Securities Division, 3rd Floor
Arizona Corporation Commission
1300 W. Washington St.
Phoenix, AZ 85007
Main: (602) 542-4242
Toll-Free Number in Arizona:
Toll free in AZ
The Arizona Corporation Commission’s Securities Division is warning investors of the potential risks associated with self-directed IRAs.
Self-directed, IRAs (Individual Retirement Accounts) permit a broader portfolio of assets that may include real estate, private placement securities, promissory notes, tax lien certificates, precious metals and cryptocurrency, but they can also include the increased possibility of fraudulent schemes, high fees and volatile performance that can result in financial loss.
Risks of Self-Directed IRAs
While most investments have risk, self-directed IRAs have some risks that differ from those involved with IRAs offered by registered broker-dealers and investment advisers. These risks include a lack of legal and regulatory protection and a heightened risk of fraud, particularly when investing in alternative assets.
Risk #1: No Review – With a self-directed IRA you have sole responsibility for evaluating and understanding the investments in the account. Due to federal laws and regulatory rules related to selling investment products or providing investment advice, most custodians for other types of IRAs limit the holdings in IRA accounts to firm-approved stocks, bonds, mutual funds, and certificate of deposits (CD)s. However, these limitations do not apply to self-directed IRAs. It is important to know that custodians of self-directed IRAs:
Self-directed IRA custodians are only responsible for holding and administering the assets in the account and not typically responsible for investment performance. For additional information on self-directed IRA custodians, visit www.azcc.gov/azinvestor/investor resources and read “Are you an informed investor? Third-Party Custodians of Self-Directed IRAs and Other Qualified Plans.”
Self-directed IRA promoters are individuals or companies that promote and solicit money from investors for self-directed IRA investments that may not be licensed investment professionals subject to the same regulatory oversight and investor protection rules that govern the securities industry. Promoters may be IRA custodians or they may be affiliated with one or more self-directed IRA custodians.
Risk #2: Lack of Information and Liquidity – Self-directed IRAs allow you to hold alternative investments that, unlike publicly traded securities, may only provide limited disclosures. Even when financial information for these alternative investments is available, it may not be audited by a public accounting firm. Again, self-directed IRA custodians usually do not check the accuracy of any financial information that is provided for an investment in the account.
Additionally, alternative investments may lack liquidity either because of extended holding periods, restrictions on redemptions, limited markets, or some combination of these factors. This can make it difficult for you to easily sell these investments when you want to, including when you retire, or when you have to take required minimum distributions (RMDs).
Risk #3: High-risk investments offered— Some self-directed IRAs may offer investments in “crypto assets” such as virtual currencies, coins, and tokens. Crypto assets may be securities that are offered without SEC registration or a valid exemption from registration, and may not be accompanied by complete or accurate information to aid investors in making informed decisions. In addition, many of the trading platforms for these crypto assets refer to themselves as “exchanges,” which may give investors the misimpression that they have registered with the SEC.
Risk #4: Fertile Ground for Fraud – Fraudsters may be more likely to exploit self-directed IRAs because custodians or trustees of these accounts may offer only limited protections. Using a legitimate custodian to buy an investment DOES NOT make that investment legitimate. Fraudsters may still attempt to sell you fraudulent investments through legitimate custodians. Here are some examples of how fraudsters may try to use self-directed IRAs to perpetrate a fraud on unsuspecting investors:
Risk #5: Complex Tax Rules – Investing through a self-directed IRA requires you to follow complex IRS tax rules that do not apply to other IRAs. Failure to follow these rules may result in unintended tax consequences such as extra taxes, financial penalties, or even loss of the account’s tax deferred status. Consult with a tax advisor before investing through a self-directed IRA to confirm that any potential investment or investment strategy follows these IRS rules. More information about these tax rules can be found on the Internal Revenue Service website.
Risk #6: High Fees – Fees for self-directed IRAs may be significantly higher than those for other types of investment accounts. In addition to transaction fees, there may be account opening fees, annual account fees, administrative fees and asset specific fees in the account. These fees vary among self-directed IRA trustees and custodians. Before opening a self-directed IRA, make sure you understand these fees and how they could impact the performance of investments in your account.
Ways to Avoid Fraud with Self-Directed IRAs
There are important steps that investors can take to reduce the risk of fraud:
Recourse for Defrauded Investors
If you have lost money in a fraudulent investment scheme involving a self-directed IRA or third-party custodian, or have information about one of these scams, you should report it to the Securities Division’s Investigator on Duty at email@example.com or call 602-542-0662. The duty officer can direct you on how to begin the investor complaint process. Visit www.azcc.gov/azinvestor for more helpful information on wise investing and fraud prevention.
