ScherzerBlog | Scherzer International

The Securities & Exchange Commission (the “SEC”) recently released an educational bulletin to help investors make informed financial decisions and avoid common scams. Its 13 points include:

1. Check the investment professional’s background.
   Details about experience and qualifications are available through the Investment Adviser Public Disclosure website and FINRA BrokerCheck.
2. Be mindful of fees associated with buying, owning, and selling an investment product.
   Expenses vary from product to product, and even small differences in these costs can translate into large differences in earnings over time. An investment with high costs must perform better than a low-cost investment to generate the same returns.
3. Diversification can help reduce the overall risk of an investment portfolio.
   By picking the right mix, you may be able to limit losses and reduce the fluctuations of investment returns without sacrificing too much in potential gains. Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.
4. Paying off high-interest debt may be the best “investment” strategy.
   Few investments pay off as well as, or with less risk than, eliminating high-interest debt on credit cards or other loans.
5. Promises of high returns, with little or no associated risk, are classic warning signs of fraud.
   Every investment carries some degree of risk and the potential for greater returns comes with greater risk. Ignore the so-called “can’t miss” investment opportunities or those promising guaranteed returns or, better yet, report them to the SEC.
6. Any offer or sale of securities must be either registered with the SEC or exempt from registration.
   Otherwise, it is illegal. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
7. Do not invest in a company about which little or no information is publicly available.
   Always check whether an offering is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
8. Investing heavily in shares of any individual stock can be risky.
   In particular, think twice before investing heavily in shares of your employer’s stock. If the value declines significantly, or the company goes bankrupt, you may lose money and there’s a chance you might lose your job, too.
9. Active trading and some other common investing behaviors actually undermine investment performance.
   According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state or company, and holding on to losing investments for too long and selling winning investments too soon.
10. Con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims.
    Common tactics include phantom riches (dangling the prospect of wealth, enticing with something you want but can’t have), source credibility (trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience), social consensus (leading you to believe that other savvy investors have already invested), reciprocity (offering to do a small favor for you in return for a big favor) and scarcity (creating a false sense of urgency by claiming limited supply).
11. Some investments provide tax advantages.
    For example, employer-sponsored retirement plans and individual retirement accounts generally provide tax advantages for retirement savings, and 529 college savings plans also offer tax benefits.
12. Mutual funds, like other investments, are not guaranteed or insured by the FDIC or any other government agency.
    This is true even if you buy through a bank and the fund carries the bank’s name.
13. The key to avoiding investment fraud is using independent information to evaluate financial opportunities.
    Many investors may have avoided trouble and losses if they had asked questions from the start and verified the answers with sources outside of their family, community, or group. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information is a significant advantage for investing wisely. 

The Association of Certified Fraud Examiners (ACFE) recently released its Report to the Nations on Occupational Fraud and Abuse – 2012 Global Fraud Study. The ACFE states that the Report is based on data from 94 countries compiled from studies of 1,388 occupational fraud cases that occurred between January 2010 and December 2011, and were investigated by certified fraud examiners. The ACFE conducts global occupational fraud studies every two years. According to the Report, a typical organization loses 5% of its revenues to fraud each year, which translates to more than $3.5 trillion if applied to the estimated 2011 Gross World Product. As in its prior studies, the Report shows that the industries most commonly affected by occupational fraud are banking and financial services, government and public administration, and manufacturing. Small organizations suffered the largest median losses. The Report indicates that asset misappropriation continued to be the most frequently committed fraud, yet least costly, with a median loss of $120,000, while financial statement fraud remained the least frequent but the most costly, with a median loss of $1,000,000. Below are the Report’s findings about the fraud perpetrators:

• Perpetrators with higher authority levels tend to cause much larger losses. The median loss among frauds committed by owner/executive was $573,000, by managers it was $180,000, and by employees, $60,000.
• Vast majority (77%) of all frauds were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing.
• In 81% of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct: living beyond means (36%), financial difficulties (27%), close association with vendors or customers (19%) and excessive control issues (18%).
• Approximately 87% of the fraudsters had never been charged or convicted of a fraud-related crime, and 84% had never been punished or terminated for fraud-related conduct.

The Report further notes that the most frequent method of detection continued to be by tip, which occurred in 43.3% of the cases, followed by management review and then by internal audit detection. For entities with fraud hotlines, the likelihood that the fraud would be found by tip was 50.1% whereas for entities without a fraud hotline, that likelihood decreased to 35%, according to the Report. Overall, the median duration of a fraud before being discovered remained consistent with the ACFE’s 2010 study, at 18 months. Nearly half of victim organizations do not recover any losses suffered from a fraud.

The Report confirms that the nature and threat of occupational fraud is universal. Though its research noted some regional differences in the methods used to commit fraud – as well as organizational approaches to preventing and detecting it – many trends and characteristics are similar regardless of where the fraud occurred. The Report recommends that management should continually assess the organization’s specific risks and establish or revise compliance and fraud prevention programs accordingly.

