Mormons Lose $50 Million to Gold Bullion Scam

Henry Jones and his two partners were convicted in federal court in Los Angeles on charges of mail, wire and securities fraud.

Background Story on Jones and His Two Partners

1. Henry Jones: The main man from Nigeria. 55 years old.
2. Robert Jennings: An associate pastor at the New Life Fellowship Church in Perris, California. 59 years old.
3. Arthur Simburg: A former marketing representative for sporting-goods manufacturer Puma AG. 64 years old.

Jennings, the son of a postal worker, and Simburg, who grew up in Berkeley, California, were themselves victims of a scam. The two met in the late 1960s when Simburg, who was working for Puma, gave a pair of sneakers to Jennings, then a 6’6” basketball player at California Polytechnic State University in San Luis Obispo.

They reconnected in 1995 and, in the late 1990s, were trying to raise money for a clean-coal company called H&J Energy Co.

An Orange County investment firm, Morgan Weinstein & Co., promised to loan them $100 million in exchange for a $100,000 fee – a fee they paid even after getting two calls from a Federal Bureau of Investigation agent warning them it was a con. The loan never materialized, and six principals in the firm were convicted of fraud in 2003.

Simburg was introduced to Jones in 2001 by a mutual acquaintance who thought the Nigerian might use his international connections to help Tri Energy raise capital. Tri Energy, founded that year by Simburg, Jennings and Jennings’s father-in-law was registered in Nevada and had leases on two low-producing Kentucky coal mines.

Jones failed to find any investors. He did offer something else: a chance to take part in a Middle East gold transaction and use $200 million of the expected profits to finance the coal operation.

Jones was more flamboyant than either Simburg, who lived in a bungalow near the Los Angeles airport, or Jennings, who had a small house in Perris, 70 miles east of the city. He used investor money to buy a $1.5 million home in Marina del Rey and a $277,000 Ferrari Spider for his wife.

Jones showed up for meetings in a chauffeur-driven limousine wearing loud, custom-made suits and a bowler hat, at times bringing his wife, Yekaterina Jones, an aspiring singer and Russian model, says a person who met with him on several occasions.

Here’s What Happened

Henry Jones and his two partners raised more than $50 million from 735 investors.

They told investors they were brokering the sale to Arab buyers of 20,000 tons of gold owned by a group of Israelis; promised to triple investment – if only Tri Energy could overcome some last-minute “glitches.”

Jones said in a conference call (the favored method of communication with the investors), all that’s need to close the deal was a “safe-passage letter” that would cost $450,000.

A few days later, need $100,000 to open a “commission account.”

Less than a month later, bank handling the deal wanted $125,000 to conduct an audit.

The Delays and pleas never stopped.

Their company had no office, they rarely met with investors and they spun a series of deals that never materialized including a plan to ship Congolese uranium via diplomatic pouch, a venture to produce 99.3 percent emissions-free coal at a Kentucky mine and a project to develop hydroelectric power in Sierra Leone.

Scams Target Religious or Ethnic Groups – Community of Trust

Like Bernard Madoff’s $65 billion Ponzi scheme, which initially snared wealthy Jews to an alleged $44.4 million fraud aimed at deaf people. Tri Energy’s invertors had something in common.

Many were Mormons and born-again Christians who shared dreams and prayers on nightly conference calls. They vowed to use the profits for charitable works and kept raising funds, at times taking out second mortgages, draining retirement accounts and recruiting relatives.

Ned Hill, a professor of business management and a former dean of the Marriott School of Management at Brigham Young University in Provo, Utah, says Mormons have a history of being victimized by financial scams. The church, an offshoot of Christianity founded by Joseph Smith in 1830, teaches its 13.5 million members they can get into heaven by following a prescribed path of good works.

Hill says he confronted the power of belief over reason when he learned about 12DailyPro, an Internet advertising business being pitched to students at the Mormon-affiliated university that promised returns of 44 percent in 12 days.

When he sent an e-mail warning students it was a pyramid scheme, he says he received death threats from some investors, which he reported to university security officials. The SEC obtained a permanent injunction and shut it down in 2006.

“What you have in a Mormon community or any religious community is a community of trust, and it can be very strong,” says Hill, who is a Mormon. “If you can break into that trust, then the things that make this so supportive can make people really vulnerable. Mormons can be especially vulnerable because they’re committed to doing good.”

Jones, Jennings and Simburg, none of whom is a Mormon, exploited this vulnerability for at least four years, offering a cocktail of spirituality, exclusivity and the promise of high returns.

“Faith — if you have it the size of a mustard seed, you’ll move mountains,” Jones said during a call with investors in February 2004.

“The guys who did this were geniuses in a way,” says Dana Carney, an assistant professor of management at the Columbia University Graduate School of Business in New York, who has written about investor psychology. “This has the flavor of a cult. They hit all these vulnerabilities. There was religion; we trust like people, especially religiously like people. With the nightly calls, there was an illusion of transparency. They took advantage of the sunk-costs phenomenon: The more people invest in something, the more connected they feel.”

