When exotic investments are too good to be true

That December, Woodwell received a Christmas present from Moore in the mail. It was a copy of The Secret, an inspiration-oriented DVD that later became a bestselling book by Rhonda Byrne. “You are the most powerful magnet in the universe! You contain a magnetic power within you that is more powerful than anything in this world,” went a typical passage. The DVD described how to use that magnet to attract wealth.

A New Agey self-help video was the last thing that would appeal to Woodwell. He’s the sort of man who concerns himself with concrete facts and evidence — the very picture of buttoned-up law enforcement intensity with his solid physique, gray suits, and a buzz cut that leaves him a millimeter short of full baldness. Woodwell was taken aback by the gift. “I realized something was up,” he says now.

A few months later Moore e-mailed to tell Woodwell he was making fabulous returns — 10% a month — in a private fund that bought undervalued houses and resold them. The fund was unusual in that it seemed to be about more than money: It espoused a dogma that stressed individualism and self-reliance for the type of person who wasn’t going to rely on the government to tell him where it’s safe to invest. Moore wasn’t just putting his savings into the fund; he was doing legal work for it and recruiting new investors as well. Woodwell, who favors plain-vanilla mutual funds, is the type of person who considers buying a few shares of an individual stock as living dangerously. He ignored Moore’s offer to help him buy in.

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The days of public sector salaries were gone for Moore, it seemed, and he was reveling in his new affluence. He took his wife on a Caribbean vacation. And when Woodwell visited a few months later, Moore showed off his newest and proudest possession: a gleaming red Lexus.

That night, after Moore and his wife attended a violin recital by Woodwell’s wife at their church, Moore made his pitch: Woodwell should give up his CIA job and join him. In addition to the successful real estate investments, Moore explained, he was planning to start a life-coaching business that he was certain would be a success. “If you’re ready to leave the agency,” Moore told his friend, “we should work together.”

For as long as there have been businesses to invest in, scenes like this have played out — in bars, in offices, on backyard decks — with buddies wooing buddies to join them in every type of venture (and adventure) under the sun.

But there’s a profound change afoot today. Many investors, traumatized first by the dotcom bust, then again by the financial crisis, have vowed never to return to the stock markets. To say they no longer trust Wall Street or the financial establishment would be an understatement. A small but significant minority believe the system is rigged.

Just as the birth of the Tea Party embodied and propelled a revolt against the political establishment, there’s been a simultaneous investing revolt — without a party to name it or lift it to national prominence. The revolt can be seen in the slow but seemingly inexorable exodus by some frustrated investors out of mutual funds, stocks, and bonds — out of every mainstream institution responsible they have been counseled to put their faith in — and into what are often called alternative investments. These include a broad array of choices: foreclosed homes, personal mortgage loans, promissory notes, tax-lien certificates, foreign-exchange funds, private partnership interests, precious-metals trading pools, and so-called viatical settlements (other people’s life insurance policies acquired in the hopes that the insured will depart quickly so that the investor can cash in).

The growth in this broad category of investing is undeniable, though there’s no trade group that consolidates the statistics for such disparate assets. “The numbers are exploding,” says Lori Schock, director of the office of investor education and advocacy at the Securities and Exchange Commission. Assets in so-called self-directed IRAs, which have looser rules than traditional IRAs and are often used to hold alternative investments, have swelled. According to an SEC estimate, about 2% of all IRA assets — some $102 billion — is now in self-directed IRAs.

Driving off-road, in investing terms, can feel liberating, and advocates say it’s more profitable than traditional markets. There aren’t a lot of speed limits — and almost no cops around. And that’s a problem. Many alternative investments aren’t governed by the regulations intended to protect investors in stocks and mutual funds. A person peddling such an opportunity may have little or no legal obligation to disclose anything about its dangers.

A wave of new investment combined with few protections inevitably means one thing: misbehavior. “We’re seeing a transition of the frauds these days,” says James Barnacle, chief of the FBI’s economic crimes unit. “They had been based on equities and other securities before. Now they’re going to alternative investments and commodities markets. We’re definitely seeing an increase in these investment frauds.”

The SEC and state securities regulators view it as a grave enough concern that, in 2011, they issued a special alert noting a “recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as a key feature.”

