Category Archives: Broker/dealer

New products in classic schemes such as, binary options, marijuana-related businesses, stream-of-income investments, and digital currency sure to face investors this coming year.

William Beatty, NASAA President and Washington Securities Director says “Regulators are seeing classic threats to investors morph into new or altered dangers, many fueled by the Internet. Overarching all of these threats are unlicensed agents selling unregistered products to unsuspecting investors.”

The following list of top threats facing unwary investors throughout North America was compiled by the securities regulators in NASAA’s Enforcement Section:

Emerging Threats:

• Binary Options
• Marijuana Industry Investments
• Stream-of-Income Investments
• Digital Currency & Cybersecurity Risks

Persistent Threats:

• Reg D/Rule 506 Private Offerings
• Pyramid and Other Ponzi Schemes
• Real Estate Schemes, Including Those Using Promissory Notes Affinity Fraud
• Internet Fraud (including Social Media and Crowdfunding)
• Oil & Gas Investments in the Fracking Era

State and provincial securities regulators can provide detailed background information about those who are registered to sell securities or provide investment advice, and about the products being offered. Unregistered individuals continue to be the most common subject of enforcement actions by state securities regulators. “It pays to investigate before you invest,” Beatty says.

Top Emerging Investor Threats Closer Look, Courtesy of the Securities Regulator NASAA.

Binary Options: Binary options are securities in the form of options contracts that have a payout that depends on whether the underlying asset – for example, a company’s stock or a stock index – increases or decreases in value. In such an all-or nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased. Unlike a traditional option, a binary option will pay a fixed sum at expiration regardless of the magnitude of the difference between the settlement value and the option’s exercise price. A call binary index option would pay out if the settlement value of the underlying index were at or above the option’s exercise price at expiration, and a put binary index option would pay out if the underlying index were below the option’s exercise price at expiration. Binary option risks include: illegal distributions- trading of binary options without complying with applicable registration and distribution requirements; potential for fraud – fraudulent promotion schemes (with misleading average returns on investment); identity theft (collecting customer information such as credit card and driver’s license data for unspecified uses); refusals to return, or pay out, investor funds; potential for abusive trading: manipulation of the binary options trading software to generate losing trades. Particular investor risks are that the option is an all-or-nothing payout structure and investors can easily lose their entire investment. In addition, much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable local regulatory requirements.

Marijuana Industry Investments: Medical marijuana is legal in 23 states and the District of Columbia, and recreational use is legal in four states and the District of Columbia. The legalization of this once prohibited substance is generating headlines, which, in turn, has grabbed the attention of investors looking to capitalize on the high potential of this new legal market. Many promoters have seized upon this to market and sell investments in the marijuana industry, including investments in companies that provide products and services to the marijuana industry such as vaporizers, hydroponic supplies, lighting systems, and security systems. But as is the case with any headline-generating topic, scam artists also recognize an opportunity to capitalize. Many of these companies are micro-cap companies selling low-priced securities which typically are highly speculative and carry a high degree of risk for investors. Securities regulators are seeing “pump and dump” scams, typical of micro-cap offerings. Fraudsters lure investors with aggressive, optimistic, and potentially false or misleading information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success (the “pump”). Once share prices and volumes peak, scammers behind the ploy sell their shares at a profit, leaving investors with worthless stock (the “dump”). Investors should think carefully and do their due diligence before jumping into marijuana-related investments.

Stream-of-Income Investments: Investors looking for monthly returns are being enticed to invest by companies that introduce investors to individuals selling a stream of income, such as pension payments or government disability payments. These investments can carry significant risks as laws may prohibit the assignment of the stream of income/benefits, the seller typically maintains the legal right to redirect the payment, and if the seller does redirect the payment, the investor may be left with an unenforceable contract right. In addition, the benefits are contingent on the life of the seller, and even life insurance policies on the seller’s life may be cancelled and do not protect an investor if a seller simply redirects the income stream. Sales of these investments are of concern to state regulators because often veterans and disabled persons are preyed upon to assign their benefits when they experience financially stressful times, selling much needed future benefit payments at a significant reduction. Investors should consider obtaining independent legal advice before investing in the purchase of another person’s income stream and also check with their local securities regulator to confirm that the investment and those selling it are exempt from registration or are properly registered.

