defrauding investors

FINRA has some common sense advice for avoiding investment scams

  1. Guarantees: Be suspect of anyone who guarantees that an investment will perform a certain way. All investments carry some degree of risk.
  2. Unregistered products: Many investment scams involve unlicensed individuals selling unregistered securities, ranging from stocks, bonds, notes, hedge funds, oil or gas deals, or fictitious instruments, such as prime bank investments.
  3. Overly consistent returns: Any investment that consistently goes up month after month, or that provides remarkably steady returns regardless of market conditions, should raise suspicions, especially during turbulent times. Even the most stable investments can experience hiccups once in a while.
  4. Complex strategies: Avoid anyone who credits a highly complex investing technique for unusual success. Legitimate professionals should be able to explain clearly what they are doing. It is critical that you fully understand any investment that you are considering, including what it is, what the risks are and how the investment makes money.
  5. Missing documentation: If someone tries to sell you a security with no documentation, such as a no prospectus in the case of a stock or mutual fund, and no offering circular in the case of a bond, he/she may be selling unregistered securities. The same is true of stocks without stock symbols.
  6. Account discrepancies: Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error or they could indicate churning or fraud. Keep an eye on account statements to ensure that activity is consistent with your instructions, and know who holds your assets. For instance, is the investment adviser also the custodian? Or is there an independent third-party custodian? It can be easier for fraud to occur if an adviser is also the custodian of the assets and keeper of the accounts.
March 28th, 2014|Educational Series, Fraud|

SEC’s whistleblower program gains momentum

On November 15, 2013, the SEC released its third annual Whistleblower Report to Congress. According to the report, In the fiscal year 2013, the SEC paid four major awards, one of which was for over $14 million for information leading to an enforcement action that recovered substantial investor funds. Three other payments totaling $832k were made for information regarding a bogus hedge fund.

The report states that the number of complaints and tips increased from 3,001 in the 2012 fiscal year to 3,238 in 2013. The three most common complaints or tips were about corporate disclosures and financials, offerings fraud, and manipulation.  The number of FCPA-related tips also rose, from 115 to 149.

December 9th, 2013|Fraud|

SEC issues warning about investing in reverse merger companies

On June 9, 2011, the Securities and Exchange Commission (SEC) issued an Investor Bulletin about investing in companies that enter U.S. markets through the so-called “reverse mergers.” These mergers allow private companies, including those outside the U.S., to access U.S. investors and markets by merging with an existing public shell company. The SEC and U.S. exchanges recently suspended trading in more than a dozen reverse merger companies, citing a lack of current, accurate information about these companies and their finances.

“Given the potential risks, investors should be very careful when considering investing in the stock of reverse merger companies,” said Lori J. Schock, director of the SEC’s Office of Investor Education and Advocacy. “As with any investment, investors should thoroughly research the company – including ensuring there is accurate and up-to-date information – before making a decision to invest.”

The SEC’s warning is especially strong regarding Chinese companies, as more than 150 entities have recently put their shares up for grabs to American investors through the backdoor “without any of the vetting from underwriters and investors that companies undergo when they perform a traditional IPO,” as noted by Commissioner Luis Aguilar.

Shareholders already have sued a string of China-based, U.S.-listed companies for fraud, claiming that they lost money when stocks plummeted after the financial scandals. They charge that the companies operated sham businesses, inflated revenue or gave vastly different information to U.S. and Chinese regulators. And they are starting to sue the auditors who signed off on the financial statements. But it will be tough to win these cases in American courts, as Chinese entities often have refused to comply with U.S. court proceedings.

The best hope for investors may be the SEC, which has launched an inquiry into U.S. audit firms with China-based clients. Investors could benefit if the SEC, which can force companies and auditors to cooperate in investigations, sues more auditors or companies.


June 15th, 2011|Educational Series|
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