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The tale of Ross Moore and Keith Woodwell captures much of the allure, and the peril, of investing off the grid. When Moore touted his exciting real estate investment, Woodwell had no specific reason to distrust it. But he was suspicious nonetheless. His philosophy is old-fashioned and simple: There are no shortcuts to wealth. You work hard, make good decisions, and inch forward.

So it’s no surprise that Woodwell declined Moore’s offers. And maybe it’s no shock that the real estate investments that Moore was involved in, so successful in 2006, would end badly a few years later. But what would be hard to anticipate is that not only would Woodwell leave the CIA, but he’d become the chief securities regulator of the state of Utah. His biggest project in the new job would be investigating the very fund that his close friend was investing in and working for.

When Moore and Woodwell first met in the CIA’s grueling training program in 2001, it seemed as if each had discovered a long-lost brother. In addition to their shared home state, profession, university, and religion, both had also served as missionaries — Moore in Thailand, Woodwell in the Dominican Republic. They had even moved to the same Virginia suburb, Ashburn. In short order their wives connected through a shared passion for marathon running. Their kids — both have three, nearly the same ages — gathered for play dates. The families attended the same church and barbecued together. Sometimes Moore would cook Thai food, a skill he had learned during his missionary days, for the two couples.

Despite their shared history, Woodwell, now 44, and Moore, 38, were very different people. Woodwell seemed like the more natural CIA agent. He easily withstood the exhausting regimen of classes and exercises. He tended to be suspicious of people and their motives. Moore, who acknowledges he has always had a weight problem, struggled with the physical challenges of the training. He was much more of an optimist, inclined to trust people. Moore had a boyish face, an easy smile, and a casual, likable manner. He was outgoing, a natural conversationalist.

Where Moore really excelled was persuasion. His salesman-like qualities shone as the class conducted exercises in human intelligence gathering. In one exercise the trainees pretended they were attending an embassy reception, Woodwell says. They had to strike up conversations with people they deemed important or interesting and establish relationships. Woodwell, who is more reserved, had to force himself to approach people, but Moore smoothly made contact after contact. “Ross was really good at it,” says Woodwell.

One of the critical goals of espionage training is to teach the recruits how to read people, to ferret out those who try to sell themselves as something they are not. The agency brought in psychologists to explain how to see through ruses and how to manipulate sources to obtain information. One of Moore’s key tools, he says, was humor, since it disarms people. “I wanted to write a book, Spies Are Fun People, because that’s the way I come across,” says Moore. “I can figure people out pretty fast and be sociable and make them like me. But I’m usually getting something I want.”

By 2003, Woodwell and Moore had graduated into the CIA. Both were focused on Southeast Asia, with Woodwell a covert operative eventually based in Australia, and Moore (whose weak surveillance skills led him to drop out of the undercover program) an analyst at CIA headquarters in Langley, Va. They were in constant contact.

Working at the CIA — for Ross Moore, anyway — turned out to mean a lot of desk-bound drudgery and no James Bond-like derring-do. Only 3 1/2 years into his CIA career, he had wearied of the demands of analyzing intelligence and the long hours.

Moore had always had ambitions of investing in property and dreams of riches. In 2005, as the U.S. real estate frenzy neared its apex, he brushed off his wife’s pleas to hold on to his steady government paycheck and convinced her that the family should return to Utah. There Moore opened a small title-insurance business. He contacted a cousin of his wife’s who was involved in what appeared to be a booming, innovative real estate investment program to see if he could handle the title insurance for their house purchases.

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The program was called Franklin Squires Investments. It was well known in Utah, publicized on billboards along the I-15 corridor running south from Salt Lake City. Its charismatic founder and promoter, Claud “Rick” Koerber, promised astounding returns — as much as 5% a month (and more if you brought in others) — from a complex technique that financed home purchases through what amounted to a multilevel marketing scheme. Koerber wrapped the program inside a gospel of prosperity he called “free capitalism,” which he preached on billboards, on the Internet, and on talk radio. The program was thriving, raising tens of millions of dollars through a series of feeder funds.

To Moore’s delight, the Franklin Squires partners offered him more than title-insurance commissions. They rented him office space in their headquarters, he says, then frequently hired him to handle closings on home purchases. That not only generated revenue but allowed Moore to see up close how the plan worked. Entranced by the lucrative returns and by Koerber’s philosophy, he began to proselytize to his friends.