August 7, 2019
Idaho Man and his Company Sold Unregistered Promissory Notes
The Corporation Commission ordered Roland B. Woolsey of Idaho and his affiliated company, Skytrace, Inc., to pay $142,500 in restitution and $10,000 in administrative penalties for offering and selling unregistered promissory notes. Woolsey and Skytrace, Inc. were seeking to raise $10 million in order to market a web-based inventory application but are not registered to offer or sell securities in Arizona.
In settling this matter, the respondents neither admit nor deny the Commission’s findings, but agree to the entry of the consent order. All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21055A-18-0309.
July 11, 2019
Commission Finds Phoenix Man Defrauded Hispanic Christians with Promissory Notes
The Corporation Commission ordered Jaime A. Verdugo of Phoenix to pay $381,954 in restitution and a $20,000 administrative penalty for committing securities fraud. The Commission found Mr. Verdugo was not registered to offer or sell securities in Arizona when he solicited multiple promissory note investors, most of whom were from Hispanic Christian communities. The Commission found Jaime A. Verdugo told investors, on behalf of Verdugo Enterprises, LLC, that their money was going to purchase home decor products to fulfill online orders.However, the Commission found Mr. Verdugo mislead investors by stating their money was safe while knowing at least eight prior investors did not receive any investment returns. Also, the Commission found Jaime A. Verdugo failed to inform investors about the company’s unwritten policy to limit payouts to $6,000 every two weeks, which is contrary to the explicit terms of the promissory notes.
All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21064A-18-0402.
June 11, 2019
Commissioners sanction Laveen man for unlawful sale of securities
The Corporation Commission ordered Carlton Lamont Fox of Laveen, Arizona, and his affiliated company to pay $15,200 in restitution and a $5,000 administrative penalty for participating in the unlawful offer and sale of unregistered securities while not being registered as an Arizona securities salesman or dealer. The Commission found at least 17 investors were promised a return on their initial investment within 3-6 months, funding either the purchase of leads for prospective businesses that were interested in credit card reader terminals or for the purchase of the terminals that would be subsequently sold to interested businesses. The Commission found that Fox and his affiliated company, Fox First Services, LLC, participated in the unlawful sale of securities as an unregistered salesperson or dealer. Further, the Commission found that none of the investors received a full return of their original investment, and that Fox used some of the money to pay telemarketers for their work in soliciting investor funds. In settling this matter, respondents neither admitted nor denied the Commission findings, but agreed to the entry of the Commission's consent order.
All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21059A-18-0345.
June 11, 2019
Commissioners order more than $2 million in restitution to restore investors
Arizona resident Adam W. Child agreed to pay $2,014,592 in restitution and a $25,000 administrative penalty for selling promissory notes and LLC membership interests to investors. The Corporation Commission found that Child offered and sold notes and membership interests to at least 17 investors of Titan Funding Group I, LLC and Titan Capital Real Estate Fund I, LLC. The Commission found the investor funds were pooled to lend money to real estate developers who were to purchase and "flip" residential properties. However, the Commission found that Mr. Child violated the Securities Act's antifraud provisions when he failed to disclose to investors a previous judgment against him, that he had declared bankruptcy and that his prior mortgage-lending business had its license revoked.
In settling this matter, the respondent agreed to the entry of the consent order and admitted to the Commission's findings only for purposes of the administrative proceeding. All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21054A-18-0301.
May 15, 2019
Densco Investment Corporation Investors to Receive Additional Restitution
Last week, investors of DenSco Investment Corporation were awarded a second monetary distribution for losses incurred as a result of their investment in a fraudulent company. On May 10, 2018, Maricopa County Superior Court approved the receiver’s motion to provide a second distribution in the amount of $2.5 million to DenSco Investment Corporation investors. This comes on the heels of a decision by the court in December 2017 where the receiver’s first motion was approved and $4.5 million was distributed to investors.
DenSco Investment Corporation was a real estate investment firm based in Chandler, Arizona that ceased doing business in 2016. The company was obtaining loans against hundreds of properties that were never actually purchased. As a result of this fraud, action was brought against the company by the Arizona Corporation Commission for violations of the Arizona Securities Act. Due to the death of the sole owner of the corporation, a receiver was appointed by the court in 2016. A receiver is a person appointed by the court to take possession and charge of designated assets or property and to administer them in accordance with court directives.
To date, DenSco Investment Corporation investors have been awarded roughly $7 million in distributions approved by the court. The receiver continues to recover assets and claims on behalf of the receivership and believes that more funds will be available for distribution at a later date.