What happens when the SEC accuses one of the biggest self-directed IRA custodians in America of helping to promote a Ponzi scheme… a scheme which wiped out many MILLIONS of dollars from the accounts of that custodian’s clients? I’m Bryan Ellis… I’ll give you the latest RIGHT NOW in Episode #86.
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\r\nIt’s an ugly, ugly situation, my friends. And I hope you’re not one of the many unfortunate investors who were victimized.
\r\nBefore I give you all of the sordid details, it’s important that you understand that everything I’m about to share with you is allegation on the part of the SEC. This has not yet gone to court, though it’s heading there presently. It’s entirely possible that the huge Self-Directed IRA custodian involved in this situation could be fully exonerated. They have denied the charges.
\r\nBut I’ve got to tell you… it doesn’t look good for Equity Trust, one of the largest – if not the very largest – self directed IRA custodian.
\r\nI’ll give you the ugly details about that in just a moment. But first, I’d like to give a heart-felt thank you to: EVERY ONE OF YOU. I just love doing this show… I love that you listen to this show… and I’m truly, truly grateful for you.
\r\nSo, back to our story:
\r\nHere’s my reading of the situation from a layman’s point of view. Equity Trust is in trouble because the SEC believes that they, in effect, helped to promote an investment that turned out to be a fraudulent Ponzi scheme… and they did nothing to alert their clients, even though there were some very clear red flags. That Ponzi scheme – promoted by Ephren Taylor and Randy Poulson – resulted in the loss of a total of about $5 million dollars across about 100 accounts at Equity Trust.
\r\nWhy were so many Equity Trust clients involved in this particular scheme – which they all believed to be a legitimate investment? Apparently, Equity Trust representatives participated at events hosted by Taylor and Poulson, where the custodian encouraged attendees to transfer their retirement savings from traditional IRAs to self-directed IRAs at Equity Trust so they could invest in the Taylor or Poulson offerings.
\r\nBut the real crux of the matter, according to the SEC’s allegation, is that there were some red flags that should have tipped off Equity Trust to the potentially fraudulent nature of the transaction. And apparently, those red flags were ignored by Equity Trust.
\r\nWhat were the red flags? Well, possibly the biggest one was that even though Taylor and Poulsen were providing investments in the form of “notes” – basically just a loan – those guys apparently never provided investors with documentation about the collateral for those notes. And this is a problem for Equity Trust, as the entity who seems to have both PROMOTED the investment and served as a custodian for accounts that purchased the investment. What does the SEC think about that? Well, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement says it rather bluntly:
\r\n“We allege that Equity Trust failed to protect the interests of its customers when it acted as more than a passive custodian. When custodians like Equity Trust are aware of red flags suggesting an ongoing fraud, they must take action to try to prevent it.”
\r\nSo, the issue here is NOT that clients of Equity Trust were involved in an investment which turned out to be fraudulent. After all, they sell self-directed accounts, which inherently includes the ability to self-direct into bad investments as well as good ones. No, my friends, the problem is more fundamental: The SEC thinks that Equity Trust, in effect, recommended the investment, and stepped out of the role they’re supposed to serve – which is as a passive custodian of assets – and into a role which is not compatible, and apparently legal problematic, for a custodian to be involved in… that role being investment advisory. And since that investment showed some red flags of fraud, and later turned out to be genuine fraud… the SEC thinks Equity Trust’s role beyond passive custodianship obligated them to protect their clients, which clearly did not happen. The next step will be a hearing an administrative law judge.
\r\nNow my friends, let’s be clear: I don’t know if any of this is true. Equity Trust certainly denies it… but it doesn’t look good for them. I don’t have an account at Equity Trust, so I have no first-hand experience with them.
\r\nBut I’ll tell you this much: It’s NEVER good news when a custodian explicitly endorses an investment opportunity. When you see that – and you certainly will, from time to time – ask yourself: What’s the quid pro quo?
\r\nInvariably, it’s one or both of two things: The custodian is endorsing the investment because the investors must first set up a self-directed account with the custodian and/or the custodian is otherwise being compensated for promotion of the investment to its clients.
\r\nNow, here’s the truth: I’m not a huge fan of these types of regulations, so even though Equity Trust’s reputation is that they’re somewhat heavy-handed when it comes to pushing their services, still… I’m not a fan of government overreach. But I’m not really sure that’s happening here. It seems, on some level, quite reasonable for a custodianship to be a totally separate function from investment advisory. But on the other hand… I prefer that laissez-faire be the rule.
\r\nBut that leaves a responsibility with you, my friends. It’s the responsibility to do the one thing required of all self-directed investors: To respect your own capital. How do you do that? Make sure that you stick only with investments that match the S3 Standard: SIMPLE, SAFE and STRONG.
\r\nThis investment that’s gotten Equity Trust in trouble – and far more importantly – has resulted in the loss of MILLIONS of dollars for their clients… well, it CLEARLY didn’t meet the SAFE part of the standard.
\r\nYou’ve heard me talk about note investing many times here on this show. I love a good note investment. It makes sense in so many ways. And the investment that Taylor and Poulsen were promoting through Equity Trust was a note investment… but it turned out to be fraudulent… and a complete rip-off.
\r\nWhat’s the difference between what they were doing, and a GOOD note investment? The answer is right there in the SEC press release: There was no documentation about the collateral for the loan. NO DOCUMENTATION! I mean, COME ON, PEOPLE! What do you think… do you think you should just trust people with your money? Should you just turn over your money with nothing to show for it and hope for the best? Jeez… how silly.
\r\nOh, wait a minute… that’s exactly what Wall Street requires you to do with stocks and mutual funds.
\r\nNevertheless, my point stands. The ONE THING that can make a note investment really safe is to have really great collateral. You’ve heard me talk about it on this show over and over. Whenever my investors get involved in a new loan – in other words, a note – we tell them to DEMAND that the collateral that they receive is worth at least 50% MORE than the amount of the loan. So if they make a $100,000 loan, they’ve got to get $150,000 of collateral.
\r\nTHAT is a great way to keep your money safe. You’ve got to have ALL 3, my friends – simple, safe and strong – and you’ve got to have them all DOCUMENTED and in legally enforceable language!
\r\nMy friends… alternative assets can be GREAT! In fact… I’d venture to say that it’s really quite simple to totally WHIP the long-term average of the S&P 500… and to do it in an incredibly safe way using alternative assets. Particularly with well-collateralized notes.
\r\nBut… make sure you understand what you’re getting into. If you don’t have a lot of personal experience with the investment opportunity you’re considering, be wise and hire an attorney or other advisor who does. It just makes sense.
\r\nRemember, my friends: Respect your own capital. That’s rule #1.
\r\nThat’s all for today, folks. Please be sure you’re subscribed to the FREE self directed investor email discussion group. Just text the word SDIRADIO (with no spaces or periods) to 33444 to join this private group. Again, text SDIRADIO to 33444.
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My friends: Invest wisely today… and live well forever!
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