As Moore describes it, the strategy was based on the premise that the company could consistently identify deeply undervalued houses across the country. The aim was to obtain appraisals larger than the purchase price, he says. That allowed the firm to take out mortgages for more than had been paid during the acquisition. The excess money gave the company more capital to pay off investors and buy yet more properties. Given that real estate prices were consistently arching upward at that time, the homes could be flipped or rented for substantial profits, Moore says.

He was dazzled by the oceans of cash Franklin Squires was generating. “I was seeing how the partners were pulling down hundreds of thousands of dollars at a whack,” Moore recalls. “It sure beat my little title-insurance fee.”

Koerber held expensive seminars to teach his system, which he called the “equity mill.” The seminars disseminated Koerber’s free-market philosophy, and also provided a way to troll for new participants in the program. After spending what could amount to thousands of dollars on the training, seminar attendees could be solicited for investments, used to help identify more undervalued properties, and become finders to bring in yet more capital, Moore says.

To avoid regulatory problems, the investments were structured as open-ended loans with promissory notes, rather than securities or partnership interests. Since they weren’t securities, the Franklin Squires partners believed they didn’t have to be registered with regulators, with all the disclosure that required — a view regulators have since rejected. There were no registration statements, no audited financial records, no disclosures of risks. Some investors put up tens of thousands of dollars based on little more than brief conversations with Franklin Squires participants.

Few seemed to mind at the time. As noted, the promissory notes typically generated 5% in interest per month for initial investors (and 3% to 4% for those who bought in later). If investors attracted capital from new participants, they received a fee or a monthly commission, as would those newer investors if they in turn brought in their own recruits.

For Moore the program was a revelation. He was working with guys he trusted as good Mormons who shared his views on self-reliance and limited government. He took the $150,000 he had made selling his condominium in Virginia and invested it in a Franklin Squires fund. He wheedled his reluctant wife into putting up part of her own nest egg, which she had inherited when her first husband, a state trooper, had died in the line of duty.

Moore employed his substantial powers of persuasion to entice friends, family members, and fellow Mormons, encouraging them to use the equity in their home or the assets in their IRAs. “I was amazed at how much money was floating around out there. I mean, a lot of money,” Moore says. “But a lot of the time it was someone who was just working to get by. So we would use the equity in their home to invest. We would tell them to take out a second mortgage and pull out that equity and invest it and we would get them these great returns.”

That technique, which puts people at risk of losing their home or retirement savings if the investment sours, prompted a concerned Mormon church leader to visit Moore and ask if the investments were safe enough for such precious capital. Moore’s people skills came to his rescue. “I can sweet-talk pretty well,” he says, “and I told them how good this was. They accepted what I told them.”

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By the middle of 2006, income was rolling in. Moore was raking in as much as $15,000 a month — double his government salary — plus the income from his title-insurance business, which, he says, had grown and had a handful of employees.

Moore admits that his wife harbored deep misgivings about what she perceived as the riskiness of the scheme. But Moore was elated. He was making more — and working less. He had time to stay home and read to his kids. He’d embarked on an intense exercise regimen to finally get fit.

With money came status. The Franklin Squires partners were well known for their flashy Maseratis and Ferraris, so Moore went out and bought a sharp red Lexus. “I got the Lexus to fit in,” he says. “I was in the cool-car club with that.”

Woodwell had resisted the lure of easy money. But like Moore before him, he began to tire of the CIA. In 2007 the agency moved Woodwell and his family from Australia to a new post in California, only to ask him months later to take a position in Cambodia. He’d had enough. Concerned about the stress on his family, he says, he quit the agency and began looking for a new job in Utah.

Woodwell, who had once worked for the Utah legislature and was known in state government circles, was hired as director of Utah’s Division of Securities in June 2008. He expected a brief ceremonial handshake with Utah’s then-governor, Jon Huntsman Jr., after his swearing-in. Instead, Huntsman, a former ambassador to Singapore (who would later be ambassador to China), was fascinated by Woodwell’s experience in Asia. He peppered Woodwell with questions about the political situation in Cambodia, and the two ended up talking for half an hour. Woodwell’s family was thrilled to be back home in Utah, and he was excited by the new job. He told his wife, “I’m really going to enjoy this.”

But a shadow hung over Woodwell’s new mission: Franklin Squires. The once-soaring housing market had faltered in 2007. The supply of new investors began drying up. As prices declined, the fund starting missing monthly payouts in May 2007.

