Fraud at Triton Financial
Reynald Magbouo
AC500
Fall 2011
The former Triton Financial chief executive Kurt Barton was found guilty on all 39 counts of fraud in August of this year. He was convicted for running a Ponzi scheme that took advantage of over three hundred people which included family, fellow church members, retired and current professional athletes. He even used retired NFL players and Heismann Trophy winners including Jeff Blake, Ty Detmer and Chris Weinke as employees to recruit more investors. Federal agents said that Barton raised about $75 million but only about $20 million was used for its intended purpose with most of it being used to pay for Triton operations, line Barton’s pockets and to pay off earlier investors2. They would help raise money for supposed investments in real estate and businesses and for short-term loans for business owners. One lawsuit that was filed against the Austin, Texas based-firm claimed that Barton and his colleagues persuaded investors to invest in an insurance company in Florida but instead bough an equipment leasing company in Nebraska without the investor’s consent3. This is just one of the many unfortunate incidences that were led by Kurt Barton.
In 2008, Jeff Blake emailed 102 retired NFL players and told them without a disclaimer that Triton was averaging thirty two percent annualized return on its investments within the past five years. The ex-NFL quarterback was basically saying that investors would have quadrupled their money in the past sixty months. Before the lawsuits the website even stated that they aim for “an internal annualized rate of return of 30+ percent over a typical hold period of 24 to 36 months.4” This was a red flag because the National Association of Real Estate Investment Trusts claimed that the commercial real estate returns around the country were -9.22 percent average for the past five years and -32.75 percent in 2009. Barton’s whole strategy was to seek out distressed commercial properties and then flipping it for profit so to see such a huge difference between Barton’s and the Trust’s numbers should have raised flags. Blake wasn’t an expert and was not familiar with the laws pertaining to misleading advertisements because if he did then he would have known that he was not supposed to mass email this information without following the guidelines set by the SEC. According to the prior SEC ruling from a 1986 no-action letter to Clover Management Inc., advertisements by investment advisers have to “disclose any material conditions, objectives or investment strategies used to obtain the results portrayed6. This is an example of the lack of compliance at Triton that should have been observed and attended to by Barton and the compliance officer. It was well understood that he was not knowledgeable in the laws set by the SEC and yet they allowed Blake to send this mass email to potential investors.
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Barton also stated that Triton Financial was registered with the SEC and had about $300 million in assets under management. Further investigation showed that Triton was registered with the state of Texas but not with the SEC as it did not reach the necessary threshold of $30 million in AUM in which they would be then obligated to do so. The threshold is set by the SEC do verify the credibility of a company as it means that it is more attractive to potential investors if they have reached this threshold. Barton falsely claimed this misleading everyone that he was trying to sell their service to which unfortunately made it more appealing to. His deceit and lies helped keep the Ponzi scheme going at the expense of those that decided to invest their money with him and Triton. Barton and his colleagues also lied to the state of Texas, specifically in their registration from or the Form ADV. One question on this form was whether Triton provided “continuous and regular supervisory or management services to securities portfolio4” in which they answered no. However, Barton and his top employees said that it does manage the securities portfolios of athletes and other clients on their website for everybody to see. There were even testimonies in court showing the fabricated E*Trade monthly account statements that Barton showed to commercial lenders, financial institutions, and potential investors. This was one of the many lies he told to keep the money flowing in. Kurt Barton’s Ponzi scheme could have been discovered if the athletes and potential investors checked and verified everything that Barton said to them and what was printed on the website. A simple call to the SEC or the state of Texas could have saved people from investing their money into Triton. They would have uncovered the truth and realized that they should invest their money somewhere else.
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There was also a lot of trust in Barton and everything that he said. Barton convinced his investors to invest in buying certain commercial properties that were distressed and then once there was a commitment, Barton would purchase something else or use that money to pay off other investors without informing the investor. There was an unbelievable amount of trust that would make some investors at fault for not following up on the purchase. There was no verification of the purchase or dealings with anybody else other than Barton. This should have been another red flag for the investor because they should have asked for more details like visitation and verification that the purchase was made.
Ponzi schemes also tend to go after a group of people with some association especially in the beginning and then expand. Bernie Madoff targeted Jews and Jewish foundations and Charles Ponzi targeted Italians. Kurt Barton went for members of his family and church, members of the Church of Jesus Christ and Latter Day Saints. He then recruited athletes as his employees and aimed for sports fans who were wooed with the presence and association with these famous athletes. Victims of this fraud testified that they believed in Barton because why else would these ex professional athletes associate themselves with him if he wasn’t. Similar to all Ponzi schemes, the investors should have looked around at all the clients and saw a common theme requiring more investigation.
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The causal factors as seen in the Fraud Triangle are applicable to Barton and Triton. The motive or pressure for Barton was to make money in the beginning and changed to having to pay off previous investors as they pressured him and starting getting suspicious. Defendants for Barton repeatedly claimed in court that he was attempting to run a legitimate business but made some bad decisions. If Barton was doing this, then he shouldn’t have spent investor money on sports cars and University of Texas luxury suite football tickets. He used these purchases to gain potential investors and falsely show that he was a successful investor. A chief executive running a legitimate business would not have done that. Even if he did truly believe that he could pull his company out of debt he still lied to his investors and moved their money where he saw fit. This also fits with the rationalization for committing the fraud. One of the more common reasons is they tell themselves that they are only borrowing the money and that the person committing the crime convinces themselves that this is just a temporary situation. Barton could have believed that these economic times won’t last for long and that he would be able to keep the scheme going until the economy gets better.
