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Category Archives: Ponzi Scheme

Emerging Investor Threats for 2015

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.

 

Policing Wall Street

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.

‘Broker to the Stars’ Bambi Holzer Booted From Securities Industry

Once known as a financial broker to the rich and famous, Bambi Holzer has now been barred from the securities industry by the Financial Industry Regulatory Authority (FINRA). Holzer agreed to the settlement with FINRA last week.

Holzer’s problems seemingly began at the onset of her career in the financial business. As reported in a 2009 article by Forbes, Holzer started working in the 1980s as a receptionist for Oppenheimer & Co. She was promoted within a few weeks to assist the firm’s muni bond trading desk. Shortly thereafter, Holzer moved to Shearson Lehman Hutton, where she was accused of fraud, negligence and churning a client account. According to the Forbes article, Holzer’s employer paid $70,000 to resolve those allegations.

Regulatory records show that Holzer returned to Oppenheimer in 1989 and was “permitted to resign” the following year. Over the years, Holzer worked for at least 10 different broker/dealers, including Brookstreet Securities, A.G. Edwards, Bear Stearns, Newport Coast Securities and UBS.

Despite her problems with regulators – as well as a growing list of investor complaints and disciplinary actions – Holzer somehow managed to maintain an image of wealth and success. With a Beverly Hills office located just off of Rodeo Drive, Holzer counted several celebrities among her clients, including former “Seinfeld” star Julia Louis-Dreyfus. In addition to dispensing financial advice, Holzer authored several books and made numerous television appearances.

Eventually, however, Holzer’s sketchy regulatory history caught up with her. In 2007, former client and actress Julia Louis-Dreyfus, as well as other investors, sued Holzer and one of her former employers over a dispute involving $4.4 million invested in annuities. That suit was later settled.

According to the Investment News article, Holzer and her firm at the time, UBS PaineWebber, paid out at least $11.4 million to settle dozens of investor claims that she misrepresented variable annuities by saying that they offered guaranteed returns.

In September 2013, Holzer was suspended by FINRA since September; at the time, her BrokerCheck report contained 115 pages of investor complaints.

One month later, Holzer was sued by FINRA for allegedly lying to one of her former broker/dealers, Wedbush Morgan Securities Inc., about several clients’ net worth when she sold preferred shares of one of the deals issued by Provident Royalties. In July 2009, Provident Royalties was sued by the Securities and Exchange Commission (SEC) for fraud and what later turned out to be a $485 million Ponzi scheme.

Broker Who Worked for Firm Caught in Alleged Promissory Note Scam Barred by FINRA

For many investors, promissory notes tend to conjure memories of recent deals gone bad, especially those associated with Medical Capital Holdings or Provident Royalties. Both entities were charged with fraud by the Securities and Exchange Commission (SEC) and cost investors millions of dollars in financial losses.

Promissory notes are again back in the news. This time a broker who worked for a firm – Success Trade Securities – that is alleged to have sold more than $18 million in fraudulent promissory notes to 58 investors has been barred by the Financial Industry Regulatory Authority (FINRA).

The broker, Jinesh “Hodge” Brahmbhattm, worked for Success Trade Securities from 2009 until April. He was barred by FINRA last week.

Many of the individuals who invested in the fraudulent notes are current and former NFL and NBA players. As reported Nov. 20 by Investment News, one athlete, Jared Odrick of the Miami Dolphins, has filed an arbitration complaint with FINRA against Brahmbhatt, Success Trade and the company’s top executive, Fuad Ahmed.

The letter of acceptance, waiver and consent from FINRA doesn’t mention Brahmbhatt’s work with Success Trade as the reason he was barred from FINRA. Rather, it cites Brahmbhatt’s failure to appear and testify in August at a disciplinary hearing regarding Success Trade and Ahmed.

Earlier this spring, FINRA filed a cease-and-desist order against Success Trade and Ahmed. The order specifically instructed the two “to halt further fraudulent activities” and cited “the misuse of investors’ funds and assets.”

FINRA also filed a complaint against Ahmed and Success Trade, alleging “fraud in the sale of promissory notes issued by the firm’s parent company, Success Trade Inc.”

According to a Nov. 18 story by Yahoo Sports, Brahmbhatt had once been registered in a financial advisers program created by the NFL Players Association. He dropped his FINRA license in April, and told Yahoo Sports at the time that he had more than 30 clients who had purchased some $12 million of the allegedly fraudulent promissory notes from Success Trade.

Meanwhile, Odrick, the NFL player, filed his arbitration complaint with FINRA in April. He says in the complaint that he invested $625,000 in Success Trade notes and one other series of promissory notes beginning in 2011. Among other things, Odrick alleges that he was promised returns of 10% to 12.5%. The Success Trade note “was part of a large Ponzi scheme orchestrated by Success Trade, Ahmed and Brahmbhatt,” the complaint states.

 

Are You a Potential Financial Fraud Victim?

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.

Indiana Man Charged in Ponzi Scam Targeting Retirement Savings of Investors

Every year, more investors watch helplessly as their retirement savings vanish because of investment fraud. Many of these individuals are elderly investors 65 years of age or older. According to researchers, scams from Ponzi schemes to frauds involving bogus private placements and promissory notes cost U.S. seniors $3 billion a year.