Digital Currency & Cybersecurity Risks: Digital currencies are emerging as trendy way to pay for goods and services. Bitcoin, perhaps the most popular digital currency, was priced at around $10 per unit in early 2013 but peaked at around $1,200 per unit later that year. The rapid price increase sparked considerable public interest and media attention, creating a fresh market for securities offerings tied to digital currencies. Unfortunately, unscrupulous promoters may be attempting to capitalize on this popularity by illegally offering securities tied to digital currencies. Even legitimate securities offerings tied to digital currencies may present considerable risks to the investing public, including risks associated with volatility and demand for the units, the anonymity associated with the use of certain digital currencies, and the threats posed by hackers using malicious software to compromise network security systems. These risks were highlighted earlier this year when Mt. Gox, once the world’s largest Bitcoin exchange, filed for bankruptcy amid reports that hackers may have stolen around 850,000 Bitcoins worth as much as $500 million.

Alternative investments can be risky, illiquid, and complicated and, as witnessed in a growing number of cases in the past few years, cost investors thousands of dollars in financial losses.

Last week, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) took up the subject of alternative investments by issuing a Risk Alert on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.

“Money continues to flow into alternative investments.  We thought it was important to assess advisers’ due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such investments or recommendations are consistent with client objectives,” said OCIE Director Drew Bowden.

The alert, which can be read here, describes current industry trends and practices regarding advisers’ due diligence. In particular, the alert notes that advisers are:

*Seeking more information and data directly from the managers of alternative investments

*Using third parties to supplement and validate information provided by managers of alternative investments

*Performing additional quantitative analysis and risk assessment of alternative investments and their managers.

However, SEC staff observed certain deficiencies in several of the advisory firms examined, including:

*Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients

*Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted

*Having due diligence practices that differed from those described in the advisers’ disclosures to clients.

Despite warnings state and federal law enforcement and securities regulators, investment fraud schemes continue to grow across the country, damaging lives and producing thousands of dollars in financial losses for their unsuspecting victims.

One recent fraud scam involves so-called investment clubs.  In this case, the scam amounted to $36 million. One of the perpetrators, Christopher Jackson, 46, recently was convicted in a federal trial in Sacramento for his participation in the scheme known as Diversified Management Consultants, or DMC.

According to court documents, between 2003 and 2009, DMC purported to help people invest money in real estate development and save their homes from foreclosure. In reality, authorities said, DMC was an investment fraud scheme that defrauded at least 180 people out of approximately $36.9 million.

U.S. District Judge Troy L. Nunley ordered Jackson remanded into custody immediately after the jury’s verdict. Jackson is to be sentenced April 10.

Jackson’s accomplices, Michael Bolden; Victor Alvarado; Nicholo Arceo; Erica Arceo; and Garry Bradford – all of Sacramento – have pleaded guilty to charges of conspiracy, wire fraud and false statements. They are currently awaiting sentencing.

Court documents and evidence produced at the trial show that DMC was an umbrella for the various defendants’ investment clubs. The defendants induced people to invest their ordinary savings, tax-deferred retirement savings and proceeds of cash-out residential loan refinancing. They told investors that their money would be used to purchase property and buildings for a real estate venture. Instead, the victims’ money went to pay other investors’ fake returns on investments and to pay for the defendants’ personal expenses, including a luxury lifestyle, authorities contend.

As reported by the Sacramento Bee on Jan. 23, Jackson was the “closer” among the DMC participants. His investment club – Genesis Innovations – recruited approximately 80 investors and took in more than $10 million. Many of Jackson’s victims invested all of their retirement savings with him based on his promise of a high interest rate and very little risk. Out of the $10 million, Jackson invested no more than $2.5 million in developing real estate, authorities said.

The rest of the money was allegedly used by Jackson to pay false returns to other investors and to live in a way that Jackson himself compared to an entertainment or sports star. He used the Genesis Innovations account to drive a Lamborghini, a Rolls Royce, a BMW and a Land Rover. He also employed a personal chef and a bodyguard, who at times carried a metal briefcase in which Jackson carried cash.

In addition, Jackson took annual trips to Las Vegas, where he paid for an entourage of guests to join him at the finest hotels and restaurants, authorities said. He also spent more than $1 million on purchases, including jewelry and landscaping his house, with all the money coming out of the investment club account.

In 2012, one of the largest non-traded real estate investment trusts (REITs) – Inland American Real Estate – was the target of a Securities and Exchange (SEC) nonpublic, fact-finding investigation as part of an effort to determine whether it had violated certain federal securities laws. Now, Inland American could be in line for a merger or listing of its shares, according to a story reported last Friday in Investment News.

