NASAA Releases Top Investor Threats for 2015
North American Securities Administrators Association (NASAA) released its annual list of top investor threats. The top investor threats were compiled from a survey from the various state securities regulators to identify the five most problematic schemes. Following the launch of the Investment Fraud Bingo Program, it is uncertain whether the Commonwealth of Pennsylvania Department of Banking and Securities participated in the survey.
However, based upon the states that did, here are the top five threats to investors for 2015.
Unregistered products/unlicensed salesmen: The offer of securities by an individual without a valid securities license should be a red alert for investors. Con artists also try to bypass stringent state registration requirements to pitch unregistered investments with a promise of “limited or no risk” and high returns.
In addition, these are especially problematic because at the end of the day there is no person or entity that can be seen as a viable source of recovery. We recently became involved in a case where approximately 150 people, mostly in Maryland, were defrauded of approximately $9 million by a husband and wife team holding themselves out as investment advisors but whom in fact were never licensed. The best part is that Maryland took action against them twice before in 2006 and 2011, but they appear to have gone back at it again, they apparently made $2 million in commissions from the sale of what turned out to be a Ponzi scheme. The victims’ stories are tragic, and what is more tragic is that no one can help them because the schemers are an unlikely source of a meaningful recovery.
Promissory Notes: In an environment of low interest rates, the promise of high-interest-bearing promissory notes may be tempting to investors, especially seniors and others living on a fixed income. Promissory notes generally are used by companies to raise capital. Legitimate promissory notes are marketed almost exclusively to sophisticated or corporate investors with the resources to research thoroughly the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal. Most promissory notes must be registered as securities with the SEC and the states in which they are sold. Average investors should be cautious about offers of promissory notes with a duration of nine months or less, which in some circumstances do not require registration. Short-term notes that appear to be exempt from securities registration have been the source of most – but not all – of the fraudulent activity involving promissory notes identified by regulators.
If something is too good to be true, it probably is. In 2015, we saw a variety of promissory note schemes and fictitious CD sales by in fact registered stockbrokers moonlighting on the side as agents for the sale of fictional promissory notes and CDs, issued by fictional institutions with nice sounding names.
Oil/Gas Investments: Many oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices. Fraudulent oil and gas deals frequently are structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. As a result, there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for authorities and victims to identify and expose the fraud.
Also in 2015, we saw a case where a registered broker sold an oil and gas partnership interest to a client, which of course was a complete sham. The broker denied all involvement and maintained that the client (a widow) purchased the securities directly from the issuer without his involvement. Fortunately, FINRA was able to uncover, as were we, the existence of other customers of the broker, whom did not know each other, investing in the same scheme. However, notwithstanding that the broker lied to FINRA in connection with its investigation, because the conduct took place more than five years ago, the broker was only issued a “letter of caution” by FINRA which does not appear on public disclosure. The broker also stated that he did not get paid. However, it was discovered that the same oil and gas operator-promoter, invested almost the same amount that broker raised in the broker’s Italian restaurant venture in Pittsburgh.
Real Estate-related Investments: Troublesome real estate-related investments identified by securities regulators included non-traded real estate investment trusts (REITs), timeshare resales, and brokered mortgage notes. These types of products often carry higher risk. For example, non-traded REITs are sold directly to investors and are not traded on exchanges (as are conventional REITs). Non-traded REITs can be risky and have limited liquidity, which may make them unsuitable for certain investors.
The REIT cases have worked their way through the system, and most of the bad ones have been in trouble or defunct since 2009 or 2010. Notwithstanding that brokerage firms are now required to report the value of these REITs on customer statements, rather than just show them at cost, there are certainly many REIT victims still suffering and wondering what to do. We have a 2105 case where the broker did not like the lower values on the customer statements, so since 2010, he made up his own statements and sent them to his customers.
Ponzi Schemes: The premise is simple: pay early investors with money raised from later investors. The only people certain to make money are the promoters who set the Ponzi in motion. “Investors should always be wary of unsolicited financial advice or investment opportunities,” “Before making any decisions with your money, ask questions, make sure you understand the risks, and contact your jurisdiction’s securities regulators for detailed background information about those who sell securities or give investment advice, as well as about the products being offered.”
The problem with Ponzi schemes is that they do not advertise as Ponzi schemes, but instead as hedge funds, equity funds or alternative investments. They are not called Ponzi schemes until the investment goes south. Ponzi schemes are hard to spot. However, less than customary looking monthly or quarterly statements and the lack of annual audited financials, by actual existing CPAs or accounting firms are a clue. If a hedge fund or alternative investment cannot show you a schedule of its invested assets at year end, you may have a problem.
Contact information for all state, provincial and territorial securities regulators is available on the NASAA website.