It is now well documented from news articles and law suits arising from some of the more famous Ponzi scheme masterminds (Madoff, Pearlman, Daniel Health, Ephren Taylor) that their fraudulent enterprise depended on the use of self-directed IRAs (SDIRAs) and specifically designated self-directed IRA custodians ("Custodians"). In each case, the fraud promoter steered their victims to a particular Custodian. But why are these SDIRAs so popular with Ponzi Schemers? The shocking reason is because the Custodian of a SDIRA has absolutely no responsibility to evaluate or confirm the value of the "investment" sold by the fraudster to the investor/victim. So to give you some examples from the Lee v. Ephren Taylor, City Capital, et al matter, those victims thought they were investing in tens of millions of dollars worth of businesses, real estate, stock, oil rights, sweepstakes machines, mortgages, liens, etc. However, the actual value of their investments at the time of investing was less than 20% of the amount paid and that is an average. Many investors made an investment in nothing. But the victims never knew that because the Lee co-conspirators provided the investment "value" to the designated Custodians. The Custodians simply took the co-conspirators stated investment value and noted it in the victim's SDIRA investment account as the account's stated value.
By using a SDIRA as the investment tool, the Lee co-conspirators were able to sell the victims real property with an actual value of $18,000 for $60,000 or a business with a negative net worth for $80,000. Moreover, at the time of the investment, the Lee victims didn't know that the taxes and fees on their investment property and/or business were delinquent, and that there were liens on the property. But those were minor concerns. The major concern with all of these investment transactions consummated by the Lee co-conspirators was that TITLE TO THE INVESTMENT PROPERTY NEVER PASSED TO THE VICTIMS/OWNERS. Yet the Custodians never raised the issue with these inexperienced investors.
In addition, all of the promissory notes purchased by the Lee investors from Ephren Taylor's companies went into default but the CUSTODIANS NEVER NOTICED OR ADVISED THE VICTIMS THAT THEIR NOTES WERE IN DEFAULT, EXPIRED, OR THAT THE INTEREST PAYMENTS WERE NEVER RECEIVED. By the time the victims realized that they had been defrauded, the money was gone. Yet the Custodians continued to charge the victims hundreds or thousands of dollars in administrative fees to provide the Lee victims with account statements that were inaccurate and concealed repeated defaults, lack of ownership of the investment and fraud.
Unfortunately, it is pretty clear why Ponzi Scammers prefer SDIRAs to perpetrate fraud-because SDIRAs and the Custodians who maintain them make it very, very easy.
Tomorrow we will examining the custodial responsibilities for SDIRAs.