In a letter to shareholders, Inland American stated that, “In connection with our board’s review of an additional liquidity option for our stockholders, this letter serves as notice that we are suspending our current share repurchase program, which is available to stockholders in the event of death or for stockholders that have a ‘qualifying disability’ or are confined to a ‘long-term care facility…”

As reported in the Investment News story, Inland American has had its share of issues over the years, many of them tied to the 2008 financial crisis. Launched in 2005, Inland American was among a group of large non-traded REITs that suffered in the wake of fallen commercial real estate prices. Originally sold to investors by brokers at $10 per share, the REIT’s most recent estimated per share valuation at the end of December was $6.94 per share.

Stay tuned.

Despite the fact that JPMorgan Chase & Co. has recently been mired in regulatory and criminal probes – which ultimately cost the bank more than $23 billion in settlements – the person who oversaw the fiasco unfold is getting a big raise. As reported in the company’s public filing last week, JPMorgan’s board of directors opted to give CEO Jamie Dimon a 74% raise – or $20 million – last year, bringing his pay closer to where it stood before the board faulted his oversight of botched derivatives bets, reports a story in the Los Angeles Times.

Directors had previously cut Dimon’s 2012 pay after the company lost $6.25 billion on the so-called “London Whale” derivatives trade that Dimon once referred to as a “tempest in a teapot.”

Other tempests in the teapot that later proved noteworthy included a record settlement of $13 billion to resolve inquiries into mortgage-bond sales. The bank also paid $2.6 billion and avoided criminal prosecution while settling claims that it failed to stop disgraced broker Bernie Madoff’s Ponzi scheme.

Elder fraud is one of the fastest-growing crimes in the United States, with several research studies reporting that the elderly lose more than $3 billion every year to financial fraud and investment scams.

Earlier today, Mark Maddox joined Indiana Secretary of State Connie Lawson and Nancy Stone of the Senior Medicare Patrol on WFYI’s No Limits with John Krull for a discussion on Elderly Fraud. Among other things, the panel talked about common investment scams that target the elderly, what children of aging parents can do to protect their elderly parents from becoming investment fraud victims and the red flags of elder fraud.

“Seniors are targeted for a number of reasons; many have money, some are retired or lonely. We see a lot of seniors these days who have been preyed upon by people they trust: greedy children, unscrupulous caregivers. One of the biggest cases we worked on a few years ago and which was seen in the movie, the Wolf of Wall Street, concerned Jason Belfort and Stratton Oakmont. His boiler room operation stole about $200 million from customers – most of whom were seniors,” said Mark Maddox of Maddox Hargett & Caruso on today’s program.

If you missed today’s show, you can listen to it here.

The issue of Elder Fraud will be featured on NPR’s No Limits program today, Jan. 23, from 1 to 2 p.m. EST. Panel guests include Mark Maddox of Maddox Hargett & Caruso, P.C., Indiana Secretary of State Connie Lawson and Nancy Stone of the Senior Medicare Patrol. Join the conversation and post any questions you may have for the panel at https://facebook.com/NoLimitsWFYI.

A summary of the show will be posted here on this Web site later today.

The hype surrounding the movie “The Wolf of Wall Street” – which chronicles the rise and fall of broker-turned-investment swindler Jordan Belfort – shines yet another spotlight on the inner-workings of Wall Street and, specifically, what is and isn’t being done to protect investors from fraudsters like Belfort.

Last year, Frontline addressed this very subject in a documentary to mark the fifth anniversary of the global financial crisis of 2008. Titled The Untouchables, the documentary explored a number of questions. Among them: Why had no major bank or top executive been found criminally liable and prosecuted for the crisis or the fraud tied to the sale of toxic mortgages? Why were federal prosecutors so reluctant to act on credible evidence that Wall Street knowingly packaged and sold bad mortgage loans to investors? Are banks simply too large to prosecute and therefore too big to jail? Will Wall Street ever be held accountable for its wrongdoings and excessive risk taking?

Following interviews with top prosecutors, government officials and industry whistleblowers, Frontline reveals that many Wall Street bankers ignored pervasive fraud when buying pools of mortgage loans. Tom Leonard, a supervisor who examined the quality of loans for major investment banks like the now-defunct Bear Stearns, said bankers instructed him to disregard clear evidence of fraud. “Fraud was the F-word, or the F-bomb. You didn’t use that word,” said Leonard. “By your terms and my terms, yes, it was fraud. By the [industry’s] terms, it was something else.”

Former Sen. Ted Kaufman (D-Del.) was one of the individuals who was determined to see bankers punished for their bad behavior and their involvement in the financial crisis.  “I was really upset about what went on Wall Street that brought about the financial crisis,” Kaufman recalls. “That doesn’t happen if there isn’t something bad going on.”

