The financial crisis has not only battered home values and investment portfolios, it has exposed major investment frauds. Many of those schemes unraveled as the cash needed to keep the perpetrators afloat dried up and investors began demanding their money. Here’s one story about how attorneys in private practice and working at public agencies have successfully recovered investors’ losses.
This past summer, former stockbroker James Buchanan pled guilty in Maricopa County Superior Court to 15 felonies resulting from a Ponzi scheme he ran defrauding Arizona investors. Buchanan’s fraud came to light in March 2008, when one of his elderly victims demanded her $200,000 back.
Under the terms of his plea agreement, he will receive a prison sentence of between eight and 20 years. The prosecution seeks more than $10 million in restitution.
The charges arose from a Ponzi scheme that Buchanan perpetrated from at least 2000 until March 2008 while he worked as a stockbroker, first at Ameriprise Financial Services and then at LPL Financial Corporation, two of the nation’s largest brokerage firms. During his tenures at those firms, Buchanan stole $1 million from his own church, which had entrusted him with its building fund. He also lied to his pastor’s widow in order to steal her recently deceased husband’s life insurance proceeds.
How did Buchanan do it? According to court records, Buchanan exploited his victims’ trust and the lax supervision by his managers at LPL and Ameriprise.
Buchanan’s scam was a classic case of “affinity fraud,” in which a con artist targets members of his own religious, ethnic or other group affiliation. The con artist plays up the religious or other association that he and the investor have in common to lower the investor’s guard and exploit their natural trust. Even normally savvy people tend to let their guard down when offered an investment by a member of a group to which they belong.
Buchanan targeted members of his own church, of which he was a prominent member. He portrayed himself as a very devout Christian who was also a successful financial adviser. His fellow church members respected and trusted him. He led the church’s financial ministries, taught seminars at the church and was involved with its finances. Several church leaders and members invested their personal funds through Buchanan.
Buchanan took advantage of his victims’ trust in him by having them write their investment checks payable to “James J.F. Buchanan, CFP.” Buchanan was never a CFP — Certified Financial Planner. But trusting investors did not question Buchanan’s credentials or why they were writing checks to him instead of to Ameriprise or LPL. Buchanan gave investors phony confirmations and account statements showing steady returns of between 6 percent and 8 percent. Buchanan paid phony “interest” to his long-time investors by giving them a fraction of the money he obtained from newer investors.
Buchanan’s $10 million fraud devastated the finances of dozens of Arizonans. Many of his victims are elderly and have no ability to re-enter the workforce to attempt to support themselves.
Fortunately, some victims have recovered substantial portions of their losses through claims brought under Arizona’s securities laws against Buchanan and his former supervisors at Ameriprise and LPL. Investigation in those cases revealed several blatant red flags that the brokerage firms allegedly ignored about Buchanan.
During his last several years at Ameriprise, Buchanan enjoyed a lavish lifestyle despite the absence of any apparent means to support it. Buchanan lived in a palatial home on top of a mountain in an exclusive, gated community. He owned a BMW 760i, a Cadillac Escalade and a Harley Davidson motorcycle. But during that time, Buchanan’s commission earnings steadily declined from $319,000 in 2000 to less than $42,000 in 2005. One investor’s lawsuit alleged that Buchanan’s rapidly declining commissions combined with his increasingly extravagant lifestyle should have put Ameriprise on notice that something was wrong.
In January 2006, Ameriprise terminated Buchanan. Buchanan then went to work for LPL, which allowed him to solicit investors for several months even though he was not yet registered with LPL.
Between late January 2006 and May 31, 2006, Buchanan met with investors in LPL’s branch office and accepted their checks for investments, but he never opened an actual LPL account for them. Buchanan simply misappropriated the money these investors gave him in LPL’s branch office.
In May 2006, Buchanan applied to become registered with LPL to sell investments. As part of Buchanan’s application, LPL obtained a credit report on him. The credit report stated that Buchanan owed debts totaling $1.2 million and his accounts “have a 35.4 percent chance of entering a seriously derogatory status within two years…. James J. Buchanan is in Risk Range 5,” which is the highest. The credit report also showed several significant delinquencies, including a 60-day delinquency on his $8,227 monthly house payment and five 30-day delinquencies on his $2,212 monthly payment for one of his luxury cars.
As part of his application to LPL, Buchanan wrote that he expected to have a $7 million book of business. He also wrote, however, that in the last 12 months of his employment with Ameriprise, he only earned commissions of less than $42,000. Buchanan’s income from Ameriprise did not support his projection that he would have a $7 million book of business at LPL. After LPL “officially” hired Buchanan on June 1, 2006, he failed to earn even $600 in commissions for the remainder of that year. In 2007, Buchanan earned only $9,480 at LPL.
Some victims brought suits against Buchanan, Ameriprise and LPL for violations of Arizona’s securities laws. Ameriprise and LPL filed motions to dismiss the cases, arguing they could not be held liable for Buchanan’s misconduct. The courts repeatedly rejected those arguments, however. The brokerage firms subsequently paid substantial confidential settlements to the victims. The outcomes for those victims illustrate that Arizona’s securities laws can provide a powerful means for defrauded investors to recover their money.
Arizona has a strong public interest in protecting its residents from fraud and preserving its business community’s reputation. As the Buchanan case illustrates, attorneys in both the private and public sectors are working to ensure that businesses and investors enjoy the honest market they deserve.
— James Burgess is a director and shareholder at Fennemore Craig, P.C. He represents individuals and businesses in securities and investment fraud litigation in state and federal courts.