When the Bernie Madoff Ponzi Scheme was finally unearthed, the use of self-directed IRA custodians to facilitate fraudulent investment scams, including Ponzi schemes, became more prominent. Although the self-directed IRA custodians escaped liability in the Madoff investors/victims cases, the attraction of this investment vehicle as a faciliator of fraudulent ploys promoted by con artists became readily apparent. We will be analyzing the various unique attributes of self-directed IRAs that make them an invaluable partner to fraud promoters. One of the most attractive characteristics of a self-directed IRA for fraud promoters is the fact that the unsuspecting "investor" receives absolutely NO PROTECTION. The laws and regulations which authorize the use of self-directed IRA custodians for investments prevent the custodians from being held liable for fraudulent transactions, illegal sales of securities, or the ever popular Ponzi scheme. Because there is a total absence of scrutiny of the legality of the investment by the self-directed IRA custodian, neither the investment "opportunity" nor the "promoter" of the investment receive any kind of due diligence inquiry or investigation by the self-directed IRA custodian. Yet the inexperienced investor may feel "protected" because their investment funds are supposedly being held by an entity referred to as a "trust" or "institution". In fact, the use of a self-directed IRA custodian often gives the fraud promoter enhanced credibility with their targets.
The self-directed IRA custodial process gives the aura of protection for the investor but it is elusive. This lack of oversight or scrutiny of these investments permits the self-directed IRA custodian to charge hundreds or thousands of dollars in fees for essentially providing a quarterly report indicating the purported value of the assets in the self-directed IRA account . Yet, as we will discuss tomorrow, the lack of investigation of the investments or promoters, or auditing of the assets held in these self-directed IRA accounts further assists the fraudulent scheme by giving the investor the illusion that their investment still has value.
In sum, one of the primary ways the use of a self-directed IRA custodian assists in facilitating fraud promoters is by creating the illusion that the investment is insured and protected and that the fraud promoter is legitimate because of their affiliation with a large, self-directed IRA custoidan. Those of you who have read our Class Action Complaint in Lee v. Ephren Taylor et al will note many allegations as well as exhibits demonstrating the co-conspirators use of the prominence and size of their designated, self-directed IRA custodian in marketing documents given to potential investors to facilitate their fraud and enhance the fraud promoter's credibility.