As the documentary shows, Kaufman became increasingly frustrated by the lack of criminal prosecutions and left office in 2010.  Meanwhile, Jeff Connaughton, Kaufman’s chief of staff, remains convinced that the U.S. Department of Justice never made prosecuting Wall Street one of its top priorities. “You’re telling me that not one banker, not one executive on Wall Street, not one player in this entire financial crisis committed provable fraud?” asks Connaughton in the documentary. “I mean, I just don’t believe that.”

Given the heightened attention that the movie, The Wolf of Wall Street, is creating about the greed and excesses of Wall Street, if you missed The Untouchables last year, it may well be worth your time now. You can view it online here.

Disgraced “Wolf of Wall Street” broker Jordan Belfort is no longer doing business in the securities industry, but some of his cohorts in crime continue to be on the radar of regulators.

As reported yesterday by Investment News, one of those brokers is Christopher Veale, who was charged Wednesday by Massachusetts Secretary of the Commonwealth William F. Galvin of engaging in abusive sales practices, churning a client’s account and using markups to conceal commissions in the account of an 81-year-old investor.

Regulators allege that the elderly Rhode Island investor put $873,622 into his account with Veale. He also was charged $319,818 in commissions and hidden fees. A colleague of Veale’s at Brookville Capital Partners LLC, Ali Habib Mayar, also is named in Galvin’s complaint.

The elderly client ultimately suffered out-of-pocket losses of almost $1.6 million as a result of the brokers’ alleged actions and Brookville Capital’s alleged failure to supervise their actions, the complaint says.

“[The] Senior Investor attempted to close his Brookville account twice, but both times was convinced to keep the account open. Specifically, Veale persuaded Senior Investor that he could turn the account around and promised Senior Investor that he would significantly increase profits, but that the only way Veale could make that happen was if Senior Investor put in another $200,000,” Galvin stated in the complaint.

The complaint seeks to revoke the registration of the two representatives and firm and permanently bar them from the securities industry in Massachusetts. Rhode Island also has filed a similar action against the two brokers and Brookville.

Veale infamously began his career in the securities industry in 1995 with the now-defunct Stratton Oakmont. Stratton Oakmont is credited with being one of the first ‘boiler room’ operations whose brokers aggressively cold called potential investors and pushed them to buy penny stocks that were manipulated by Stratton Oakmont.

Stratton Oakmont and its creator, Belfort, are now the subject of Hollywood in the movie, “The Wolf Wall Street.”

After Stratton Oakmont was put out of business by federal authorities, Veale went on to work with some 17 other broker/dealers, including the now-defunct John Thomas Financial.  That company closed its doors last year over fraud allegations. In December 2013, Anastasios “Tommy” Belesis, the founder of John Thomas Financial, agreed to be banned from the securities industry in a settlement with U.S. regulators who had accused him of defrauding investors in two hedge funds.

Veale currently works for Legend Securities, according to his BrokerCheck report with the Financial Industry Regulatory Authority (FINRA).

Aubrey Lee Price was a former Georgia investment adviser who went missing in 2012 after duping investors out of millions of dollars in a private-placement fraud scheme. Price was later presumed dead when authorities discovered an apparent suicide note detailing the fraud.

Now, it appears Price is back from the dead. The Federal Bureau of Investigations (FBI) reported on its Web site last week that Price had been captured and charged with securities and wire fraud.

In 2012, the Securities and Exchange Commission (SEC) froze the assets of Price, alleging that he had raised about $40 million from hundreds of investors by selling shares in an unregistered investment fund (PFG) that he managed. Price purported to invest fund assets in traditional marketable securities, but he also made illiquid investments in South America real estate and a troubled South Georgia bank. In order to conceal the mounting losses of investor funds, Price created bogus account statements with false account balances and returns that were provided to investors and bank regulators.

As reported today by Investment News, Price pleaded not guilty last Wednesday to federal bank fraud charges in U.S. District Court for the Southern District of Georgia before consenting to be held in custody while the case proceeds.

If convicted, Price faces a possible penalty of 30 years in prison and a $1 million fine. If that happens, it would be justice for victims like Rick Smith. Smith, 63, retired early from Lockheed Martin in 2007 on Price’s advice. Now, however, Smith and his wife have gotten part-time jobs and been forced to sell a boat and RV in order to compensate for the losses they incurred by investing with Price.

“It helps a whole lot just knowing where he is,” Smith said in a Jan. 6 story by the Globe and Mail. “Maybe he’ll pay for what he did.”