Category Archives: Investor Education

You work hard for your money, so when you trust it with a broker or investment adviser you want to make sure that person or company is legitimate. While the majority of the stockbrokers, brokerage firms, investment advisers and investment firms are, indeed, reputable, it never hurts to do your homework because sadly there are some individuals and firms ready to take advantage of you and your money.

State and federal laws require brokers, advisers and firms to be registered or licensed. With this in mind, before you invest your money it may be helpful to contact the securities regulator in your state. Among other things, the state securities regulator can provide employment information about a broker or investment adviser, as well as disciplinary and registration information. You can find contact information for your state securities regulator here.

The North American Securities Administrators Association offers several resources in this area on its Web site. Other helpful hints from NASAA on what to do before investing your money include asking for all materials from the Central Registration Depository (CRD) about your prospective stockbroker. This computerized database contains licensing and registration information on more than 650,000 stockbrokers.

In addition, search the Investment Adviser Public Disclosure (IAPD) Web site for information on investment adviser representatives and firms registered with state securities regulators and the Securities and Exchange Commission (SEC).

Lastly, you can find information and research on brokers, brokerage firms, investment adviser representatives and investment adviser firms through the BrokerCheck Web site of the Financial Industry Regulatory Authority (FINRA).

The Financial Industry Regulatory Authority (FINRA) has issued a new investor alert that cautions investors about investing in private placements.  A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (SEC) and is not offered to the public at large.

“Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing. Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education, in the alert titled Private Placements—Evaluate the Risks before Placing Them in Your Portfolio.

Among other things, FINRA advises investors to do the following before investing their money in a private placement investment:

*Carefully review the private placement memorandum or other offering document.

*Find out as much as you can about the company’s business and understand how and when you might liquidate your private placement securities.

*Ask your broker what information he or she was able to review about the issuing company and this private placement.

*Be extremely wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you.

*Be extremely wary of private placements you hear about through spam emails or cold calling. They are very often fraudulent.

Eighty percent of Americans have found themselves targeted by investment scammers, according to a new report from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation. Findings in the study also showed that 40 percent of respondents were unable to identify even the most classic red flags of financial fraud.

For example, many of those surveyed lacked an understanding of reasonable returns on investments, leaving them vulnerable to fraudulent pitches that promised unrealistic or guaranteed returns, the study said.  In fact, more than 4 in 10 respondents found an annual return of 110% for an investment appealing and 43 percent found “fully guaranteed” investments to be appealing. In reality,  no investment is without risk and 100% annual returns are highly improbable. Such promises are common pitches of fraudsters.

Con artists are adept at using a variety of tactics to get their hands on consumers’ money. The FINRA Foundation’s survey found that 64 percent of those surveyed had been invited to an “educational” investment meeting that was likely a sales pitch. Additionally, 67 percent of respondents said they had received an email from another country offering a large amount of money in exchange for an initial deposit or fee.

Older Americans are particularly vulnerable to fraud scams. The FINRA study found that Americans age 65 and older were more likely to be targeted by fraudsters and more likely to lose money once they were targeted. Upon being solicited for fraud, older respondents were 34% more likely to lose money than respondents in their forties, the study said.

This quiz from ABC News lets you test your awareness about financial fraud.

An Indiana-based company called E-Biofuels has been accused by federal officials of allegedly operating the largest tax and securities fraud scheme in the state’s history. U.S. Attorney Joe Hogsett says the scam cost the government and investors more than $100 million.

According to the charging documents, instead of actually manufacturing biofuel, E-Biofuels bought cheaper fuel and sold it to customers as its own product for a profit. In doing so, E-Biofuels was able to fraudulently collect about $35 million in federal tax breaks that are supposed to be reserved for pure biofuel producers.

Read the indictment here.

