Patricia White of Elk Grove, California, directed most of her self-directed IRA into a company called Crumbs R Us.
She said this unusual investment idea came highly recommended by Loral Langemeier, one of those self-proclaimed investment gurus offering expensive seminars on how to get rich.
Crumbs R Us was also endorsed--or so Ms. White thought--by The Entrust Group, an Oakland, Calif.-based company that administers nearly $2 billion in self-directed individual retirement account funds.
Ms. White, 66 years old, put $120,000 in a Crumbs R Us promissory note--an unregistered security that was supposed to yield 12%. It was retirement savings Ms. White had put away while doing clerical work for 22 years at Kaiser Permanente. It is now worth crumbs.
Crumbs R Us was an entity set up by Ms. Langemeier and a Louisiana businessman named Jerry O. Pearson Jr. Among Mr. Pearson's holdings was a "retirement services" company called Entrust Mid-South LLC in Alexandria, La.
Ms. White claims Mr. Pearson put her savings into a self-directed IRA through Entrust Mid-South and then had her direct this money to his other company, Crumbs R Us.
Interest payments on Ms. White's promissory note ceased in late 2008. Ms. White said she then received a lot of excuses from Mr. Pearson about declining real estate values.
"He'd say, "As soon as I get on my feet, I'm going to pay you all back,'" she said in a telephone interview. "The biggest fear we had was that he was going to file bankruptcy."
Years passed. Now, in a lawsuit filed this month in U.S. District Court in Sacramento, Calif., Ms. White claims Crumbs R Us was part of a Ponzi scheme. The lawsuit seeks class-action status to represent similarly situated investors across the U.S.
My phone calls and emails to Ms. Langemeier, Mr. Pearson and their attorneys went unreturned. Ms. Langemeier is referenced repeatedly in the lawsuit, but is not named as a defendant. The complaint does name Mr. Pearson, Entrust CEO Hugh Bromma, and Entrust entities that controlled the money.
Entrust's attorney Mark Terman wrote in an email that the firm terminated its licensing agreement with Mr. Pearson's company in April of 2011. He did not say why. Ms. White's lawsuit claims it was because Entrust knew Mr. Pearson was illegally funneling self-directed IRA funds into his own shell companies.
"My strong preference is not to comment to the media about pending litigation" Mr. Terman wrote in an email exchange. "But, you should know that our clients deny any wrongdoing and especially deny involvement in any Ponzi scheme. The nature of "self-directed" individual retirement accounts is that administrators do not, among other things, provide investment advice.
"Mr. Pearson was a principal and owner of Entrust Mid-South, LLC," Mr. Terman wrote. "Neither of The Entrust Group, Inc., Entrust Administration, Inc., and Hugh Bromma owned or managed Entrust Mid-South, LLC."
Entrust did, however, grant Mr. Pearson a license to use its name and put customers into its self-directed IRAs. The lawsuit claims Entrust also released these funds to Mr. Pearson's allegedly sham enterprises, including Crumbs R Us, Out of the Box Holdings and Mid-South Wealth Builder.
Mr. Pearson did not have a license to sell securities and could not have put people in self-directed IRAs without Entrust's help, the lawsuit claims. It also alleges he leveraged his relationship with Entrust to build trust and then simply "absconded with the investment monies."
Coral Springs, Fla., attorney Cathy Lerman, who represents Ms. White and other victims, told me this may be the beginning of many other lawsuits to come.
The self-directed IRA, after all, has been a useful tool for Ponzi schemers. State and federal regulators have uncovered numerous instances where scammers coaxed victims into setting up these accounts and then handing over unfettered access to their retirement savings.
The problem has been common enough for Securities and Exchange Commission and the North American Securities Administrators Association to put out a joint alert. Self-directed IRAs, after all, are a handy pot to pinch, holding an estimated $94 billion in retirement funds.
"Investors...should be especially wary of an unsolicited investment offer that promotes the use of a self-directed IRA," the alert on the SEC's website reads.
"Fraud promoters who want to engage in Ponzi schemes or other fraudulent conduct may exploit self-directed IRAs because they permit investors to hold unregistered securities and the custodians or trustees of these accounts likely have not investigated the securities or the background of the promoter."
Ms. White said she doesn't even know what Crumbs R Us was supposed to do. She bought it because promised a 12% return and came highly recommended by people she trusted, including an old acquaintance who was working with Ms. Langemeier's group.
"If I can do it, you can do it. I'm a farm girl from Nebraska," Ms. Langemeier, the so-called "millionaire maker," boasts on her website.
For Ms. White, it's a painful cliche. "You start going to these seminars and you'll hear the same stuff over and over again," she said. "It's just a different person saying it."
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at firstname.lastname@example.org or tellittoal.com)