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Henry Jones delivered the good news in a conference call with Tri Energy Inc.'s investors. The gold deal the company had been working on for years was about to pay off.
Jones, 55, a record producer in Marina del Rey, Calif., and his two partners had raised more than $50 million from 735 investors, which they said they were using to broker the sale to Arab buyers of 20,000 tons of gold owned by a group of Israelis. They promised to triple investors' money -- if only Tri Energy could overcome some last-minute glitches.
All the company needed to close the deal, Jones said on the Dec. 20, 2004, conference call taped by one of the participants, was a "safe-passage letter" that would cost $450,000. A few days later, on another call, he said Tri Energy had to come up with $100,000 to open a "commission account." Then, on Jan. 15, 2005, a new request -- the bank handling the deal wanted $125,000 to conduct an audit.
Like those caught up in other get-rich scams -- from Bernie Madoff's $65 billion Ponzi scheme, which initially snared wealthy Jews among others, to an alleged $4.4 million fraud aimed at deaf people -- Tri Energy's investors had something in common. Many were Mormons or born-again Christians who shared dreams and prayers on nightly conference calls. They vowed to use the profits for charitable works and kept raising funds, at times taking out second mortgages, draining retirement accounts and recruiting relatives.
Although the delays and pleas for more money never stopped, the charade eventually did.
Affinity fraud » In May 2005, the U.S. Securities and Exchange Commission obtained a temporary restraining order against Jones and his partners, Robert Jennings, an associate pastor at the New Life Fellowship Church in Perris, Calif., and Arthur Simburg, a former marketing representative for sporting-goods manufacturer Puma AG.
Jones, a native of Nigeria, and Jennings, 59, were later convicted in federal court in Los Angeles on charges of mail, wire and securities fraud. Jennings was sentenced last November to 12 years in prison, and Jones got 20 years in April. Simburg, 64, who pleaded guilty and cooperated with prosecutors, received a nine- year sentence.
Although their scam was puny when compared to Madoff's, which netted him 150 years in prison, it had much in common with the largest Ponzi scheme in history and other so-called affinity frauds. Such cons prey on like-minded or culturally connected investors whose trust blinds them to the implausible in the pursuit of profit.
The SEC has filed 86 enforcement actions involving Ponzi schemes since the beginning of 2006, according to data compiled by NERA Economic Consulting, a New York-based research firm. The number more than tripled to 36 in the first six months of this year from 11 in 2006.
Many of the scams, in which money from new investors is used to repay others or siphoned off by the promoters, targeted religious or ethnic groups.
"Affinity can be a powerful element," says Mitchell Zuckoff, a professor of journalism at Boston University and author of Ponzi's Scheme: The True Story of a Financial Legend , a 2005 book about Charles Ponzi's 1920 fraud. "That's what gets people to lower their inhibitions. There's this attitude, 'He's like me. I can trust him.' It's almost hard-wired into our DNA."
'Totally outlandish' » Although some Tri Energy claims were implausible -- the 20,000 tons of gold was more than twice the total U.S. bullion reserve, the largest in the world -- investors rarely wavered in their loyalty. One even invested more money after his brother, despondent about being conned, committed suicide in Ogden, prosecutors say.
For Kim Flanigan, 37, a Mormon who owns a furniture store with her husband in Casper, Wyo., being part of a spiritual mission was addictive. She says she invested $10,000 in Tri Energy at the suggestion of her mother and an aunt.
"It was almost like a cult," Flanigan said. "There were prayers at the end of most of the calls. That element was key. There was a real sense of camaraderie, a sense of community, and everything we were going to do involved humanitarian efforts to change the world. That's why you felt like you didn't dare disrupt it. God's behind us, and you shouldn't betray him."
Ned Hill, a professor of business management and a former dean of the Marriott School of Management at Brigham Young University in Provo, notes that Mormons have a history of being victimized by financial scams. The church teaches its 13.5 million members they can get into heaven by following a prescribed path of good works.
"What you have in a Mormon community or any religious community is a community of trust, and it can be very strong," said Hill, who is a Mormon. "If you can break into that trust, then the things that make this so supportive can make people really vulnerable. Mormons can be especially vulnerable because they're committed to doing good."
