Category Archives: Investor Beware

Just like an average person who ages, an older financial adviser is more likely to show signs of aging. Red flags that a financial adviser might be suffering from senior moments: forgetfulness, a tendency to repeat things, a disregard for following instructions. If you are concerned, bring attention to the branch manager or to compliance, or, if they don’t do anything, to the authority. An increasing problem that seems to go unreported most of the time, but in the next few decades be prepared to see these declining mental skills claims increase.

51 is the average age of financial advisers and 43 percent are older than 55, according to Cerulli Associates. Many are planning to retire in the next decade and it is a struggle to recruit young advisers to offset those retiring from the industry. The North American Securities Administrators Association are aware of the financial services industry’s continuing concerns regarding the aging of advisers and have begun addressing the issue with proposing a rule requiring state-registered investment advisers to have succession and business continuity plans in place.

FINRA and the SEC want to alert individual investors about performance confusion on the objectives of leveraged and inverse ETFs. Investors should be aware that performance of ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.

The best form of investor protection is to clearly understand these types of investments before dishing out your hard earned money. Start by reading the prospectus, which will provide detailed information on the ETFs’ investment objectives, principal investment strategies, risks, and costs. The SEC’s EDGAR system, as well as search engines, can help you locate a specific ETF prospectus. You can also find the prospectuses on the websites of the financial firms that issue a given ETF, as well as through your broker.

Consider pursuing the advice of an investment professional. Work with someone who understands your investment goals and tolerance for risk. Your investment professional should recognize these complex products, be able to explain if or how they fit your personal goals, and be willing to monitor your investment.

As with all investments, it pays to do your own homework. Only invest if you are confident the product can help you meet your investment objectives and you are knowledgeable and comfortable with the risks associated with these specialized ETFs.

Take a look at the alert issued by the SEC for more information and for real-life examples that illustrate how returns on a leveraged or inverse ETFs over longer periods can differ significantly.

FINRA announced on November 24th that it fined Citigroup Global Markets, Inc. $15 million for supervisory failure in communications between its equity research analysts and its clients and Citigroup sales and trading staff, and for permitting one of its analysts to participate indirectly in two road shows promoting IPOs to investors. Department of Enforcement and the Office of Fraud Detection and Market Intelligence conducted this investigation for FINRA.

FINRA Executive Vice President and Chief of Enforcement, Brad Bennett said, “The frequent interactions between Citigroup analysts and clients at events like ‘idea dinners’ created a heightened risk that views inconsistent with research would selectively be disclosed to clients. Citigroup failed to successfully police these risks.”

Citigroup’s failure to supervise definite communications by its equity research analysts at “idea dinners” hosted by Citigroup equity research analysts that were also attended by some of Citigroup’s institutional clients and sales and trading personnel. At these dinners, Citigroup research analysts discussed stock picks, which, in some instances, were inconsistent with the analysts’ published research. Despite the risk of inappropriate communications at these events, Citigroup did not effectively monitor analyst communications or provide analysts with adequate management concerning the boundaries of permissible communications.

FINRA found that from January 2005 to February 2014, Citigroup failed to meet its supervisory obligations regarding the potential selective distribution of non-public research to clients and sales and trading staff. During this period, Citigroup issued approximately 100 internal cautions concerning communications by equity research analysts. However, when Citigroup discovered violations involving selective dissemination and client communications, there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the strictness necessary to deter repeat violations of Citigroup policies.

In 2011, FINRA found that, a Citigroup senior equity research analyst helped two companies in preparing presentations for investment banking road shows. Between 2011 and 2013, Citigroup did not particularly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials. Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, in settling this matter.

For more information, please visit http://www.finra.org/Newsroom/NewsReleases/2014/P601793

Concern about a new lending practice targeting the military is worrying federal auditors and veterans. Military pensioners are offered money up front in exchange for signing over monthly benefits for a period of time, with few strings attached. After the time period ends, they’re told, they’ll get their monthly payments back.

The Government Accountability Office found that the terms of these financial deals are often unclear and sometimes conceal interest rates that are “significantly higher than equivalent regulated interest rates” from banks and other financial services companies.

18 of 38 companies offering pension advances to veterans and other federal retirees, are located in California, according to a recent federal audit. At least one class action suit has been filed by a Marine Corps veteran from San Diego County.

Jack Harkins, a Marine Corps veteran and past chairman of the United Veterans Council of San Diego County says, “He and other veterans are troubled that their comrades could find themselves in a financial situation in which they borrowed money from companies that didn’t have their best interest in mind.”

Without particular regulations for pension advance companies, they continue to flourish. Another issue identified by federal auditors is the network of companies offering pension advances.

“We found that at least 30 out of 38 companies that we identified had a relationship or affiliation with each other, including working as a subsidiary or broker, or the companies were the same entity operating with more than one name,” the federal auditors wrote.

So far there has been little movement to regulate the new loan products, said Scott Silver, managing partner of the Silver Law Group, which is attempting to file class action lawsuits against pension advance companies across the country. Silver said he gets three to four calls a week from retirees who signed up for pension advances that they now regret. He said the cases are difficult to take to court because the contracts include clauses that prevent veterans from participating in class-action suits and lock them into arbitration.