Just this week, the Securities and Exchange Commission (SEC) filed fraud charges against an Indiana man accused of stealing millions of dollars in retirement savings from clients. The SEC alleges that John K. Marcum of Noblesville, Indiana, and Guaranty Reserves Trust LLC used clients’ money for personal use and to fund a bounty hunter reality TV show.

Marcum Cos. LLC was named as a relief defendant in the SEC’s case. Marcum is the principal of both Guaranty Reserves and Marcum Cos.

“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, Acting Director of the SEC’s Chicago regional office, in a statement.  “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”

The SEC says that Marcum allegedly raised more than $6 million from at least 37 investors by selling investments in Guaranty Reserves Trust. Clients were allegedly told by Marcum that their principal was guaranteed and their proceeds would earn large returns from day trading. In addition, Marcum allegedly provided investors with account statements showing that he had used their money to achieve annual returns of more than twenty percent (20%), with no monthly losses. Marcum also reportedly told his clients that he would use their money to earn strong returns by day-trading in stocks.

In reality, Marcum did very little actual trading, and when he did, he suffered significant losses. Instead of day-trading, Marcum used his investors’ money as collateral for a $3 million line of credit for himself. Marcum turned to this line of credit to finance several start-up businesses, including a bridal store, a soul food restaurant and bounty hunter reality television show. Marcum also used investor money to finance his lavish lifestyle, which included luxury car payments, airline and sporting event tickets, expensive meals and hotel stays, the complaint states.

In the complaint, the SEC says that Marcum assisted many of his investors in setting up self-directed IRA accounts at several trust companies. The investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts, or by transferring their taxable assets directly to brokerage accounts which Marcum controlled.

Marcum and certain investors then co-signed promissory notes created by Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC says. The notes were securities and stated that the individual is making an “investment” with GRT. The promissory notes also repeatedly stated that the securities are “asset-backed,” “secured” and “guaranteed,” and promise the payment of interest based on “100% of the asset’s performance.”

Marcum’s scheme, which began in 2010, began to unravel in mid-2013, when certain investors began demanding distributions. Marcum could not comply, because virtually all of his investors’ money was gone. Faced with the reality of being unable to honor investor redemption requests, the SEC alleges that Marcum provided investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.

In June 2013, the SEC says Marcum had a phone conversation with three investors in which he admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money, the SEC alleges. According to the complaint, Marcum offered to name these investors as beneficiaries on his life insurance policies, which he claimed included a “suicide clause” imposing a two-year waiting period for benefits.  Marcum suggested that if he was unsuccessful in returning investors’ money, he would commit suicide to guarantee they would eventually be repaid.

The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

 

 

Elder Investment Fraud: A Booming Business for Scam Artists

It’s become an increasingly common crime: Elder investment fraud. Every day, there are more stories about elderly individuals – many suffering from dementia – who have been taken advantage of financially by an unscrupulous family member, stranger, friend, or even an investment adviser.

Fortunately, more attention is being paid to the issue of elder investment fraud. After a recent fact-finding initiative spearheaded by the Consumer Financial Protection Bureau (CFPB) last year, the non-profit Investor Protection Trust produced a survey about elder exploitation. Among the report’s findings: About 20% of Americans 65 years of age and older have been the victim of a financial swindle.

Criminals often target senior citizens because they manage a significant percentage of the nation’s liquid assets. They also are more likely to be vulnerable to fraud and deception because of age-related medical-conditions such as dementia, memory loss or Alzheimer’s disease. In many cases, the assets stolen from victims of elder fraud represent the individual’s life’s savings.

The scam artists behind these schemes and swindles often pose as “friends,” gaining the elderly victim’s trust. The perpetrators may be strangers or have a relationship with their targeted victim. The intent, however, is the same: To scam the intended victim out of his or her money.

Scammers who target the elderly can be difficult to detect. That’s because many of these fraudsters sound knowledgeable about the bogus product, scam or investment they are touting.  Moreover, they often have official-looking documents about the so-called investment, as well as information regarding the supposed professional credentials they possess.

Examples of common elder fraud schemes and investment scams include the following:

  • Telemarketing or mail fraud. Every year, thousands of people lose money to telemarketing scams – from a few dollars to their life savings.  Fraudulent telemarketers are good at what they do. According to the Federal Trade Commission, dishonest telemarketers make an estimated $40 billion each year off of their victims. In many cases, scammers who operate by phone don’t want to give victims time to think about their pitch; their goal is just to get you to say “yes” to whatever they’re selling. Other unscrupulous telemarketers may ask for more personal information, such as checking and credit card numbers. Never provide this information via the telephone.
  • Charity scams. Older Americans are especially generous when it comes to helping someone in need. And that generosity is exactly what appeals to scammers who call on unsuspecting consumers and ask for a donation or credit card information in order to help victims of recent natural disasters or tragedies. Case in point:  Type in “Boston Marathon Bombings,” and you’ll see a myriad of Web site pages appear. Some of these pages are legitimate; others may not be. Following the Boston Marathon tragedy, the Massachusetts Attorney General warned the public not to give into emotional appeals without first checking the charity in question and ensuring that any Web site visited actually belongs to a legitimate, established and registered charity.
  • Redemption/strawman/bond fraud. Perpetrators of this fraud typically claim that United States Government or the Treasury Department holds a bond on every U.S. citizen and that  by submitting the proper paperwork, you can access to these “U.S. Treasury Direct Accounts.” Individuals promoting this scam frequently cite various discredited legal theories and may refer to the scheme as “Redemption,” “Strawman,” or “Acceptance for Value.” Trainers and Web sites will often charge large fees for “kits” that teach individuals how to perpetrate this scheme. They will often imply that others have had great success in discharging debt and purchasing merchandise such as cars and homes. Failures to implement the scheme successfully are attributed to individuals not following instructions in a specific order or not filing paperwork at correct times. According to the FBI, this scheme predominately uses fraudulent financial documents that appear to be legitimate. These documents are frequently referred to as “bills of exchange,” “promissory bonds,” “indemnity bonds,” “offset bonds,” “sight drafts,” or “comptrollers warrants.” In addition, other official documents are used outside of their intended purpose, like IRS forms 1099, 1099-OID, and 8300. This scheme frequently intermingles legal and pseudo legal terminology in order to appear lawful.

Part II of our blog features more scams and schemes targeting the elderly, plus how to avoid these crimes and what to do if you or loved one becomes a victim.

Legal Issues Continue to Follow B-Ds in 2013

Independent broker/dealers continue to face a wave of legal and regulatory issues in 2013, with many expected to shutter their businesses.

As reported Jan. 20 by Investment News, the problems facing smaller B-Ds with 150 registered representatives or fewer include higher compliance costs, record low interest rates for money market accounts, competitive commission rates from large or discount broker-dealers and a tax increase that will cut available discretionary funds that investors can put to work in the stock market.

Small B-Ds make up the majority of firms registered with the Financial Industry Regulatory Authority (FINRA).  In the first 11 months of 2012, pressures on the industry reduced the number of FINRA-registered firms to 4,319 – down 97 firms from the prior year and a 14% decline since the end of 2007.

Regulatory and compliance issues are a key factor contributing to the reduction in smaller B-Ds. In a move to improve investor protections, the Securities and Exchange Commission (SEC) approved FINRA Rule 4524 in 2012, which mandated that broker/dealers file additional financial or operational schedules or reports as FINRA deemed necessary.

Many B-Ds to close up shop in the past few years have done so because of deals involving failed private placements, such as those connected to Provident Royalties LLC and Medical Capital Holdings LLC. The SEC charged both of those firms with fraud in July 2099, which in turn spurred a rash of investor lawsuits and arbitration claims. As a result, many broker/dealers were unable to contend with the litigation costs and subsequently shut down.

 

Elder Fraud by the Numbers

$2.9 billion: Estimated cost of financial exploitation and fraud for older U.S. adults in 2010.

69: Average age of an investment fraud victim.

2x: The rate at which older women are fraud victims compared to men. Most victims are between 80 and 89 of age, live alone, and need help with either health care or home maintenance issues.

51%: Estimated share of elder fraud committed by strangers. Thirty-four percent of fraud is committed by family, friends or neighbors. The business sector accounts for 12 percent.

84%: Estimated share of victims who do not report elder fraud because they are embarrassed or ashamed.

SOURCES: MetLife Mature Market Institute, AARP Foundation, Investor Protection Trust.

Victims Speak Out in Tim Durham Fraud Case

Five thousand victims, 50 years in prison. That’s what it came down to when a federal judge sentenced Indianapolis businessman and owner of Ohio-based Fair Finance Tim Durham to 50 years in prison for swindling investors out of $250 million.

Durham was convicted of using investors’ life savings to fund his own lavish lifestyle, which consisted of classic cars, mansions in California and Indiana, luxury gambling trips and other extravagant items. On Nov. 30, Durham and the judge responsible for determining his fate heard from several former clients who once trusted Durham with their life savings.

U.S. District Judge Jane Magnus-Stinson received more than 1,000 letters from investors of Fair Finance. One of the investors was Jane Kalina, who told the court that her father had invested everything with Durham’s company – only to lose his life savings of $170,000.

“My father’s been a farmer for many, many years and as soon as he had his farm paid off, he started investing in Fair Finance. When he sold the farm, he put some of that money in, too. Basically this is his life savings. He’s been devastated. He has no retirement, no 401(k) and this is his life savings for him and my mother,” said Kalina.

Then there’s 74-year-old Barbara Lukacik, an Ohio nun who lost more than $125,000 to Durham’s scam.

In speaking to the court, the 74-year-old looked Durham squarely in the face and said: “Shame on you!”

Two of Durham’s co-conspirators also learned their fate on Nov. 30. Fair Finance co-owner James Cochran was sentenced to 25 years in prison, while Rick Snow was sentenced to 10.

“Mr. Durham will never spend another day of his life in anything other than a federal prison,” said Joe Hogsett, U.S attorney, following Friday’s hearing.


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