How the LDS Church and Utah State University got tied up in an alleged Ponzi scheme and must now pay back millions

Gaylen Rust allegedly defrauded hundreds of individuals and used proceeds to make charitable donations.

(Trent Nelson | The Salt Lake Tribune) An employee worked on a display at the Rust Rare Coin in Salt Lake City in 2017. The owner of the shop, Gaylen Rust, has been indicted on counts of money laundering. Court receivers are currently trying to claw back the funds he allegedly received improperly and later donated to Utah State University and the LDS Church.

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A decade of donations from Gaylen Rust helped Utah State University build a sparkling new concert hall on campus.

And for years, too, Rust gave extra in tithing and other big contributions — amounting to more than $2 million — to The Church of Jesus Christ of Latter-day Saints.

But Rust was being generous with other people’s money, federal and state authorities allege, contending that more than 1,000 victims lost millions to his silver trading enterprise. They’re calling it one of the largest Ponzi schemes in Utah history.

And now a court-appointed receiver is working to recover what he says Rust gave away under the guise of charity.

“Whether it’s a university, whether it’s a religious organization, I need to go and get that money back,” said receiver Jonathan Hafen. “It’s unfortunate and unfair to those who thought they were legitimate donations, but it’s the right thing to do here. It wasn’t his money to give.”

Judge Tena Campbell appointed Hafen to oversee the seizure of Rust’s assets in a civil case jointly filed by the federal Commodity Futures Trading Commission and the Utah Department of Securities.

Uncovering how Rust spent funds on charity — largely, investigators say, to boost his reputation — and trying to recover them is the latest step in what has been a yearslong process that began when state and federal agents first charged Rust, his wife and his son with money laundering and other counts in November 2018.

Authorities allege Rust created a fake silver trading program, with a home base at his coin shop, Rust Rare Coin in Salt Lake City, to lure in investors. Since at least 2008, separate criminal charges allege, Rust tricked hundreds of people in Utah and surrounding states to pool their money into a fund they thought would be used to purchase precious metals.

Rust told them he was buying up silver when prices fell and selling it when prices rose to make a profit, Hafen said. Authorities say it was a sham and that the depositories that Rust said held the silver in Salt Lake City and Los Angeles never stored anything for him.

Prosecutors allege that that virtually all of the investment funds Rust received were diverted to unrelated businesses, spent on personal expenses or used to make payments to other investors.

Rust has pleaded not guilty to the criminal charges against him, and he and his son, Joshua Rust, are proceeding toward trial. His former wife, Denise Gunderson Rust, was sentenced in September to 18 months in prison on one count of money laundering.

Gaylen Rust’s public defenders did not respond to a request from The Salt Lake Tribune for comment.

Meanwhile, investigators have spent months looking at every transaction in his bank accounts and the hundreds of files they got from his office in an attempt to track everywhere the money was spent, focusing on his largest donations.

Donations to the LDS Church

Hafen believes it’s not surprising that most of Rust’s charitable giving of money from the alleged scheme went to the LDS Church.

Before the charges were filed, Hafen said, Rust was a prominent member of the faith who used his knowledge of precious metals to help church officials assess and trade in tithing offerings from individuals who gave their gifts in unusual currencies — such as antiques or vintage coins. He is a particular expert in early Mormon and Utah coins, which he sold at his own store.

(Trent Nelson | The Salt Lake Tribune) An employee works on a display of rare U.S. and Mormon currency at Rust Rare Coin in Salt Lake City on Thursday November 2, 2017.

But investigators say that the faith was also a large part of how Rust ran his operation; he allegedly used his relationship with the church to exploit individuals into investing in his fake silver pool. Court documents allege that he gained their trust by being a member in high standing, often getting those in his local ward to contribute and encouraging them to get other members of the faith involved.

And, court documents allege, he pointed to his generous contributions to the church as a means to bolster his credibility and suggest that the investment would make them just as wealthy and able to give more in tithing to their shared faith. In the church, members are expected to donate 10% of their income.

Hafen, the receiver, said he was able to trace $2.4 million that Rust gave to the LDS Church in tithing and other donations that came directly from the money he collected in his alleged scheme.

According to state and federal law, any money that was collected through illegal means, and then donated, must be returned.

The LDS Church has entered into a settlement agreement to pay the $2.4 million to the receiver so that the money can be returned to investors.

“The Church of Jesus Christ of Latter-day Saints would never knowingly accept or retain donations that are the proceeds of fraudulent activities,” spokesman Sam Penrod said in a statement for this story. “The Church was not aware these donations were the result of ill-gotten gains and is returning the donations as agreed upon with the court appointed trustee.”

Court documents confirm the church was not aware of how Rust got the money. In fact, Hafen said, it can be impossible in many cases for an organization to be able to vet that. And it often leaves them in a similarly vulnerable position as many victims.

The church was able to repay the money, largely because it has vast financial resources. But other organizations are not in the same situation, Hafen said.

The challenge with Utah State

In building his reputation, Rust also significantly invested in the arts in Utah — particularly music.

