The Securities and Exchange Commission on Tuesday announced charges against Equity Trust Co., an Ohio-based self-directed IRA provider, for ignoring red flags for accounts with investments that turned out to be fraudulent.
“We allege that Equity Trust failed to protect the interests of its customers when it acted as more than a passive custodian,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.
According to the SEC, Equity Trust took an active role in marketing investments offered by Ephren Taylor, who targeted churchgoers while running a Ponzi scheme, and Randy Poulson, who has been indicted in federal district court for an alleged offering fraud targeting real estate investors in New Jersey.
The SEC Enforcement Division alleges that Taylor and Poulson defrauded more than 100 investors out of $5 million invested through accounts at Equity Trust.
“When custodians like Equity Trust are aware of red flags suggesting an ongoing fraud, they must take action to try to prevent it,” Ceresney said.
The SEC alleges that Equity Trust processed investments in notes offered by Taylor and Poulson in spite of serious red flags.
Red flags included knowing that Taylor and Poulson had not provided them with documentation of the investments’ collateral as it required as custodian of the self-directed IRAs, and that Taylor made false statements to thousands of people at a church near Atlanta.
According to the SEC, Equity Trust representatives also participated at events hosted by Taylor and Poulson, where they 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.
Equity Trust also sponsored dinner events with Poulson and prospective investors.
The SEC alleges that Equity Trust continued to charge fees to customers invested in Taylor’s notes as recently as this year despite the fraud charges announced against him in 2012.
Equity Trust denies the SEC’s charges, including the allegation that it acted as more than a passive custodian.
“Equity Trust is an industry leader in fighting fraud, and stopped permitting its self-directed IRA clients to make investments with these sponsors more than two years before the SEC brought actions against them,” the firm said in a statement.
The firm adds that courts and regulators, including the SEC, have determined that self-directed IRA custodians are “responsible only for holding and administering the assets” in client accounts, not for evaluating investments.
“Equity Trust and other custodians state the same thing in their customer contracts and in each direction of investment form its customers sign,” the firm said in the statement. “Equity Trust does not endorse any investment or investment sponsor.”
A public hearing before an administrative law judge will be scheduled to adjudicate the SEC’s allegations and determine what, if any, remedial actions are appropriate.
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