From the "things you don’t see at market bottoms" department, this morning the WSJ reported about a 64-year-old felon named Scott Kohn was able to rip off unwitting and financially unsophisticated investors for over $100 million, under the guise of being able to allow them to earn more retirement income by borrowing against their pensions in their later years.
The report details the demise of Mr. Scott Kohn and his company, Future Income Payments. As of today, the company is embroiled in litigation with parties like the Illinois Attorney General, its clients and other regulatory agencies who are seeking recourse for over $100 million that was irrevocably lost.
The scam product, which was then turned around and sold by different investment advisors seeking high commissions, highlights how dangerous private market investment products can be. How did Future Income Payments work: here is the WSJ:
Future Income essentially sold investors other people’s pensions. Mr. Kohn’s firm would find workers entitled to pension payments and temporarily buy the rights to those payments—effectively lending the beneficiaries money against their future pension income in what is called a “pension advance.” Then, Future Income would sell the rights to investors for a lump sum. An investor might put up $100,000 in exchange for an income of 7% for five years, for example.
But Future Income’s apparent collapse has left investors stranded. The company is no longer collecting the pension money that funds its own payments to investors, according to court documents. Mr. Kohn couldn’t be reached for comment. It isn’t clear if he has a lawyer.
Today Kohn’s company, Future Income Payments, is shut, according to court filings, and his investors are likely to be wiped out, according to lawyers representing them, who plan to sue scores of firms that sold Future Income products as soon as this week.
As the WSJ nots, "the blow-up shines a light on the boom in opaque private markets, to which investors have flocked in the hope of doing better than they can in traditional stock and bond markets."
One story highlighted by the Wall Street Journal exemplifies how this scheme targeted those with a little financial acumen and are of retirement age:
JC and Mary Barb of Hemet, Calif., say their financial adviser Kevin Kraemer persuaded them to invest some $78,000 with Future Income last year. “He came to us and said, ‘Hey we can make some more money on your money,’ [and] sold us this new deal,” said Mrs. Barb, a 66-year-old retired postal worker. Her husband, a 63-year-old retired teacher, said the money “was to be a big help to us in our retirement and now it’s not there, it’s gone.” Mr. Kraemer declined to comment.
Some clients were even advised to "refinance their homes" to buy FIP's products:
Unlike publicly traded investments, there are few rules on how pension advances can be sold or by whom. “They illustrate the problems with the financial services industry selling opaque, high-commission private investments,” says Joe Peiffer, a New Orleans-based plaintiffs’ lawyer representing some purchasers of Future Income’s products. “We have clients who were advised to cash in their pensions and refinance their homes to buy these things.”
Then in April of this year it all collapsed and Cohn had sent a letter to his investors stating FIP was under “intense regulatory pressure and legal expense,” before telling his investors that there were “no guarantees [they] would receive all payments.” Despite the fact that the company, run by a felon, claimed in its marketing materials that it had over 200 employees, it was found to be run from a rental mailbox in a UPS store near Las Vegas which Cohn had used for previous businesses.
Future Income called itself “America’s largest pension cash-flow originator,” boasting of a “global footprint of over 200 employees.” Its mailing address is a mailbox at a United Parcel Service Inc. store in a strip mall outside Las Vegas. The same address has been used by Mr. Kohn for dozens of other companies, most of them now defunct, state records show.
Kohn had also previously pled guilty to trafficking and counterfeiting goods in 2006 and spent over a year in federal prison as a result. Bizarrely, regulators had been on the case of FIP since 2014, initially over the terms with which it was buying pension benefits. Regulators alleged that the company was lending illegally and breaching certain state laws limiting interest rate maximums on loans. The WSJ found one instance where a Gulf War veteran was charged $450/month for five years to repay a loan of $2,700. It was 10x what he had borrowed and worked out to an APR of 200%.
Not only were the FIP products toxic to begin with, but the way they were flipped and sold to people by investment advisors was just as ugly:
The sellers included Live Abundant, a firm based in Salt Lake City that promises on its website to “empower you to live a more abundant life by replacing your old, outdated retirement philosophy.” It has sold products from both Future Income Payments and Woodbridge Group of Cos. LLC, another private-market investment that collapsed, according to lawyers representing investors who said they intend to sue Live Abundant.
Loren Washburn, an attorney for Live Abundant, said the firm plans to review what it “could have done better” in vetting the deals. “This outcome where we’re having to explore options to collect [the money due to investors] is obviously not optimal.”
The sellers also included independent advisers registered with the Securities and Exchange Commission, such as Gus Marwieh of Austin, Texas. Mr. Marwieh “used his strong religious beliefs to engender trust from investors,” said Mr. Peiffer, who is representing some of them. Mr. Marwieh confirmed he sold Future Income products but declined to comment further.
The worst part: if retirees are buying the line that they can be somehow making more money than in traditional investments - after the stock market has been on a decade long run higher - we can't help but wonder that when we hit the inevitable coming recession, these types of scams will only intensify in hopes of preserving the ponzi and become more abundant, instead of fading away, as scammers continue feeding naive retirees the one commodity that is in endless demand: hope.