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.

Last week we posted a blog titled Elderly Primary Target for Troubled Brokers. Within that blog it discussed parts of the United States that are “Hot Spots”, where these brokers with troubled regulatory records tend to cluster, often among people 65 and older. A good place to check and see if your broker is troubled is by visiting the BrokerCheck website run by FINRA. This site shows if your broker has any red flags, such as complaints, regulatory actions, or even recent bankruptcies. FINRA’s BrokerCheck sometimes has brokers fall through the cracks though, so make sure you investigate your broker before trusting them with you hard earned money. If you’ve been invited to a FREE meal by a broker, they may give good advice. FINRA warns investors to be careful if attending these events, because you may face a hard sell and be bullied into a  follow-up meetings with the broker.

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.

The Financial Industry Regulatory Authority (FINRA) has unveiled a new and improved version of its BrokerCheck Web site that allows investors and other individuals to more quickly access and intuitively understand the professional background of investment professionals.

“Investors using BrokerCheck will encounter a more user-friendly interface that allows them to quickly find information that can help them decide if an investment professional is right for them,” said Derek Linden, FINRA Executive Vice President, Registration and Disclosure, in a statement.

The new changes let investors search both the BrokerCheck and Investment Adviser Public Disclosure (IAPD) record of any securities professional or firm directly from FINRA’s homepage.  BrokerCheck then presents the search results in a more user-friendly graphical timeline that details the industry professional’s employment status and history, industry registrations, and any reportable events such as customer disputes or disciplinary actions that may have occurred during his or her career.

FINRA also plans to make the new BrokerCheck widget available to third-party Web sites, allowing visitors to those sites direct access to securities professionals’ or firms’ BrokerCheck or IAPD reports without having to visit the FINRA or Securities and Exchange Commission (SEC) Web sites.

In 2012, members of the public used BrokerCheck to conduct 14.6 million reviews of broker or firm records.

Investment and financial fraud is a $50 billion a year crime – and one that can happen to the young, old, sophisticated investors and novices alike. A recent report from the FINRA Investor Education Foundation found that more than 8 in 10 respondents were solicited to participate in potentially fraudulent financial offers, with 11% of all respondents losing a significant amount of money after engaging in such deals.

Even though financial fraud and investment schemes are commonplace, many Americans don’t know the red flags of financial scams because they lack an understanding about the fundamentals of investing, such as realistic rates of return on their money. Older Americans are particularly vulnerable to financial fraud. According to the FINRA Foundation report, Americans age 65 and older are more likely to be targeted by fraudsters and more likely to lose money once targeted. Upon being solicited for fraud, older respondents were 34% more likely to lose money than respondents in their forties.

Additional highlights of the FINRA Foundation study include the following:

– Many Americans are vulnerable to fraudulent investment pitches promising unrealistic returns because they fail to realize what a reasonable return on an investment should be. For example, nearly half of respondents found a daily rate of return of more than 2% appealing. Claims of achieving “typical” returns of 110% per year were found attractive by 42% of respondents.

– 84% of respondents reported being solicited with at least one of the 11 types of potentially fraudulent offers.

– 67% said they had received an email from another country offering a large amount of money in exchange for an initial deposit or fee.

– 64% had been invited to an “educational” investment meeting that turned out to be a sales pitch.

– 18% had been asked to participate in an investment that offered a commission for referring other investors.

You can read FINRA’s entire report here.

Crowdfunding investing is about to be available to the average Joe – and that means the floodgates to a whole new set of potential risks could be opened wide, predict investor protection advocates.

The Securities and Exchange Commission (SEC) voted yesterday to propose rules that, for the first time, would allow entrepreneurs and start-up companies looking for investors to solicit over the Internet from the general public.

If adopted by the SEC, the proposal would be a major change in the way in which small U.S. companies are allowed to raise money in the private securities market. Currently, private companies can solicit only from accredited, sophisticated investors who have a net worth of at least $1 million or an annual income of more than $200,000.

The proposed investment crowdfunding rule changes this scenario, giving small businesses the green light to raise up to $1 million a year by soliciting unaccredited investors.

For those investors, the new proposal is a chance to get on the ground floor of the next big investment. At the same time, however, investment crowdfunding can be extremely risky, given the fact that most start-ups never see the light of day. A recent Wall Street Journal article reported that 3 out of 4 venture-backed start-ups fail.

In addition, critics of investment crowdfunding say it will unleash a myriad of new fraud schemes, particularly among unsophisticated investors.

The SEC’s crowdfunding proposal is in response to the Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama last April as a way to help spur small business growth by easing federal regulations.

Last year, the North American Securities Administrators Association (NASAA) issued an advisory for investors considering crowdfunding. Among other things, the report highlighted a number of crowdfunding concerns, including offers from disreputable persons and platforms seeking to prey on entrepreneurs unfamiliar with the JOBS Act’s requirements.