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Monthly Archives: October 2010

Green-energy scams put portfolios in the red

The emerging green-energy market has created a horde of fraudsters. So many, in fact, that late last year, the Financial Industry Regulatory Authority (FINRA) warned about schemes that promise large gains from investments in companies that pitch alternative, renewable or waste-to-energy products. And in May of this year, the Securities & Exchange Commission (SEC) followed with its own alert about potential scams that exploit the Gulf oil spill and related cleanup efforts.

The green-energy get-rich-quick schemes are showing up in blog posts, e-mail, infomercials, Internet message boards, text messages, and Twitter. As with most investment scams, all promise unrealistic returns, such a 200 percent stock gain by a solar panel company, a one-in-a-million deal to get a “51 times” return on current stock value from a China wind-power enterprise, and a 500 percent one week stock gain by a hydrogen-based energy outfit.

Of course, the regulators are on the lookout for the scammers. In one recently filed case, the SEC charged that promoters of eco-friendly investment opportunities lured 300 investors into a $30 million Ponzi scheme, encouraging the participants to finance “green” initiatives of Mantria Corporation, including a purported “carbon negative” housing community in rural Tennessee and a “bio-char” charcoal substitute made from organic waste. Investors were promised returns ranging from 17 percent to “hundreds of percent” annually. But, according to the SEC’s complaint, Mantria did not generate any income from which such extraordinary returns could be paid.

As cautioned by the SEC, the oil spill in the Gulf of Mexico brought additional scam opportunities for cons promising financial gains from investments in companies that claim to be involved in the cleanup operations. In May and June 2010, the SEC suspended the trading in shares of ACT Clean Technologies Inc. of Huntington Beach, CA, and Green Energy Resources, Inc. of New York, NY, because, among other issues, questions arose about the accuracy and adequacy of the publicly disseminated information by the companies.

To dodge green-energy investment scams (and other frauds) investigate before investing! And:

  • Never rely solely on information contained in an unsolicited communication.
  • Find out who sent the investment recommendations; many companies and individuals that tout stocks are paid by the company being promoted.
  • Examine the fine print for any statements indicating payments in cash or in stock for issuing the report or message.
  • Find out where the stock trades. Most unsolicited recommendations involve stocks that do not meet the listing requirements of the major stock exchanges; they are usually quoted on the OTC Bulletin Board or in the Pink Sheets, which do not impose minimum qualitative standards. Many of the OTC or Pink Sheets stocks trade infrequently which can make shares difficult to sell. When these stocks do trade, they may fluctuate in price very rapidly.
  • Read the company’s SEC filings to verify information.
  • Exercise skepticism and be wary of any pitch that suggests immediate pay-offs, especially if the investment involves a start-up company or a product or service that is still in development.
October 19th, 2010|Educational Series, Green Technology|

SEC’s proposed rule requires issuers and underwriters of asset-backed securities to make due diligence findings available to the public

The Securities and Exchange Commission (SEC) issued on October 13, 2010 a proposal to enhance disclosure to investors in the asset-backed securities market. The proposed rule requires issuers of asset-backed securities (ABS) to perform a review of the assets underlying the securities, and publicly disclose information relating to the review. The proposal also requires an issuer or underwriter of ABS to make publicly available the findings and conclusions of any third-party due diligence report.

  • The SEC’s proposed rule would enhance ABS disclosure in three ways:
    Issuers of ABS that are registered with the SEC would be required to perform a review of the bundled assets that underlie the ABS.
  • Proposed amendments to Regulation AB would require an ABS issuer to disclose the nature, findings and conclusions of this review of assets.
  • Issuer or underwriter of both registered and unregistered ABS offerings would be required to disclose the findings and conclusions of any review performed by a third-party that was hired to conduct such a review.

In addition to this rule, the Commission last week proposed regulations that require issuers of ABS — and credit rating agencies that rate ABS — to provide investors with new disclosures about representations, warranties, and enforcement mechanisms. And, in April 2010, the Commission proposed rules that would revise the disclosure, reporting and offering process for ABS to better protect investors in the securitization market.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Commission to adopt rules regarding the review of assets, such as loans, underlying the securities no later than 180 days after enactment.