Outlandish Claims Don’t Matter

While some Tri Energy claims were implausible – the 20,000 tons of gold was more than twice the total U.S. bullion reserve, the largest in the world – investors rarely wavered in their loyalty. One even invested more money after his brother, despondent about being conned, committed suicide.

“Some of their stuff sounded ridiculous, but it worked for years,” says Ruth Pinkel, an assistant U.S. attorney in Los Angeles and a prosecutor on the case. “The more ridiculous it sounded, the more people seemed to love it.”

Mormon #1: Kim Flanigan

For Kim Flanigan, 37, who owns a furniture store with her husband in Casper, Wyoming, being part of a spiritual mission was addictive. She says she invested $10,000 in Tri Energy at the suggestion of her mother and an aunt.

“It was almost like a cult,” Flanigan says. “There were prayers at the end of most of the calls. That element was key. There was a real sense of camaraderie, a sense of community, and everything we were going to do involved humanitarian efforts to change the world. That’s why you felt like you didn’t dare disrupt it. God’s behind us, and you shouldn’t betray him.”

Mormon #2: Roger Sohn

To Roger Sohn, 67, a dentist in San Bernardino, California, who invested and lost $210,000, the strong spiritual undercurrent made the three promoters more credible.

“That was one of the things that deceived me more than anything else,” says Sohn, who describes himself as not religious.

Mormon #3 and #4: Montierth Brothers – Ask for more money at the funeral

When Wesley Montierth, a financial planner in Ogden, Utah, who had invested in Tri Energy, committed suicide in October 2004, Simburg attended the funeral and helped pay for it.

Montierth, a Mormon and a retired schoolteacher, grew despondent after realizing he had been conned and had lost $136,000 of his own money as well as funds of family members and clients.

That didn’t prevent Simburg from reaching out at the funeral to Montierth’s brother David, a California cable TV executive. David, who had already invested $100,000 at his brother’s urging, testified that he put in another $65,000 at Simburg’s request.

Getting Caught Lying Also Don’t Matter

Even when they were caught lying, the promoters managed to convince investors to keep on believing.

Several of them, angry about the repeated delays, confronted Simburg and Jones in Los Angeles on Super Bowl Sunday, Feb. 1, 2004. Jones had told them he couldn’t meet because he was in Europe. When they went to the office of his music company, Marina Investors Group Inc., they found him hiding under a desk.

Three days later, Jones said on a conference call, that he had concealed his whereabouts because he was being shadowed by “men in white trousers circling the building in odd hours of the night.” If investors gave him a little more time, Jones said on the call, he would provide proof that the gold deal was about to succeed.

“So we only have to wait another few hours for the documentation?” asked one investor. “I think it’s worth our while to do that.”

The investors hung on for almost two more years.

It is Like a Cult

“There was a core group that thoroughly defended them, even after they were shut down, and said that if you just wait, the gold deal will close,” Craig Mason, the lead FBI agent on the case says. “They blamed the government for their losses, for stopping the deal when it was about to come through.”

The SEC says the scam went back to the 1990s and brought in at least $50 million. During the four-year period covered by the federal indictment, almost $8 million was paid out to investors, including some who received commissions for bringing in new money, prosecutors say.

Henry Jones, a Rich Man, Apparently Not Very Good at Real Business

About two-thirds of the money raised by Tri Energy went to Jones. In addition to the house in Marina del Rey, he purchased a town house in Culver City later valued at $725,000. He also bought a 2005 Porsche Cayenne for $108,000 and spent more than $800,000 supporting his wife and child. And $21 million went to his two entertainment companies, Global Village Records and Marina Investors Group.

He built a recording studio, financed concert tours, shot music videos and paid clubs to let his artists sing. The revenue from Jones’s entertainment businesses during the four years was about $7,800. The last album he released, for a Korean duo called the Fantasy Twins, earned only $20.33 in online sales.

“He just blew the money, totally blew it on the company,” says court- appointed receiver Richard Weissman, who has been unable to account for about $13 million of the money Jones took.

He has recovered only $1 million of Tri Energy’s assets, which will be returned to investors.

Jones wrote in his letter that his entertainment company was a long-term investment with valuable assets.

“My case, unfortunately, is a reminder that there are times when the abstraction of the soul from the bondage of the bottom line is worthy of serious contemplation,” he wrote.

Mormon #5: Sean Pearson

While the theft angers Pearson (36 and the brother of Kim Flanigan), the Seattle accountant who blew the whistle on Tri Energy, he’s bothered even more by the investor behavior that made the scam possible.

“It angered me because I’d lost my Mom; I mean, there was no reaching her,” Pearson says. “I showed her clear evidence why this had to be a scam. But after a while it wasn’t about the money anymore. It was her identity. If people have a certain personality trait or emotional need, they won’t let go.”

The Verdict

• Jennings was sentenced last November to 12 years in prison
• Jones got 20 years in April
• Both Jennings and Jones have filed notices that they intend to appeal.
• Simburg, 64, who pleaded guilty and cooperated with prosecutors, received a 9-year sentence.