Clients in self-directed IRAs turned over control; 20% returns pitched
The Securities and Exchange Commission has filed fraud charges against a trader who allegedly took millions in retirement savings from clients hoping to boost returns, only to blow the money on funding a bounty hunter reality TV show that never got off the ground.
The federal securities regulator filed suit against John K. Marcum of Noblesville, Ind., and Guaranty Reserves Trust LLC in the U.S. District Court in the Southern District of Indiana. Marcum Cos. LLC was named as a relief defendant in the case. Mr. Marcum is the principal of both Guaranty Reserves and Marcum Cos.
Going back to 2010, Mr. Marcum allegedly raised more than $6 million from at least 37 investors by selling them investments in Guaranty Reserves Trust, according to the SEC. Clients were allegedly told that their principal was guaranteed and that their proceeds would earn large returns from day trading, the SEC claimed.
Investors also allegedly received statements saying they'd receive annual returns upward of 20%, according to the lawsuit.
Clients involved in the alleged scam set up self-directed IRA accounts at trust companies and supposedly handed Mr. Marcum control over their assets by rolling over their existing IRA accounts into the new self-directed IRAs they opened with the trader's help, the SEC alleged. Alternatively, clients also allegedly transferred their taxable assets to brokerage accounts under Mr. Marcum's control, according to the suit.
The trader and some of the investors co-signed promissory notes that were created by Mr. Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC claimed. The notes were supposedly touted as “asset-backed” and “secured,” and claimed to be guaranteed with a “collateralized asset,” according to the suit.
Contrary to what investors were allegedly led to believe, very little trading actually took place, according to regulators. Mr. Marcum invested mostly in equities, stock options and Treasury bills, losing over $900,000 from these activities, according to the SEC.
Investor money went toward collateral for a line of credit, which funded a couple of startup businesses, including a bounty hunter reality TV show and a soul food restaurant owned and operated by the TV bounty hunters, according to the suit.
Some $3 million of clients' cash went toward paying down the balance on the line of credit and close out the account, the regulator alleged. The bounty hunter show and the other startups did not appear to be profitable, the SEC noted. Another $1.4 million went toward making payments to other companies, and some $525,000 went toward personal expenses, including hotel stays and luxury car payments, according to the suit.
The alleged scheme began to unravel this year when clients began making redemption requests that Mr. Marcum couldn't honor, the SEC said. At one point, he allegedly “begged his investors for additional time to recover their money,” offering to name them as beneficiaries on a number of his own life insurance policies to guarantee their repayment.
“Marcum suggested to these investors that if he was unsuccessful in returning their money, he will kill himself so that they could be made whole,” the SEC said.
The SEC froze the assets and obtained a temporary restraining order. The regulator now seeks permanent injunctions, disgorgement and penalties from Mr. Marcum and his companies.
A call to Mr. Marcum's attorney Patrick Chavis IV was not returned.
