Investment Fraud - University of North Carolinaold.northcarolina.edu/conferences/oia/6-2016/Session...
Transcript of Investment Fraud - University of North Carolinaold.northcarolina.edu/conferences/oia/6-2016/Session...
Investment Fraud
Guarding Your (& Clients’) Assets in a Scary World
John MaronDirector, Investor Education Program
NC Dept. of the Secretary of StateSecurities Division
PO Box 29622Raleigh, NC 27626-0622
(919) [email protected]
� This workshop is presented as aneducational experience and theinformation provided should not beconstrued as legal advice
� The views expressed are those ofthe presenter
� Presenter believes all information istruthful and accurate; however,mistakes can occur and laws andregulations may change
Disclaimer
Thd
�Between 2004-2011, open securities and commodities fraud investigations increased from 1,139 to 1,846 (+62%).
�During this time period, the losses associated with these types of schemes have increased to billions of dollars.
�In response, the FBI has added 91 agents since 2008 (+61%).(Source: FBI’s 2010-2011 Financial Crimes Report)
Investment Fraud
u
Investment Fraud -- Effects
NC Department of theSecretary of State
Hon. Elaine F. Marshall
Secretary of State
Investment Fraud
NC Dept. of the Secretary of StateAdministers and Enforces:
NC Securities Act (N.C.G.S. § 78A)
NC Investment Advisers Act (N.C.G.S. § 78C)
NC Commodities Act (N.C.G.S. § 78D)
What is a “security”?
Full definition is found at N.C.G.S. §78A-2(11); however, in general:
A “security” is any investment in which the investor has a reasonable expectation of making a profit as the result of the managerial or entrepreneurial efforts of others.
1. With limited exceptions, anyone who sells a security or provides investment advice must be licensed and registered with the Securities Division.
2. With limited exceptions, all securities must be registered with the Securities Division.
Registration Requirements
For More Information
NC Securities Division (1-800-688-4507)www.SOSNC.gov
Types of Scams• I immigrated to the
US in 1903 at age 20.• In 1920, I devised a
scheme that still bears my name today.
• I opened a company in Boston telling investors that I could provide a 100% return in just 90 days.
Types of Scams• I was deluged by
investors, taking in $1M in one 3-hourperiod.
• I went from being penniless to exceedingly rich to penniless and imprisoned in less than a year.
Types of Scams• By the time I was exposed, I
had taken investors for $10M - $15M while only investing ~$50.
• What is my name?
My name is:
Charles Ponzi
and similar scams are referred to even today as “Ponzi Schemes.”
Not “Fonzi”!
Types of Scams• By the time I was exposed, I
had taken investors for $10M - $15M while only investing ~$50.
• What is my name?
My name is:
Charles Ponzi
and similar scams are referred to even today as “Ponzi Schemes.”
Ponzi Schemes Are Alive & “Well”
This fellow was convicted of pulling off the biggest Ponzi scheme in history.
Ponzi Schemes Are Alive & “Well”
He is believed to have “made off” with $20 billion ininvestor money.
Madoff’s Ponzi Scheme
Ponzi Schemes Are Alive & “Well”
Madoff used to live here.
He used to own this.
Ponzi Schemes Are Alive & “Well”
Now he lives here.
Scheduled Release Date:11/14/2139
� Lived in Catawba Co.� Active from 1991-2008� Sold fake promissory
notes� Snared approximately
500 investors, bilking them out of ~$25M
� Victims included:� Friends� Church members� Family
� Even Mother and Father!
Ponzi Schemes Are Alive & “Well”(Even in North Carolina!)
J.V. Huffman, Jr.
� Pleaded guilty in Jan ‘10 to 28 felony counts, including 14 counts of securities fraud
� Sentenced to 30 – 40.5 years
Ponzi Schemes Are Alive & “Well”(Even in North Carolina!)
J.V. Huffman, Jr.DOC Number: 1188382
� Queen Shoals, LLC; Queen Shoals II, LLC & Select Fund LLC
� 2006-09 took +$30M from 100+ investors by falsely claiming profitable trading in T-bills, precious metals & foreign currencies
� 5-yr prom notes guaranteeing 8-24% via “non-depletion accounts”
� Pled guilty 7/09 to securities & mail fraud & sentenced 3/11 to 22 yrs in prison. 11/11 ordered to pay $24M in restitution & civil penalties
Ponzi Schemes Are Alive & “Well”(Even in North Carolina!)
Sidney S. HansonFed. Reg. #23422-058
• Fraud aimed at members of a group sharing a common characteristic.
• Targets: Seniors, ethnic groups, religious groups, professional or civic groups.
• Con man: “You can trust me because I’m just like you.”
Affinity Fraud
� NC Securities Division first to uncover this scheme in 2006
� Between 2004-07, they stole ~$82M from ~7000 people through an elaborate FOREX Ponzi scheme disguised as a religious charitable debt elimination program
� Investor money was used to pay each $1 million salaries, buy a private jet, luxury suites at the Atlanta Falcons and Carolina Panthers stadiums, and a $900,000 motor coach, among other things
� Found guilty in SC in Nov. 2009� Sentenced to 27-33 years in prison
in Dec. 2010 � Investors have gotten back ~.46 of
every $1 invested.
