus his knowledge of accident reconstruction, can allow in some instances for him to testify as to who he believed caused the accident to occur.

The Importance of Evidence in the “Black Box” For Truck Accident Litigation

Often in truck accidents there is a lot of conflicting testimony between the truck driver’s version of events and that of the injured person regarding such important issues as speed, acceleration and braking. Some of this conflict may come from a bias of protecting one’s own interests, but in addition these accidents often happen so quickly, and so many things happen in quick succession that it can be difficult to accurately remember or even notice all relevant pieces of information.

That is where a heavy truck’s Event Data Recorder (known in the industry as an “EDR”), and often commonly referred to as a “black box” can be very useful. This piece of electronic equipment, while not required by law to be present in all vehicles, at this time, often is present and can be very helpful in accident reconstruction.

The Types of Data That May Be Recorded in a Truck’s EDR That Help in Accident Reconstruction

There are many types of EDRs, and therefore they do not all record exactly the same type of information in exactly the same manner, although NHTSA (National Highway Traffic Safety Administration) does have some standards and rulings for these recording devices.

Some of the types of data that an EDR may record, and which may be helpful for accident reconstruction, include the following:

• Speed
• Acceleration rate
• Engine revolutions per minute (RPMs)
• Gear selection and/or clutch application
• Engine malfunction information
• Airbag deployment information
• Measured changes in forward velocity (Delta-V)
• Engine throttle
• Brake application
• Steering angle
• Whether seatbelts were on or off
• Sudden stops
• Low oil pressure
• Coolant loss
• Cruise control status
• Fuel economy
• Idle time
• Average travel speeds

Passenger Vehicles Often Have an EDR Too

Not only do many heavy trucks have these black boxes, but often many passenger vehicles may have them as well. Typically, but not always, these EDRs record less information than those within heavy trucks, but still tend to include information used to calculate airbag deployment and seat belt tensioner calculations, for example.

Just as attorneys for injured victims in truck accidents may request the information from an EDR, so too can plaintiffs receive requests to have their data downloaded and analyzed. It can be important for injured parties to have legal representation in such instances to determine what is, and is not, relevant and admissible evidence and what must be provided during discovery.

Expert Testimony Necessary to Interpret and Present This Evidence in Court

The information contained in the black boxes can be used for accident reconstruction, and it is typically downloaded directly from the vehicle(s) involved in the accident soon after the accident occurs. It is important to make sure you obtain legal representation as soon as reasonably possible after an accident occurs to make sure all relevant data is downloaded before it becomes unavailable, lost or destroyed.

Once the information is downloaded into a report it must be analyzed and interpreted by an expert in accident reconstruction to understand what the data means, and to draw conclusions about how the accident occurred (and potentially why it occurred). An experienced truck accident attorney will be able to contact such experts to evaluate the data involved in your case.

Courts often hold that this EDR data is generally accepted and reliable, which meets the requirements for its admission into evidence. However, there are often legal arguments on both sides regarding what the expert can, and cannot say, in regard to conclusions based on the data retrieved. This requires an understanding of evidentiary law, as it relates to expert testimony, to determine which conclusions are appropriate for a jury to hear from an expert.

Indiana State Fair Collapse Lawsuit Filed Against Sugarland

Date: November 22, 2011:

Today, Mario Massillamany, of the Indiana law firm Starr Austen & Miller, LLP, announced the filing of a complaint on behalf of 47 victims of the Indiana State Fair stage collapse, which occurred on August 13, 2011.

On August 13, 2011, a large crowd of Sugarland fans gathered at the Indiana State Fair Grounds expecting a great country music concert, and instead tragedy struck. During a severe thunderstorm with very strong winds the overhead stage rigging at the outdoor concert collapsed, killing 7 people and injuring over 40 others. Among those victims were Starr Austen & Miller clients Lisa Hite, and her granddaughter Kyla-Reed Brummet, who were both in the Sugar Pit at the concert. "The injuries I sustained have left me unable to provide for my family," Hite stated. "The financial and emotional strain this has caused has left a lasting impact on my family."

The lawsuit has named Sugarland Music, Inc. and other private entities responsible for the organizing, staging and presentation of the Sugarland concert as defendants. The allegations against the defendants include that they breached their duty of reasonable care to the victims of this collapse. Specifically, the complaint alleges that Sugarland and the other private entities owed a duty to provide a safe concert environment and use reasonable care in the operation, direction, management, set-up, control, and supervision of the concert.

