Information equals power, which is why securities regulators are encouraging investors to be aware about popular investment fraud scams so they don’t become a victim. One of the most popular vehicles for investment fraud includes unregistered securities such as private placements.
Also known as Regulation D offerings, private placements do not have to be registered with the Securities and Exchange Commission (SEC). This means they often lack detailed financial information, as well as a prospectus.
In 2010 and 2011, an increase in investor complaints regarding private placements caused the Financial Industry Regulatory Authority (FINRA) to launch a nationwide investigation of broker/dealers marketing and selling the products. As a result of the investigation, a number of fraud and sales practice abuses were uncovered. Two major cases involved Medical Capital Holdings and Provident Royalties.
Both entities were charged with fraud by the SEC in 2009. Since then, several broker/dealers that sold private placements in Medical Capital and Provident Royalties have faced enforcement actions, as well as fines by regulators. Meanwhile, investors are continuing to file lawsuits and arbitration claims over the failed deals.
As reported Dec. 14 by the Wall Street Journal, baby boomers are most vulnerable victims of investment scams involving private placements. Of the enforcements in 2010 for investors age 50 or older, cases involving unregistered securities outnumbered those related to ordinary stocks and bonds by a ratio of five to one, according to the North American Securities Administrators Association.
One of the victims of those crimes is Keith Grimes, 56. Grimes put $500,000 – his entire life savings – into an investment fund that promised returns of 14% to 24%. Described as having a manager with a successful track record of trading stocks and other financial products, the investment turned out to be a Ponzi scheme, in which money from new investors is used to pay returns to other investors.
The so-called manager of the fund in question was James D. Risher. On Dec. 6, Risher was sentenced to more than 19 years in federal prison. Meanwhile, Grimes, who lost almost all of his financial savings in the doomed deal, is now living in a borrowed mobile home and running an industrial-fiberglass business, according to the Wall Street Journal article.
According to the SEC, Risher raised $22 million from more than 100 investors, while placing only $2.5 million in brokerage accounts and losing about $890,000 through his trading. More than $8 million went to “management and performance fees,” with Risher spending $4.5 million on jewelry, gifts, property and personal expenses.