The Securities and Exchange Commission has slapped third-party administrator American Pension Services Inc. and its founder, Curtis L. DeYoung, with fraud charges, alleging clients lost some $22 million on high-risk investments in uncertain business ventures.
Judge Robert J. Shelby of the U.S. District Court in Utah placed American Pension Services under receivership on April 24, granting a request by the SEC to freeze Mr. DeYoung's and APS's assets.
“We are now cooperating under the authority of the federal court appointment to secure the assets of APS for the investors and to help reach a situation where we can resume fairly normal operations as soon as possible,” said Diane Thompson, an attorney at Ballard Spahr LLP.
The basis of the SEC's complaint goes back to 2005, when Mr. DeYoung and APS allegedly solicited investors to open self-directed IRA accounts with APS. He allegedly touted “genuine self-direction” for people who wanted alternatives to traditional asset classes, namely stocks, bonds and mutual funds, according to the complaint.
APS clients hoping to transfer money to the firm needed to complete IRS Form 5305-A — which states that a third-party administrator has no discretionary authority over assets and that the depositor is responsible for directing the investment of the assets.
Clients' dollars were held at a bank in two master trust accounts, but APS allegedly had control over the money maintained there and commingled clients' funds, per the complaint.
According to the SEC, the clients received erroneous customer account statements at the end of 2012 and 2013. Savers allegedly were told there was $45.9 million in the master trust accounts at the end of 2012, when the balance was really $23.8 million, reflecting a shortage of $22 million.
The gap widened further in 2013, according to the SEC's complaint. At the end of last year, clients allegedly were told via customer account statements that they had $57.3 million in their master trust accounts. The shortfall at that time was $22.7 million, according to the complaint.
Mr. DeYoung has invoked the Fifth Amendment and would not answer securities cops' questions about the missing money, the SEC said. He has been in the limelight before. As a guest on CNBC, he discussed the merits of investing in real estate via retirement plans. It's “a fabulous opportunity because real estate is on sale,” Mr. DeYoung said on the show.
In another video, Mr. DeYoung talks about self-directed IRAs to access investments clients wouldn't otherwise get in a workplace 401(k). “Instead of you going to your company and picking from a list that they have chosen for you, you choose,” he said. “So why would you invest in something you know nothing about?”
According to the commission, clients' dollars went toward a number of risky businesses that were allegedly tied to friends of Mr. DeYoung. In one situation, Mr. DeYoung allegedly recommended promissory notes tied to a friend's businesses to APS customers, the SEC claimed. In addition to individual investments made by these clients, Mr. DeYoung allegedly invested APS funds directly with either his friend or the friend's businesses without notifying customers.
Though the friend defaulted on the promissory notes in 2010, Mr. DeYoung allegedly continued referring APS clients and their money to that individual until at least April 2013, the SEC claimed. Investors were allegedly given the impression that their investments in these specious businesses were profitable, as Mr. DeYoung supposedly gave the friend money to make phony interest or principal payments to these clients, according to the complaint.
In other scenarios, Mr. DeYoung allegedly invested clients' assets in businesses that failed outright or filed for bankruptcy, resulting in a total loss of customer funds, according to the SEC. Some $2.8 million in client dollars was lost after Mr. DeYoung allegedly invested the money in an office building in Wichita, Kan.
Some of the iffy investments included a handful of entities who have faced enforcement actions by the SEC, according to the complaint. “The investments in these entities continued to be held at their full investment value long after they became worthless or significantly reduced in value,” the SEC claimed. Even with these depressed values, clients' fees were allegedly based on the inflated value reflected on their customer account statements.
To top things off, two affected investors were allegedly placed into investments using forged buy direction letters, the SEC alleged.
“This misconduct jeopardized retirement security for thousands of APS customers,” Karen L. Martinez, director of the SEC's Salt Lake City regional office, said in a statement.