December 13, 2018

SEC Halts Sham Real Estate Investment Offering Fraud Litigation Release No. 24316 / October 12, 2018

David Liddle

David Liddle
Owner/Griddfix Busienss Solutions

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          According to a recent U.S. Securities and Exchange Commission litigation release dated October 12, 2018, Ms. Susan Werth, a.k.a. Susan Worth, Corporate Mystic, LLC, Commercial Exchange Solutions, Inc. (CES), and Exchange Solutions Company (ESC) [1] are accused of running a Ponzi scheme and other associated fraudulent activities.  The SEC complaint also includes information on Ms. Werth’s earlier criminal and civil convictions as statements of fact. In 2013 she was ordered to pay $235,000 in restitution.  (SEC vs. Susan Werth, aka "Susan Worth", et al, 2018)  Specifically, the complaint states that Ms. Werth, “Concealing [SIC] her criminal history and civil fraud judgments from investors, since at least 2015, she has marketed herself and the Defendant Entities as facilitators of Section 1031[2] exchanges – also known as “like kind” exchanges – through which her Section 1031 clients seek to defer tax payments on the sale of properties by re-investing the proceeds in similar properties (“Section 1031 Clients”). (SEC vs. Susan Werth, aka "Susan Worth", et al, 2018)

          Let's take a look at this case in relation to the fraud triangle, the perfect storm elements, and will then discuss it in terms of corporate governance, and the Sarbanes-Oxley Act. 

          Why did Ms. Werth commit these fraudulent crimes?  As Albrecht et al states in the text Fraud Examination, there are three elements involved in supplying motivation for a perpetrator to commit fraud: (1) a perceived pressure, (2) a perceived opportunity, and (3) the ability to rationalize the fraud as acceptable. (Albrecht et al, 2016, p. 366) Ms. Werth’s perceived pressure for committing the 2015 to current fraud may have been her earlier criminal convictions and resulting civil judgment to pay $235,000 in restitution. Adding to this pressure would have been her exorbitant life style and earlier business failings.  According to Manta.com, Ms. Werth owned, and operated Werth Consulting Inc. found in the very upscale city of La Jolla California, a business “categorized und Burglar and Security Systems Stores”.  (Manta, 2018)  Ms. Werth’s rationalization that this fraud was acceptable was the fact that theft and fraud appear to be her only way to keep up with her lifestyle and still pay her debt.  The perceived opportunity was the Internal Revenue Service (IRS) implementation of FS-2008-18, February 2008.  According to the IRS, this “like-kind exchanges” allow investors to defer taxes on gains from the sale of one property if they are buying a like-kind replacement property.  In this case investors were told that the “clients” needed the capital quickly to take advantage of the Section 1031 exchange and would pay remarkably high returns for the ability to do so.

            Albrecht et al contend that “there are nine factors that come together to create a perfect fraud storm”.  (Albrecht, et al, 2016, p. 367)  In this case the real estate economy was booming due in part to the above-mentioned tax implications. Having previously committed felony crimes, Ms. Werth was already suffering a decay of moral values.  Her deceit, falsified documents, and cover up support that conclusion.  Investors, looking to make a fast and high return clearly had misplaced incentives causing them to be easily misled.  Searching the web one can find many investment firms purporting to sell such investments, supplying analytical data supporting high expectations. Had the investors dealt with a legitimate firm, they may have reaped such rewards.  However, in this case there were no actually real estate transactions.  Returns realized came directly from funds provide to Ms. Werth et al by newer investors.  As pointed out earlier, Ms. Werth et al had exceedingly high debt levels owing to the need to show returns to older investors as well as her legal liabilities.  One can only assume that the duped investors focused only on the accounting rules and not the principles and that Ms. Werth ignored both.  Ms. Werth et al failed to report any of the security transactions to the SEC as needed by law.  Operating her entities on her own, Ms. Werth was unlikely to have had accountants or independent auditors to look over her shoulders.  Fortunately, the fraud was detected by the watchful oversite bank employees.  Greed is the single most crucial factor in Ms. Werth’s fraudulent activities.  One cannot really know if educator failures factored into Ms. Werth’s crimes.  Reading the SEC complaint, it would appear Ms. Worth is skilled in deception, falsification of documents, and had a thorough understanding of the rules that made it easy for her to convince investors.

          According to the Internal Revenue Service (IRS), “If a single-member LLC does not elect to be treated as a corporation, the LLC is a "disregarded entity," and the LLC's activities should be reflected on its owner's federal tax return”.  (IRS, 2018) In this case of Ms. Werth’s entities, there was no Corporate Governance to hold her accountable.  As for the Sarbanes-Oxley Act, Ms. Werth et al appears to have violated Section 302 by not reporting earlier fraud convictions and by trying to sell unregistered securities in interstate commerce. She is also in violation of Section 401 – needing her to publish “accurate” information that does not have incorrect (in this case falsified) statements.  Clearly, she risks the Section 802 penalties for altering and falsifying records if found guilty.  It is not clear if Ms. Werth had an accountant, but if so then the accountant would also be liable for both criminal prosecution and civil action. 

          The SEC complaint against Ms. Werth et al is separate to the criminal formal accusation she is already facing.  According to the SEC complaint “Ms. Werth’s scheme is ongoing.  As of at least mid-August 2018, Werth was still making Ponzi payments to investors and continuing to promise investors that she would repay their principal with interest in the near future”. (SEC vs. Susan Werth, aka "Susan Worth", et al, 2018) The SEC has acted to stop the continuation of Ms. Werth’s fraudulent activity.  Ms. Werth et al have no legitimate business further pressuring her to commit addition frauds.

Footnotes:

[1] Future reference Ms. Werth et al

[2] Like-Kind Exchanges Under IRC Code Section 1031

References: 

Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2016). Fraud Examination (5e ed.). Boston: Cengage Learning.

Emery, S. (2018, October 9). News - Crime & Public Safety. Retrieved from The Orange County Register: https://www.ocregister.com/2018/10/09/woman-charged-in-alleged-multi-million-dollar-ponzi-scheme/

IRS. (2018). Businesses and Self-Employed Single Member Limited Liability Companies. Retrieved from IRS.gov: https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

Manta. (2018). Werth Consultin Inc. Retrieved from Manta: https://www.manta.com/c/mml6lr9/werth-consulting-inc

SEC vs. Susan Werth, aka "Susan Worth", et al, LA CV18-8436-SVW (JPRx) (United States District Court Central District of California October 2, 2018).

U.S. Securities and Exchange Commission. (2018). SEC Halts Sham Real Estate Investment Offering Fraud. Washington D.C.: U.S. Securities and Exchange Commission.

 

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