Two New Jersey-based companies, Caravan Trading Co. and CIMA Green, are named in the charging documents for allegedly conspiring with E-Biofuels to pretend that the lower-grade biofuel was a high-quality product from the E-Biofuels Middletown facility. Also named in the lawsuit is Jeffrey Wilson, former president and CEO of Imperial Petroleum, an Evansville-based publicly traded company that bought E-Biofuels in May 2010.

In total, six people, including Wilson, three E-Biofuels employees and two employees from the New Jersey companies, could face up to 20 years in federal prison on some counts, as well as significant fines, the U.S. attorney’s office said.

As reported Sept. 18 by the Indianapolis Business Journal, the Securities and Exchange Commission (SEC) launched an investigation last year into E-Biofuels LLC in Middletown, Indiana. The company filed for bankruptcy in April 2012.  At the time, the company said it was about $17 million in debt. E-Biofuels’ parent company, Evansville-based Imperial Petroleum Inc., received subpoenas from the SEC and a grand jury that May, according to a regulatory filing.

Charging documents cite 88 counts against seven people and three corporations. Among the charges are allegations of conspiracy, wire fraud, false tax claims, false statements under the Clean Air Act, obstruction of justice, money laundering and securities fraud.

Brokers/dealers could soon be forced to reveal recruiting incentives to their clients if the Financial Industry Regulatory Authority (FINRA) has anything to say about it.

As reported Sept. 15 by Investment News, the proposed regulation will be a topic of discussion on FINRA’s agenda this week. Under the original proposal that was developed in January and then postponed for action by FINRA’s board in July, brokers would be required by FINRA to disclose any enhanced recruitment compensation to clients that they had solicited for one year following their transfer to a new firm. The compensation outlined in the proposal included signing bonuses, upfront or back-end bonuses, loans, accelerated payouts and transition assistance, among other arrangements.

According to the Investment News article, FINRA CEO Richard G. Ketchum said the proposed rule is designed to make potential conflicts of interest more transparent to consumers.

Indeed, in a speech given March 14, Ketchum stated that investors have a right to be informed of conflicts involving recruitment packages when deciding to move their account, especially if that decision translates into having to sell off proprietary products and incurring a possible tax hit.

“When a broker moves to a new firm and calls a customer and says, ‘You should move your account with me because it will be good for you,’ the customer needs to know all of the broker’s motivations for moving,” Ketchum said.

The initial proposal generated 65 comment letters, with many independent broker/dealers voicing opposition. If FINRA’s board now gives its approval to the proposal, FINRA staff can then file rules with the Securities and Exchange Commission (SEC).

Investment scams targeting the elderly are a thriving business for some unscrupulous individuals and so-called companies posing as legitimate financial firms. From  Bernie Madoff, to Medical Capital Holdings, to Tim Durham and, more recently, Indiana investment adviser Lynn Simon.

Simon of Evansville, Indiana, was arrested this spring on charges that he swindled more than $1 million from at least a dozen investors. He now faces three counts of securities fraud, Class B felonies, and a charge of unlawful sale of a security, a Class C felony.

Last week, Simon surrendered at the Vanderburgh County Jail.

According to court documents, several investors who lost money in Simon’s “investments” were elderly. One of the investors included a couple who lost $50,000 that they had planned to use for their retirement years.

The investigation into Simon came to a head in May after an Evansville resident filed a complaint with the Indiana Secretary of State’s office stating that he had stopped receiving interest payments on his investment with Simon. Court records show that Simon’s wife told this investor that Simon had been missing for two weeks.

Simon was a registered investment adviser with CFD Securities in Kokomo, Ind., and operated an office in Evansville under the name Financial Security Planning. Court records show that he was the sole owner of Financial Security Planning, as well as The Insurance Shoppe.

As reported by the Evansville Courier & Press, Simon’s arrest affidavit details an investment scheme involving investments for a private fund allegedly operated by Simon. Investors who invested in the fund were reportedly promised higher rates of returns on their investments. In some instances, the return rates were as high as 11%.