October 15th, 2010|Educational Series, Legislation|

Spotlight on Foreign Corrupt Practices Act (FCPA) compliance

All U.S. firms seeking to do business in foreign markets must be familiar with the FCPA. Enacted in 1977 and amended several times since then, the FCPA generally states that if a foreign company has any footprint in the U.S., even simply wiring money through it, that company is subject to prosecution if involved in corrupt payments to foreign officials for the purpose of obtaining or keeping business.

The FCPA applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. U.S. parent corporations also may be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, who were employed by or acting on behalf of such foreign subsidiaries. The same provisions essentially extend to intermediaries which include joint venture partners or agents.

Between 2006 and 2009, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), both of which have jurisdiction over the FCPA, initiated more enforcement actions than in the first 28 years of the FCPA’s existence. And the financial penalties for violations have skyrocketed. In December 2008, Siemens AG, Europe’s largest engineering firm, pleaded guilty to violating U.S. anti-corruption laws and was ordered to pay $1.6 billion to settle bribery charges in U.S. and Germany.

To ensure FCPA compliance, the DOJ recommends that companies exercise risk-based due diligence to ensure that they are doing business with reputable and qualified entities and representatives. The due diligence process, at minimum, should include investigating potential foreign representatives and joint venture partners to determine their general reputation and qualifications, whether they have personal or professional ties to the government, the reputation of their clients, and their history with the U.S. Embassy or Consulate, local bankers and other business associates. Additionally, the U.S. firm should be aware of “red flags,” i.e., unusual payment patterns or financial arrangements, indicators of corruption in the country or the particular industry, or refusal by the foreign joint venture partner or representative to provide certification that it will not engage in actions to further an unlawful offer, promise, or payment to a foreign public official and not cause the firm to be in violation of the FCPA (such as paying unusually high commissions, lacking transparency in expenses and accounting records, or retaining a joint venture partner or representative that has been referred by a government official.)

Capturing recent headlines are the changes to the FCPA-related compliance and ethics provisions of the Federal Sentencing Guidelines for Organizations that will become effective in November 2010. The amendments provide that a meaningful compliance program requires, among other actions, that when criminal conduct is detected, the company implement “reasonable steps to respond appropriately … to prevent further similar conduct.” An annotation to that provision specifies that the actions include “assessing the compliance and ethics program and making modifications necessary to ensure that the program is effective … and possibly including the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications.”

The Guidelines also state that a board must be knowledgeable about the content and operation of the company’s compliance program and must “exercise reasonable oversight with respect to the implementation and effectiveness of its compliance and ethics.” Likewise, the DOJ’s prosecution guidelines consider whether the board exercises independent reviews of the compliance program and whether it is provided with information sufficient to enable the exercise of independent judgment. Directors have similar “Caremark” oversight duties arising under case law and various other directives, such as stock exchange rules, Sarbanes-Oxley, and audit committee charters.

October 14th, 2010|Educational Series, Legislation|

One of many case studies from our files that stopped a deal in its tracks

Our client, a commercial lender, requested background investigations of a consumer products company and its two principals in connection with their application for working capital financing. The loan officer was familiar with the subjects, and was astonished by the information that SI quickly uncovered. Searches of federal court records revealed a 2008 action filed against the subjects under the Federal Trade Commission Act for falsely advertising that using their electronic exercise belt caused weight and inch loss without exercise. The action was resolved by stipulated orders as part of a global settlement of both the FTC’s lawsuit and related actions brought by county and city prosecutors. The subjects and certain retailers collectively were ordered to pay over $2 million. The FTC and state orders further barred the defendants from making false advertising claims for the product or any similar device, and provided other injunctive relief to prevent future deceptive practices. And the subjects’ nefarious acts did not stop here. Both principals had several unpaid tax liens and judgments ranging in amounts from $48,000 to $650,000, and both were convicted within the last two years of driving under the influence of alcohol.

October 1st, 2010|Criminal Activity, Judgment, Taxes|
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