According to the contract reached between Creative Artists Agency (Sugarland's agent) and the Indiana State Fair Committee, Sugarland was guaranteed:

• $300,500 to perform
• $30,000 for sound and lights
• $4,500 for catering
• 85% gross box office receipts over $470,000

The contract specifies that Sugarland has the final say on whether to cancel a concert due to weather.  "This unimaginable tragedy will forever live in the hearts and minds of the people of Indiana," said plaintiffs' counsel Mario Massillamany. "Unfortunately, this tragedy could have been prevented if the responsible parties had been concerned about the concertgoers that night."

A copy of the complaint can be seen here.  If you have information regarding the litigation, please call 574-722-6676. 

Will The Dodd-Frank Wall Street Reform Act Make FINRA Arbitration Obsolete?

The Dodd-Frank Wall Street Reform Act shows a congressional dislike for mandatory arbitration provisions, to say the least. This Act, which was signed into law on July 21, 2010, by President Barack Obama, contains many provisions which could lead, after study, to the prohibition or limitation on these boilerplate clauses in consumer contracts. This includes arbitration provisions in client agreements with broker dealers that cause many securities fraud causes of action to be arbitrated at FINRA at this time.

Widespread Prevalence of These Arbitration Clauses

Statistically, just about everyone in the United States has knowingly, or unknowingly, agreed to a boilerplate mandatory arbitration clause in the contracts or agreements we enter into day in and day out. Some of the most common are those contained in credit card agreements, for example, in which you’ve agreed to take any disputes to arbitration instead of going to court.

The Problem with Mandatory Arbitration Provisions

Arbitration is an alternative way to resolve legal disputes outside the judicial system. Using this method a neutral third party is supposed to hear both sides of the story and then make a binding decision. When arbitration was first introduced in this country it held the promise of improving the dispute process by speeding it up, making it cheaper, and keeping parties from jumping through some of the legal hoops involved in going to court. Arbitration, when conceived, however, imagined two parties of approximately equal bargaining power voluntarily choosing to use the process. That is no longer the case.

Over the years big business has begun inserting these mandatory arbitration provisions in just about every contract they can think of. They’ve done this because they’ve figured out that these arbitration provisions tend to give them the upper hand over consumers in dispute resolution. For instance, there is no jury, no public trial, little to no review by the courts, and instead of going to your local courthouse the arbitration can be located hundreds of miles away from where you live. What makes this worse is that consumers cannot negotiate these provisions, but it is take it or leave it. That assumes, of course, that we even know the fine print clause is in the document, or understand its legal implications to begin with.

Mandatory Arbitration in the Context of Securities Fraud

Arbitration provisions have also creeped into many customer account agreements between customers and their brokers, often without the customer being aware of the provisions existence, and/or unaware of its legal implications. These agreements are typically signed when a customer first begins a relationship with a broker, and agrees that any future disputes between the party, meaning things that have not even happened yet, will be subject to arbitration by the Financial Industry Regulatory Authority (“FINRA”).

The mandatory arbitration provisions in these agreements have been just as controversial as those in credit card and other consumer agreements. Some of the criticisms leveled against FINRA arbitration include that it is biased in favor of the broker dealer, because one of the three arbitrators on the panel is from the securities industry. Further, the broker dealers themselves are the people who make up the membership of FINRA, so is FINRA really going to bite the hand that feeds it? There are those, of course, from the securities industry themselves who defend the FINRA arbitration process [link to SAM article: what is FINRA arbitration?] saying it is speedy, less expensive and fair. However, as hard as many brokers and securities firms fight to enforce these arbitration provisions, and avoid court, critics may just have a point about who is most favored between the brokers and the customers.

The Dodd-Frank Act’s Potential Blow to FINRA Arbitration

It seems Congress may finally be waking up to some of these criticisms, and showing a willingness to investigate the issue further. The language related to FINRA arbitrations in the Dodd-Frank Act is found in Section 921, which confers authority on the SEC to make rules that limit or prohibit these provisions between customers and broker dealers or investment advisors.

Specifically, the section states:

The Commission, by rule, may prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.

Currently Arbitration Clauses Are Legal and Common In Securities Fraud Cases

Of course, the Act’s language does not currently prohibit such arbitration provisions in customer agreements, and therefore the industry still includes them as standard at this time. Unless and until the SEC creates a contrary rule these mandatory arbitration provisions continue to be valid and enforceable, as a general rule.