Investigators say that as part of the scheme, Simon issued typewritten promissory notes showing a rate of return at a specified maturity date. Simon did not register any of the investments that were sold under the Financial Security Planning name with the state of Indiana.

In addition, bank records did not show any money going to investments or insurance companies as purported by Simon, the Evansville Courier & Press story said. Instead, according to the affidavit, the records showed investor money going in and then either going to other investors or being withdrawn by Simon.

Investigators also say that Simon was the only person who was authorized to use the account. In addition, the records showed more than $42,000 had been withdrawn on the day before Simon’s wife first reported him missing.

Simon’s arrest serves as a cautionary reminder on the importance of thoroughly researching any investment opportunity, as well as the person or company presenting that investment. In the end, the extra homework can go a long way in preventing financial devastation.

The designations used by financial advisers can confuse even the most sophisticated investor, let alone individuals with little knowledge about financial products or investing. This confusion has led the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association to issue an investor notice about the myriad of financial titles circulating today.

The joint bulletin, which was released yesterday, stressed that financial professional designations and licenses are not the same and that investors should never rely solely on a title to determine whether a financial professional has the expertise they need.

Indeed, some financial titles can simply be purchased or even made up by financial professionals who hope to imply that they have certain expertise or qualifications, says NASAA. In most cases, such titles are generally marketing tools and not granted by a regulator.

Earlier this year, the Consumer Financial Protection Bureau released a report focusing on the proliferation of “senior designations.” The report stated that some financial professionals had taken advantage of elderly consumers by using senior qualifications and selling “inappropriate and sometimes fraudulent financial products and services.”

The SEC/NASAA bulletin offers a number of questions that investors can ask to determine whether a financial adviser has the expertise he or she is touting. Among the questions and recommendations:

What is the name of the organization that awards the financial professional title?

What training, ethical, and other requirements were performed to receive the financial professional title?

Did you have to take a course and a test?

Does the financial professional title require a certain level of work or educational experience?

To maintain the financial professional title, are you required to attend periodic continuing education courses?

The notice also suggests that investors confirm any information provided by the financial professional about his or her financial professional title.  This information may be available on the Web site of the organization that awards the financial professional title. Investors also can check the Web site of the Financial Industry Regulatory Authority (FINRA) and the “Understanding Investment Professional Designations” section.

Finally, the notice encourages investors to contact the organization issuing the financial title to confirm that the financial professional is currently authorized to use the title and to determine if they have any disciplinary history.

With Grandparents Day approaching this Sunday, the Better Business Bureau is warning seniors to be on the lookout for a fraud scheme commonly referred to as the “Grandparent Scam.”

The scam typically works as follows: A grandparent receives a phone call late at night from the scam artist who claims to be one of his or her grandchildren. The phony grandchild is in a panic, saying that it’s an emergency situation and he/she needs money immediately. The sense of urgency that the scam artist creates makes the concerned grandparents act quickly – and all too often without verifying who is actually calling.

Recent research from the Consumer Sentinel Network shows a steady increase in impostor scam reports over the past several years, from just above 60,000 in 2010 to close to 83,000 in 2012.  The Grandparent Scam is one of the most common types of impostor scams targeting senior citizens.

And while the Grandparent Scam has been around for years, it has become more sophisticated thanks to the advent of social media. Now, scam artists have the Internet and other Web tools and programs at their disposal not only to more easily uncover personal information about their targets but also to make their impersonations that more believable.

Another common fake scenario associated with the Grandparent Scam includes the scam artist getting the grandparent to wire or send money on the pretext that the victim’s child or another relative is in the hospital and needs the money. Sometimes the scam artist might call and pretend to be an arresting police officer, a lawyer, or a doctor at a hospital. The phony grandchild may talk first and then hand the phone over to an accomplice of the impersonator to add further “credibility” to the scam.

