SEC Charges Equity Trust Company in Connection with a Ponzi Scheme
On June 16th the SEC announced charges against Equity Trust Company, a retirement plan custodian in connection with a ponzi scheme. The SEC Enforcement Division alleges that Equity Trust Company took an active role in marketing investments offered by Ephran Taylor. According to the SEC, Ephren Taylor targeted churchgoers while running the Ponzi scheme with Randy Poulson, who has been indicted in federal district court for an alleged fraudulent offering in New Jersey. The SEC claims that more than 100 investors were defrauded out of more than $5 million held in accounts at Equity Trust Company.
Be sure to read The Self-Directed IRA 101
It is always a sad day when people decide to defraud investors. There will always be a few that think they can steal from people and get away with it. In light of the widely known Ponzi scheme that Bernie Madoff perpetrated, investors should be more alert of this risk and diligent in their research. They should be focused on the investment itself rather than the promoter. This SEC allegation is yet another incident where investors put too much “faith” in people who are not investment professionals.
In a separate press release, Equity Trust Company denied all the charges alleged by the SEC. Since these allegations have become public in the past few days, it is too early to know what happened or if Equity Trust Company broke the rules. Only time will tell if they are ultimately held responsible for their role in this alleged fraud.
Both the SEC and Equity Trust Company Knew Fraud was a Potential Issue
The risk of fraud with Self Directed IRAs is a well known problem among industry participants. Self Directed IRA industry participants and regulators have issued a number of press releases, articles, and educational materials to the investing public to educate them about this problem. Here are some of the materials provided to investors as a resource:
- SEC - Investor Alert
- NASAA – Informed Investor Advisory
- Equity Trust Company – Check before you invest: Anti-Fraud Campaign
- RITA – Check Before You Invest
The Self-Directed IRA industry participants and industry regulators have made considerable efforts to combat this problem. They all have been independently providing education to the investing public in an attempt to educate investors of the potential for fraud from investment sponsors. While many efforts have been made, it is obvious from this recent allegation that more needs to be done.
No doubt this is a black eye for the self-directed IRA industry. Any time there is a fraud or alleged fraud, it makes all firms in the same industry guilty by association in the public eye. While I would argue that most of the self-directed IRA custodians and administrators are operating within the rules, there will always be a select few who try to push the boundaries.
What are Some Steps That Self-Directed IRA Investors Can Take to Protect Themselves from Fraud?
Innovative Advisory Group is an industry leader when it comes to due diligence for alternative investments held in self directed IRAs. In our experience, we have found that individual investors do not put enough time into the due diligence process to help mitigate risks. If investors engage in proper due diligence for each investment, risks such as fraud are much easier to spot. Here are some ways investors can reduce their exposure to a fraudulent investment.
- Verify information in self-directed IRA account statements
- Avoid unsolicited investment offers
- Ask questions
- Be mindful of “guaranteed” returns
- Ask a licensed and unbiased investment professional
Investors should take heed of these risk avoidance tactics. However if they are not experienced in providing proper due diligence, they should follow the SEC’s advice, “investors should consider getting a second opinion from a licensed and unbiased investment professional.”
Raising the Standard of the Self Directed IRA Industry
The self-directed IRA and alternative investment industry needs to provide more transparency and legitimacy to investors as to their role in the investment process. It should be a requirement that custodians, administrators, and facilitators clearly spell out that they are not providing financial advice, and that investors should consult their own licensed financial advisors. Financial advisors for their part should be able to work with their clients to provide due diligence capabilities for the investments, helping to identify fraud and protect the investors.
Innovative Advisory Group is one of only a handful of wealth management firms that specialize in this type of financial advice. Investing in alternative investments in a self-directed IRA is new to most people. More than 80% of the investing public is not even aware that this is possible. Innovative Advisory Group has made it the company’s mission to bring visibility, transparency, and legitimacy to the self-directed IRA industry. If you want to know more about our mission, feel free to contact me.