In the summer of 2007, Koerber disclosed on his radio show that state investigators had questioned the legitimacy of his operation. Then, in February 2008, he announced he was shutting one of Franklin Squires’ offices as part of a reorganization caused by the swooning real estate market.

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Moore spent much of this time scrambling to gather all the assets he could, including taking out a $182,000 credit line on his house. He had withdrawn some of his Franklin Squires stake and invested it in another real estate venture, which was generating cash. As a result, he was able to repay his investors about 50% of what they had put in, he says, and that persuaded them not to file complaints. Since none of his investors were calling for his scalp and Moore was a relatively small player, he seemed to stay off the investigators’ radar.

Meanwhile, he was trying to cobble together an income between some legal assignments and his other real estate investment. (That investment would later go belly up too.) Moore’s normally ebullient personality darkened. He was growing desperate.

As Woodwell took his new job, he knew that investigating Franklin Squires would be one of his first and biggest priorities. His division had been on the case for months.

Woodwell worried about his friend’s involvement. “I fully expected that a complaint would come through the door at some point about Ross, and we would have to pursue it,” he says. “It really bothered me.”

In the late summer of 2008, the Woodwells invited the Moore family over for dinner. They knew the Moores were under punishing financial duress — the wives had stayed close — and they tried to tiptoe around the subject that night, keeping conversation as light as possible.

At one point during the evening, Woodwell and Moore found themselves alone. Moore told his friend that he was no longer involved in Franklin Squires. It was too late for Woodwell to offer helpful advice. All he said was, “You should stay away from them. It’s not going to end well.” That would be the last time the friends saw each other.

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In May 2009, Koerber was indicted by a federal grand jury. After some key evidence was thrown out, he was reindicted in 2011, charged with operating a Ponzi scheme that took in $100 million, of which about $50 million was lost. Four people who worked in the scheme have also been charged with federal crimes. Two have pleaded guilty, and the others, including Koerber, have denied the charges and are awaiting trial. Another five have either pleaded guilty to state fraud charges or otherwise conceded guilt. Marcus Mumford, Koerber’s attorney, argues that Franklin Squires was no more a Ponzi scheme than a commercial bank, which takes deposits and keeps just a small portion on hand for withdrawals, and he says Koerber is not responsible for money investors loaned to feeder funds.

By 2009 the speed of Moore’s decline was accelerating. He was extinguishing the family’s savings and battling to save his house from being seized by his bank.

Moore’s wife, nearly frantic, urged him to get a job — any job. For a while, he attended classes to become a long-distance truck driver but then dropped out. He talked about becoming a barber, then abandoned that idea. At a moment of particular desperation, he bought rabbits to raise at home to sell for meat. He eventually gave up on that, too, and just turned the bunnies loose.

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With the passage of time, Moore managed to pull himself out of his tailspin. By early 2012, he was slowly reassembling his life. He has remarried; he and his wife are living with his new in-laws. He says he has been supporting himself by identifying unclaimed legal judgments, then tracking down the intended recipients. He offers to collect for a 50% fee.

Moore discussed the turns in his life last summer on a warm afternoon, sitting at a picnic table in a park in front of the public library in American Fork, Utah. In lieu of an office, which he no longer has, he works occasionally in the library, he says, and uses the computers there.

When pressed about the evidence that prosecutors have presented that Franklin Squires was a con, Moore wavers. “I didn’t think it was a Ponzi scheme, and I still don’t,” he says. “But I have to say I guess it could be. They put so much stress on getting those high appraisals for the homes, but I never really talked to anyone about it. Everyone knew there were risks.”

Counters Woodwell, speaking of his former friend — whom, he says, he no longer respects — and others: “People want to believe. They want to believe because of this whole idea that they’re fulfilling some kind of dream. The price they pay is beyond anything they can imagine.”

Moore’s travails have not dimmed his entrepreneurial ardor. He’s got a new idea: quick-divorce shops. “This is something I know a lot about,” says Moore. Eventually he wants to franchise the business and bring in investors. “People who are creative will understand how big this will be.”

–Reporter associate: Doris Burke

UPDATE: On Dec. 5, Moore was sentenced to three years of probation, restitution of the $42,500 he admitted taking from a client, and 320 hours of community service, according to Utah prosecutor Curtis Larson.