Jones, Jennings and Simburg, none of whom is a Mormon, exploited this vulnerability for at least four years, offering a cocktail of spirituality, exclusivity and the promise of high returns.
"The guys who did this were geniuses in a way," said Dana Carney, an assistant professor of management at the Columbia University Graduate School of Business in New York, who has written about investor psychology. "This has the flavor of a cult. They hit all these vulnerabilities. There was religion; we trust like people, especially religiously like people. With the nightly calls, there was an illusion of transparency. They took advantage of the sunk-costs phenomenon: The more people invest in something, the more connected they feel."
A Taylorsville resident, Danniel J. Merriman was named in a Securities and Exchange Commission complaint as an investor who also solicited investments from others and forwarded the money to the scammers. Merriman also apparently used the last name Meniman. The SEC called Merriman one of the "significant promoters who brought man victims into the fraud."
Jones on board » Simburg told prosecutors he was introduced to co-defendant Jones in 2001 by a mutual acquaintance who thought the Nigerian might use his international connections to help Tri Energy raise capital. Tri Energy, founded that year by Simburg, Jennings and Jennings's father-in-law, Thomas Avery, was registered in Nevada and had leases on two low-producing Kentucky coal mines.
Jones failed to find any investors, according to Simburg's account. He did offer something else, Simburg testified: a chance to take part in a Middle East gold transaction and use $200 million of the expected profits to finance the coal operation.
Once Jones was onboard and taking part in the nightly conference calls, the gold deal took center stage, prosecutors say.
Jones, Simburg and Jennings each had a role on the nightly calls, according to prosecutors and a review of tapes, transcripts and summaries of 267 sessions conducted from early 2004 to early 2005. Simburg led the meetings, Jennings spoke about the coal mine and Jones offered updates on the gold transaction.
The three also talked about the common beliefs that held the group together.
"Faith -- if you have it the size of a mustard seed, you'll move mountains," Jones said during a call with investors in February 2004.
Suicide in Utah » The investors hung on for almost two more years despite repeated delays in closing a deal and even after they were caught in lies.
"There was a core group that thoroughly defended them, even after they were shut down, and said that if you just wait, the gold deal will close," said Craig Mason, the lead FBI agent on the case. "They blamed the government for their losses, for stopping the deal when it was about to come through."
When Wesley Montierth, a financial planner in Ogden, who had invested in Tri Energy, committed suicide in October 2004, Simburg attended the funeral and helped pay for it.
Montierth, a Mormon and a retired schoolteacher, grew despondent after realizing he had been conned and had lost $136,000 of his own money, as well as funds of family members and clients, according to a deposition given by his widow, Kathy.
That didn't prevent Simburg from reaching out at the funeral to Montierth's brother, David, a California cable TV executive.
David, who had already invested $100,000 at his brother's urging, testified that he put in another $65,000 at Simburg's request. He didn't return phone messages left at his home in Laguna Niguel, Calif.
Not long after Wesley Montierth's death, the scheme began to unravel.
The SEC says the scam went back to the 1990s and brought in at least $50 million.
During the four-year period covered by the federal indictment, almost $8 million was paid out to investors, including some who received commissions for bringing in new money, prosecutors say.
Where's the money? » About two-thirds of the money raised by Tri Energy went to Jones, prosecutors say. In addition to the house in Marina del Rey, he purchased a town house in Culver City later valued at $725,000. He also bought a 2005 Porsche Cayenne for $108,000 and spent more than $800,000 supporting his wife and child. And $21 million went to his two entertainment companies, Global Village Records and Marina Investors Group.
The theft angers Sean Pearson, 36, an accountant in Seattle who blew the whistle on Tri Energy. Pearson is the brother of Kim Flanigan, the Wyoming furniture store owner, and son of Debbie Loveless, who had invested about $50,000 in the Tri Energy coal mine. But he's bothered even more by the investor behavior that made the scam possible.
"It angered me because I'd lost my Mom; I mean, there was no reaching her," Pearson says. "I showed her clear evidence why this had to be a scam. But after a while it wasn't about the money anymore. It was her identity. If people have a certain personality trait or emotional need, they won't let go."
A Taylorsville man accused of helping bilk LDS out of tens of millions of dollars in California is facing criminal charges in Utah. › E2