He ran his own company, Your LDS Music Store, as well as a recording label, R Legacy Entertainment, to promote Utah musicians. Bank records in his court case show that he transferred some of the allegedly fraudulent proceeds, about $22 million, to R Legacy Entertainment. And that is also being liquidated by the court.

Rust’s biggest cultural endeavor, though, was a charity that he created: Legacy Music Alliance, which supported art programs in Utah schools. Through that, he donated funds so that students could travel to Carnegie Hall in New York, as well as buy new instruments. And he sponsored a season of the Utah Wind Symphony, which is made up of graduates from several Utah colleges.

“I’ve been to every university in the state,” Rust said in an interview with The Tribune in 2013. “I’ve seen the levels of educators and the level of students, and then I see the lack of support, and it’s discouraging.”

To address that, the largest donation from the alliance came in a series of payments to Utah State University’s Department of Music, starting in June 2009, that were to go toward building the Newel and Jean Daines Concert Hall at the Logan campus.

(Al Hartmann | The Salt Lake Tribune) Utah State University opened the renovated Chase Fine Arts Center, an arts complex that includes the totally remodeled Daines Concert Hall.

(Al Hartmann | The Salt Lake Tribune) Utah State University opened the renovated Chase Fine Arts Center, an arts complex that includes the totally remodeled Daines Concert Hall.

After a few years of contributions, Rust gave a total of $544,806 to that effort that the court’s receivers could track came from the alleged Ponzi scheme.

The half-million dollars from Rust was just a fraction of what it took to build and renovate the $26 million concert hall that was completed in fall 2017; it’s also just a fraction of what the school receives in donations each year. Utah State got $46.6 million for the 2020 fiscal year.

But unlike the LDS Church, Utah State has said it will be difficult to return the funds and is seeking a possible exemption.

Wayne Klein is seeking the money back, overseeing this part of the charity clawbacks as Hafen has a conflict of interest with his law firm sometimes representing USU. Hafen also occasionally argues on behalf of media organizations in the state, including The Tribune.

The school built the concert hall entirely through private donations and it does not have an extra $500,000 to pay back the donation from Rust, a spokesperson there said. And if it’s forced to do so, that cost could come at the expense of students, she said.

“Returning it would be a significant financial burden for the university,” said Amanda DeRito, who released a statement for the school. “At this time, we are working with [Klein] to resolve the matter.”

Most organizations, Klein said, even large ones like a university, have little to no way to protect themselves from accepting donations that come from illegal activities. “There isn’t really a way to screen every donation,” Klein said.

In fact, federal investigators didn’t know about Rust’s alleged dealings until nearly a decade after he started donating to USU.

DeRito said the school has a policy for declining gifts, which includes when a donor makes “unreasonable conditions” for how the money must be spent. But, she acknowledged, too, “the deception that takes place through fraud is harder to detect.”

Klein believes, though, that it doesn’t mean the school can keep the money. After the university initially declined to repay the funds, Klein filed a lawsuit against Utah State late last month asking the courts to order the school to do so.

“When a receiver sues somebody, like Utah State, it is a battle between innocent people,” he added. “Utah State is innocent here. The victims whose money was donated to Utah State are also innocent, and they deserve it back.”

He said Utah State has a few options. Its lawyers can fight the case. The school could also go to donors to make up the funds. Or the administrators there can ask the Legislature to appropriate the amount owed.

Sorting through 623 claims

In a twist of family history, Rust’s father, Alvin Rust, was defrauded of $150,000 in connection with one of Utah’s biggest news stories: the forgeries and eventual mail bombings perpetrated by Mark Hoffman.

Alvin Rust had paid Hoffman in the early 1980s to get the McLellin Collection papers, allegedly written by early LDS apostle-turned-apostate William McLellin. The papers were, of course, fake. And the family lost the money.

Gaylen Rust has previously said the incident really hurt his father, the family name and their business in dealing with historical Mormon objects.

In his case, investigators are examining as much as $50 million that Rust distributed through cash and wire transfers. The church and Utah State University received the largest donations of funds allegedly obtained through fraud, court records indicate.

The court’s receivers are also tracing money that Rust distributed to his own accounts. And they’re liquidating all of his assets, including property for an RV park he purchased in Montana, his $2 million home in Layton, a time share, music studio equipment and thoroughbred race horses that he raised.

(Chris Detrick | The Salt Lake Tribune) Gaylen Rust poses for a portrait at his home in Layton on Wednesday May 22, 2013 — five years before he was indicted on federal counts for money laundering.

They’re collecting money, too, from some of the earliest investors who profited when Rust paid them with the funds from individuals who joined the alleged Ponzi scheme later. Overall, 623 claims have been submitted to the court. And the receivers have filed 30 actions against 124 entities.

That includes Zions Bank, which has already paid back $1.6 million to the court and has another case pending against it, too, where some of Rust’s investors said the bank could have seen the warning signs in Rust’s many transactions and raised a red flag. The attorneys for those investors did not respond to a request for comment.

Hafen said the court will continue investigating how money was spent, including other charitable donations, too.

“While the victims won’t likely get all of their money back, we think everyone will get a meaningful percentage back,” Hafen said. “We’re tracing thousands of transactions wherever they lead us.”