Even if Barton had a false hope of turning things around when the economy improved, he still took innocent people’s hard earned money and used it for different reasons than what was told them and so he is guilty of fraud. The third part of the fraud triangle is the opportunity which Barton definitely had mainly due to the organization of the company. He was at the top and there were no checks and balances as he was the CEO and also sold their services with athletes that were not familiar with the process and basically repeated everything Barton told them. Kurt had all the power and therefore had the opportunity to do what he wanted. He was selling Triton financial services with other people but when it came time to purchase the commercial property the commercial property then he was the only one present. The salesmen would have known he didn’t buy the promised investment opportunity because they were there for the pitch. Barton made it a point to be the only one involved in the sale allowing him to do what he thought was best for himself. That included buying a different company or commercial property and even filtering it back into the system to give older clients their money back. The opportunity was easily there because there was nobody watching over him allowing him to easily commit fraud.
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Many things could have been changed within the small company that would have made it easier for Barton to be caught. There was also no code of conduct or internal control within the small company that probably would have recognized what was really going on. Internal control is a process and isn’t a full proof plan to prevent fraud but it would have allowed for the circulation of information and communication and more importantly monitoring. Barton monitored himself so implementing a process where he others are involved would have caught the scheme earlier than the SEC. There also did not seem that there was an audit committee within the organization to monitor compliance at all. The tone and culture at Triton financial seemed disorganized as there was a lack of standard operating procedures and written policies which show weaknesses in internal control. A majority of that was mainly due to Kurt Barton who should have monitored that aspect of the organization. Even though he was the one committing the fraud it could have empowered others like the ex-NFL players to stop and re-evaluate the situation and take a hard look on how Triton financial was being run.
Triton and Barton are not the only ones who have taken advantage of professional athletes. Fraud of professional athletes and retired professional athletes have been repeatdly happening over many years especially as salaries get bigger and bigger every year. Due to all the travel and appointments they place a lot of trust intlo their advisors and friends who end up taking more money every year. The young professional athlete coming out of college is just excited to be making lots of money and not living on a college budget anymore that they are too busy enjoying the new lifestyle that they rarely pay attention to what is going on behind the scenes with their money. It is usually small monthly payments that add up to a lot of money over the years. A former MLB pitcher recalls a story where he discovered one day in the mail that he was paying his longtime friend and advisor $5,000 a month to pay for car insurance for his two cars7. The pitcher knew his advisor for eighteen years so who knew what else he was earning from the pitcher. Triton and Barton knew this and pitched their services to a lot of professional athletes hoping that they wouldn’t have time to verify that their money was safe and invested exactly where Barton said it would be.
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Barton was heavily motivated by greed, pride and ego. He drove fancy cars, wore expensive suits and lived a very lavish lifestyle and that is something he did not want to give up so promising whatever he could wheter realistic or not to lure in potential investors was his primary goal. The investor should do their due diligence when investing their money with somebody they trust. Barton sold distressed commercial properties and businesses so the investor should have researched more into the business or property and verified that it was purchased when Barton said it was. Fraud could have been easily discovered as Barton didn’t always buy the property or business he was trying to get the investor to purchase with him and so an easy call or search on the internet would have discovered that. The fact that Barton was promising these amazing returns on the commerical real estate that was normally underwater everywhere else in the country is a good example of the saying that it’s too good to be true. Another take home message from Triton is to know what you own and that would be to have full understanding of where your money is going. Getting a second opinion or from a real estate broker about the property that Barton was trying to pitch is a great way to understand why you are investing your money.
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Even talking to the owner to find out details about the commerical property or business is a good way to know that it is a good investment. It would be a good way to find out why it is even for sale, who knows if there was a flood that ruined the property and the owner didn’t have flood insurance so they are selling the property. It is a distressed property but would require too much work to be resold for such a high profit. Details like that could have been easily discovered if the investor took the time to do more research. Another common mistake made by many of the investors is they get excited about the promised returns and invest all their money with one manager. David Akers, now a kicker on the San Fransisco 49ers, was going to retire because he took all his money out of his retirement accounts and placed it all with Triton losing $3.7 million dollars8. He had so much trust in Barton and lost it all forcing him to keep playing in the NFL. It would have been a good idea for him and other investors to diversify their investments with multiple and unrelated firms reducing the risk if one or some of them are fraudulent. Last but not least doing the research into the company and getting feedback from other investors is alway good practice because they might bring up suspicions that could bring the truth out.
Works Cited
1. http://www.nationalmortgagenews.com/dailybriefing/2010_414/president-ceo-convicted-ponzi-scheme-1026190-1.html
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6. http://www.sec.gov/divisions/investment/noaction/clovercapital102886.htm
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8. http://content.usatoday.com/communities/thehuddle/post/2011/08/49ers-k-david-akers-lost-37-million-in-ponzi-scheme/1
