(originally published October 2010)
Colorado hedge fund manager Sean Mueller allegedly swindled nearly $71 million from 65 investors last month. Among the victims: former Denver Broncos quarterback John Elway. Last year, Elway was connected to another Ponzi scheme when a company that paid him to appear at seminars with potential investors was accused by the Securities & Exchange Commission (SEC) of committing fraud. These cases highlight two very important facts: anyone can fall victim to fraud and you should never invest based solely on reputation or word of mouth.
The Colorado Securities Division charged Mueller with securities fraud, claiming he operated a Ponzi scheme and created false documents to cover up his activities. In a Ponzi scheme, the fraudster promotes an investment and uses money collected from new investors to pay returns to existing investors. In many cases, the investment doesn’t exist and the money is simply being pushed around to make it appear like the investment is producing solid returns.
Along with falling victim to Mueller’s scam, last year Elway was connected to the company Speed of Wealth, which the SEC claimed was a $30 million Ponzi scheme involving more than 300 investors. Wayde and Donna McKelvy, founders of the company, invited Elway to speak about football to potential investors at seminars in Denver and Colorado Springs. While Elway didn’t invest in the company himself or directly endorse it, the McKelvy’s used his celebrity status to impress and lure investors. The idea being that if Elway was at the company’s seminar, what they were selling had to be good.
Speed of Wealth is not the first company to take advantage of National Football League (NFL) players. Last year, Triton Financial, LLC, the investment firm that co-sponsors the Heisman Trophy Trust, was charged with committing fraud by the SEC. The company told investors their money would go toward buying an insurance firm when in reality company founder Kurt Barton pocketed it for his personal use.
The SEC claimed that Triton solicited many of its investors by asking former NFL players to email their friends, many of whom were former players themselves. According to the SEC, one former quarterback emailed 102 retired NFL players claiming that Triton was averaging 32 percent returns – a completely false statement. Over a period of at least five years, Triton Financial was believed to have raised more than $8.4 million from around 90 investors.
Utilizing someone’s reputation and/or connection to potential investors is known as affinity fraud. In some cases, fraudsters take advantage of their own relationships to solicit victims. In other cases, victims actually recruit more victims not knowing they are part of a scam. This is common in Ponzi schemes where a victim may think they are getting consistent returns and tell a friend they should invest as well. The Triton Financial case is a clear example of fraudsters relying on word-of-mouth to find additional victims.
The bottom line is that when it comes to investing, you can never be too careful. Even an investment tip from your best friend must be fully researched. Just because someone you know made money doesn’t mean you will and doesn’t mean that they aren’t unknowingly part of a scam.
Avoid falling victim to fraud by calling the Indiana Securities Division at 1-800-223-8791 to make sure the person selling you the investment and the product itself are licensed and registered with our office. For additional tips on avoiding fraud, visit http://www.indianainvestmentwatch.com/.