Religion-Based Affinity Fraud
Fed. Reg. #15780-171
Fed. Reg. #15781-171
Fed. Reg. #94223-071
The Three Hebrew Boys
We Have Lots of Tools
�Under North Carolina law, we can obtain all pertinent records from your client’s broker.
�We can subpoena bank records.
�We can do a line by line analysis of your client’s investments to determine if it is legitimate, if it is suitable, and if there is a problem.
Our Authority
An Example – Jotham Pruitt
“The former chief executive officer of a Durham financial services company is one of three men in trouble with federal authorities and linked to a multi-million dollar marijuana ring.”
-- WRAL.com07-24-2015
An Example – Jotham Pruitt
Final Order 6/14/2011
An Example – Jotham Pruitt
An Example – Jotham Pruitt
� Pruitt pleaded guilty to one count each of bank fraud, filing false tax returns and money laundering. (Sentencing pending: Could face up to 53 years in prison and $700K fine.)
� Attorney Joseph Lee Levinson pleaded guilty to one count of conspiracy to make false statements to federally insured financial institutions. (Sentencing pending: Could face up to 5 years in prison & $250K fine.)
� Charges against other individuals still pending.
In general, look for Anything Odd or Unsual
Look for the Red FlagsUnsual
Lack of Documentation
Missing documents (i.e., Form 1099) that an investor should receive can mean someone is trying to hide fraudulent activity.
Look for the Red Flags
Hand Written Tax Documents
Hand written documents are legal, but they are unprofessional and can be an indication of fraud.If you went to a doctor and he did not have a stethoscope and asked you to reuse the paper gown, that would just not seem professional.
Look for the Red Flags
Exotic InvestmentsComplex, exotic investments (hedge fund options, foreign currencies, precious metals, etc.) can confuse investors and are often used by con-artists to hide their theft.If you are not familiar with it and have to investigate what an investment is, then it is probably an exotic investment.
Look for the Red Flags
Lots of TradesIf you see excessive or unauthorized trading in an investment account, it could be a sign the brokerage firm or broker is not working in their client’s best interest.If Schedule D is getting long, something could be amiss.Too much trading may sink your client’s financial ship.
Look for the Red Flags
Unusual Gains or Losses
If your client’s current return differs a great deal from past returns and shows unusual gains or losses, they could possibly be a victim of fraud.
Look for the Red Flags
Being Paid in Stock
A stock is worth what you can sell it for and values change. At a minimum, a client should make sure the stock is registered.The stocks may be reported on a 1099 or W-2.
Look for the Red Flags
1035 ExchangeA 1035 insurance policy exchange may indicate your client has been persuaded to move from one reasonable investment into a similar replacement for the purpose of generating a commission to the broker.Annuities are meant to be long term investments. An annuity is a 10-15year time horizon, but statistics are showing the average time held is just 18 months.
Look for the Red Flags
Distribution from a Qualified Plan that was not Rolled Over
A lump-sum distribution from a retirement, college savings or other tax deferred plan that is not rolled over into another plan could indicate theft or fraud.There should be documentation that it was put into another qualified plan, or used as originally intended.
Look for the Red Flags
Lower Interest or Dividends than Previously Reported
If the amount of interest or dividends your client is reporting has decreased significantly from what was reported previously, this may be a sign that the client has been lured away from safe, income-producing investments and towards riskier ones.
Look for the Red Flags
1031 Like-Kind Exchanges
All 1031 exchanges should be scrutinized. Decreasing active participation in an investment increases the potential for fraud.In a 1031 exchange, it might be logical to sell cows to buy sheep, but not logical to buy shoes.
Look for the Red Flags
� Lack of Documentation� Unusual Gains or Losses� Being Paid in Stock� Distribution from a Qualified Plan that was not Rolled
Over� Missing Interest or Dividends When Reported Previously� Exotic Investments� Handwritten Tax Documents� Large Number of Trades� 1035 or 1031 Exchanges
Know the Red Flags
Conclusion
• If an investment sounds too good to be true –
IT IS!!!• Don’t let embarrassment
prevent you from calling the Securities Division.
• Don’t invest until you call the Securities Division (1-800-688-4507) to check the registration of the product and promoter.
NC Dept of the Secretary of StateSecurities Division
PO Box 29622Raleigh, NC 27626-0622
Phone: (800) 688-4507
Email: [email protected]
Internet: http://www.sosnc.gov
Join Us & Help FightSecurities Fraud
Follow Us on Social Mediawww.sosnc.gov
www.facebook/NCSecState
@NCSecState
www.youtube.com/c/NCSecState
YouTube
North Carolina Department of Secretary of State
Sign Up for Our eNewsletter!
Please add my email address to your address book to help ensure my mailings aren’t blocked as “spam”.
Who to Contact for Assistance/Referral
Questions about Securities Offerings:(919) 733-3924 or (800) 688-4507
NC Department of the Secretary of StateSecurities Division
PO Box 29622Raleigh, NC 27626-0622
Investor Education Presentations:John Maron
Director, Investor Protection & Education Services(919) 807-2106 or [email protected]