Investment fraud on the rise in Minnesota

For investment adviser Joel William Carlson, maintaining a comfortable style of living during the economic hard times of the last decade was easy.

He didn't pay his taxes. Then he started to steal his clients' funds.

Now Carlson, of Vadnais Heights, is going to prison for the next 3½ years. He is one of more than a dozen Minnesota investment advisers who were indicted, pleaded guilty or were sentenced for crimes against their clients and the government last year, triple the number of such cases in each of the previous two years.

Hundreds of investors lost millions of dollars with investment advisers who pushed the envelope, offering returns they couldn't deliver and diverting client investments into personal accounts.

The number of schemes and their size have led federal, state and local authorities to make prosecution of investment fraud a white-collar crime priority.

"A lot of this begins with greed because it's a whole lot easier to live on someone else's nest egg," U.S. Attorney Andy Luger said in an interview. "For some there are other [financial] problems, but there are some who are morally bankrupt and have no problem engaging in fraud from Day One."

In some respects, these cases represent the sins of the recession.

Most of the cases that advanced through the courts last year involved abuses that flourished in and around the Great Recession of 2007 to 2009, when stock prices languished and interest rate yields waned.

"It's traditional that during difficult economic times these kinds of frauds come home to roost," said former federal prosecutor Hank Shea, who teaches a course on white collar crime at the University of St. Thomas Law School.

Such cases have greed as a common denominator, but the motivations and the dependencies are many.

Michael Drilling of Grand Marais, who is serving five years in prison for securities fraud, stole $5.7 million from clients between 2009 and 2014 to pay personal and business expenses and gamble at casinos, where he lost millions, according to federal prosecutors.

Former Ameriprise Financial Services agent Susan Walker, who awaits sentencing on guilty pleas to fraud and tax evasion, used client funds from 2008 until 2013 for private school tuition and expensive vacations.

Investment adviser Sean Meadows paid off personal credit cards with client funds and spent more than $100,000 at adult entertainment venues in Minnesota and Las Vegas in a $10 million fraud the he operated from 2007 until 2014. Meadows pleaded guilty in December to fraud and money laundering. He has yet to be sentenced.

Carlson, 43, was sentenced by U.S. District Judge David Doty this month in a federal courtroom with supportive family and friends on one side and financial victims on the other.

"While other Americans scrimped to support themselves and their families through the economic downturn of the late 2000s and simultaneously upheld their duty to pay taxes, Mr. Carlson engaged in selfish and calculated actions to enrich himself and his immediate family," federal prosecutors said in a motion filed before the sentencing.

But public defender Douglas Olson asked for leniency for Carlson, who he said has "accepted responsibility for his crime."

In a pre-sentence brief, Olson wrote of Carlson, "The 2008 market crash changed everything in his otherwise seemingly blissful life. … He convinced himself that he was 'just borrowing' until things got better and he would replace the funds. But things didn't get better, and he got deeper and deeper in the hole — eventually to the point that there was no way out of the hole he had dug."

But Luger, whose office prosecuted most of the investment fraud cases in Minnesota last year, does not think leniency is appropriate in these types of cases.

"This area matters a lot to me," Luger said. "There is a broad consensus that when someone steals someone else's life savings there needs to be a significant sentence. It matters to a victim who may not be getting any money back to see the system take this crime very seriously."

In August, Vadnais Heights investment adviser Mark Holt was sentenced to 10 years in prison for stealing more than $4 million from his mostly senior citizen clients.

One of those victims was Peter Izmirian, a retired Rosemount resident who thought he had nearly $700,000 under Holt's management.

Izmirian, 65, now has nothing, while Holt sits in the Leavenworth federal penitentiary.

"It's devastating. I thought I had my whole life planned out if I was careful," said the retired courier, who now lives on a monthly $936 Social Security check that he called "peanuts."

Holt diverted funds from his clients from 2005 until 2013 and used the funds for golf club memberships and trips, fancy cars and exotic dancers. To cover his activities, Holt dummied up professional-looking financial statements for Izmirian and others to give the impression that their accounts were active and healthy.

"I thought he was my best friend," Izmirian said. "It's a lesson for everyone. Do your homework."

Investment fraud is a priority for the U.S. attorney's team of white-collar crime prosecutors. Luger predicted there will be an "uptick" in prosecutions in that area again this year.

Similarly, Minnesota Commerce Commissioner Mike Rothman said his regulators and investigators are seeing more and more investment fraud cases, especially against older Minnesotans.

Last month, Rothman announced the introduction of legislation to give the department more tools to identify, report and act in cases of financial abuses against seniors and vulnerable adults. That includes working closer with financial institutions and even health care providers to be on the lookout for unusual financial transactions by individuals.

"As Minnesotans age and retire with greater wealth, they become targets," Rothman said in an interview.

Investment fraud can become compulsive, say those who are familiar with the thought process of white collar criminals.

"Once you do it and get away with it, you become addicted to that lifestyle," said University of Minnesota law professor Richard Painter, who has studied securities fraud and corporate coverups. "That becomes part of their earnings and creates the incentive to do it even more."

Carlson told Doty he no longer is the man he was when he stole from clients, including his late father.

"I made terrible mistakes in a period when I was greedy, selfish and arrogant," Carlson said in a shaky voice. "People I cared for, I did them harm. I'm going to be looking in the rearview mirror for the rest of me life. I'm truly sorry for what I did."

For some rogue investment advisers, use of client funds starts as a temporary solution to a personal problem or a downward market fluctuation and then tumbles out of control.

"Investment advisers have customers expecting certain returns, and if you're getting hammered in the market you need to get money on the table to stop the blood flow," said Shea, the former assistant U.S. attorney. "Some can stand the ups and downs of the market. Some are not cut out for it, and desperate times lead to desperate measures."

David Phelps • 612-673-7269