The BBB offers the following tips to avoid becoming a victim of the Grandparent Scam:

Be skeptical. Without revealing too much personal information yourself, ask questions that only the grandchild could know the answer to. Examples include the name of a favorite pet, a favorite dish or what school they attended. Your loved one should not get angry about you being too cautious.

Verify information. Check with the parents to see if their child is really travelling as they say they are.

Don’t wire money. Never use a transfer service to send money to someone you haven’t met in person or for an emergency you haven’t verified is real.

If you or a loved one becomes a victim to an imposter scam, report the incident immediately to local police and your state Attorney General’s office.

Many investors who purchased bonds as the “safe” investment in their portfolio could soon be in for an unwelcome surprise when they see their account statements. That’s because of an anticipated rise in interest rates as the Federal Reserve begins to start slowing its bond-buying program sometime this year.

When the Fed will actually begin tapering its asset-purchase program – known as quantitative easing – is anyone’s guess. And that lack of clarity translates into confusion for many investors.

During times of higher interest rates, bond funds are at a particular risk for both investors who are invested in an individual bond, as well as shareholders in a bond fund. When interest rates rise, bond prices go down. For shareholders in a bond fund, however, the issue is compounded by the fact that the fund manager of the bond fund may be forced to prematurely sell off individual bonds within the bond fund to meet redemption requests by shareholders wanting to liquidate their shares. This, in turn, can have a catastrophic effect on the net asset value of the bond fund.

Making matters even worse is the fact that the majority of investors appear to be unaware about the impact of rising interest rates on their investment portfolio and, more important, what they should do.

A recent Edward Jones survey showed that 63% of the individuals surveyed believe that rising rates matter but don’t know what to do about it in their 401(k) or IRA. Another 24% of Americans said they “do not understand this at all.”

The bottom line: It’s impossible to predict the future when it comes to the current financial climate, but preparation is and always will be key.

A Sept. 1 article titled “Ignorance Is Not Bliss” by Investment News highlights the impending issues facing bond investors  and whether financial advisers are taking appropriate measures to ensure their clients don’t get caught unaware.

Last week, the 10-year U.S. Treasury note yield was 2.78%, slightly down from 2.94% that it stood on Aug. 24. As the article points out, the yield pullback is likely to be short-lived as the Federal Reserve begins to taper its monthly bond purchases under what’s known as its five-year-long quantitative-easing program.

And that’s expected to happen very soon, which means investors need to take careful note. Because bond prices move in the opposite direction of yields, the rise in market yields could spell huge losses for investors. This is especially true for bond mutual funds in which portfolio managers are forced to sell their holdings at a loss in order to meet redemption demands, according to the Investment News article.

The article makes it very clear:  The yield on the 10-year Treasury has gained a full percentage point since mid-May. A 1-percentage-point rise in interest rates translates into about a 1% decline in prices for every year of a bond’s duration. To put it another way, a bond fund with a 10-year duration would fall in value by 10% for every 1-percentage point interest-rate rise.

The question becomes whether investors clearly understand the impact of rising interest rates on their investment portfolio. Unfortunately, several studies indicate that the answer may be “no.”  According to a new study by brokerage firm Edward Jones, 63% of Americans don’t know how rising interest rates will affect their retirement portfolios, including their 401(k)s and IRAs. Moreover, 24% say they feel completely in the dark about what rising interest rates actually mean.

Financial advisers should be paying attention and taking steps to make sure their clients understand the current financial climate, especially the impact of rising interest rates on bonds. In some cases, that’s happening. In other instances, advisers appear to be completely out of touch with the state of the bond market. In that scenario, investors could very well be caught off guard and pay the ultimate price.

“The biggest risks to the clients is the adviser being either oblivious or in denial about how bonds work. And the client has faith in the adviser . . . High-quality bond funds are the worst investments on the planet right now,” said Robert Isbitts, founder and chief investment strategist at Sungarden Investment Research, in an Aug. 27 interview with Investment News.