The Securities and Exchange Commission (SEC) today charged an Illinois-based investment adviser with offering to sell fictitious securities through social media sites. According to the SEC’s Division of Enforcement, Anthony Fields of Lyons, IL, offered more than $500 billion in fictitious securities, and in some instances, used LinkedIn discussions to promote fraudulent “bank guarantees” and “medium-term notes.”

The SEC’s order instituting administrative proceedings against Fields charges that he made multiple fraudulent offers through his two sole proprietorships – Anthony Fields & Associates (AFA) and Platinum Securities Brokers. Fields allegedly provided false and misleading information concerning AFA’s assets under management, clients, and operational history to the public through its website and in SEC filings. Fields also failed to maintain required books and records, did not implement adequate compliance policies and procedures, and promoted himself as a broker-dealer while he was not registered with the SEC.
Also today, in recognition that fraudsters are now turning to new and evolving platforms to peddle their scams, the SEC issued two alerts to highlight the risks investors and advisory firms face when using social media.

One of these alerts, a National Examination Risk Alert titled “Investment Adviser Use of Social Media,” provides staff observations based on reviews of investment advisers of varying sizes and strategies that use social media. The bulletin addresses issues that may arise from social media usage by firms and their associated persons, and offers suggestions for managing the antifraud, compliance, and recordkeeping provisions of the federal securities laws. The alert notes that firms need to consider how to implement new compliance programs or revisit their existing ones to align with the rapidly changing technology.

In the SEC’s second bulletin, an Investor Alert titled “Social Media and Investing: Avoiding Fraud” prepared by the Office of Investor Education and Advocacy, the aim is to help investors be aware of fraudulent investment schemes that use social media, and provide tips for checking the backgrounds of advisers and brokers.

The Department of Justice reported yesterday that Karen M. Lancaster, of Upper Marlboro, MD, has been charged with four counts of making false statements, three counts of submitting false documents and one count of engaging in a concealment scheme in connection with her multiple job applications to U.S. federal government agencies.

According to the indictment, Lancaster was employed in various positions with the U.S. Department of Defense (DoD) from 1991 until March 2005. She subsequently was notified by DoD that she was being fired due to performance failures. In October 2006, according to the indictment, Lancaster reached a settlement with DoD whereby she was allowed to resign, retroactive to March 2005.

Between 2006 and 2008, Lancaster applied for jobs at the U.S. Departments of State, Commerce and Defense, as well as with the SEC. The indictment states that as part of the application processes, Lancaster allegedly submitted documents that falsified and concealed information about her criminal history, employment history and suitability for employment with the federal government. Specifically, Lancaster allegedly concealed and falsified informatabout her prior arrests, charges, convictions and prison terms, the unfavorable circumstances under which she had resigned from prior federal employment, the roles and responsibilities she had at previous federal jobs; and her salary history.Lancaster will be arraigned on March 25, 2011, in U.S. District Court in Alexandria. The maximum penalty for each count of making a false statement, submitting a false document and engaging in a concealment scheme is five years in prison. Lancaster also faces a maximum fine of $250,000 per count.

The Department of Justice notes that an indictment is merely an accusation, and a defendant is presumed innocent unless proven guilty in a court of law.

The Securities and Exchange Commission (SEC) today charged Tyson Foods Inc. with violating the Foreign Corrupt Practices Act (FCPA) by making illicit payments to two Mexican government veterinarians responsible for certifying its Mexican subsidiary’s chicken products for export sales.

The SEC alleged that Tyson de Mexico concealed the improper payments by putting two veterinarians’ wives on its payroll but they performed no work for the company. The spouses were later removed from the payroll and their payments were processed with invoices issued for “services.” Tyson de Mexico paid the veterinarians, who were responsible for certifying Tyson’s chicken products for export and served as official Mexican government veterinarians at Tyson facilities, a total of $100,311. It was not until two years after Tyson Foods officials first learned about the subsidiary’s illicit payments that its counsel instructed Tyson de Mexico to cease making the payments.

The SEC further charged that in connection with these improper payments, Tyson Foods failed to keep accurate books and records and failed to implement a system of effective internal controls to prevent salary payments to phantom employees and the payment of illicit invoices. The improper payments were recorded as legitimate expenses in Tyson de Mexico’s books and records, and included in Tyson de Mexico’s reported financial results for fiscal years 2004, 2005 and 2006. Tyson de Mexico’s financial results were, in turn, a component of Tyson Foods’ consolidated financial statements filed with the SEC for those years.

Without admitting or denying the SEC’s allegations, Tyson Foods consented to the entry of a final judgment ordering disgorgement plus pre-judgment interest of more than $1.2 million and permanently enjoining it from violating the anti-bribery, books and records, and internal controls provisions of the FCPA. The proposed settlement is subject to court approval.

In a related criminal action announced today, the Department of Justice (DOJ) charged Tyson Foods with conspiring to violate the FCPA and violating the FCPA. The DOJ and Tyson Foods agreed to resolve the charges by entering into a deferred prosecution agreement. Tyson Foods also agreed to pay a $4 million criminal penalty.

As part of its standard risk management program, our client requested background investigations of two individuals in connection with an engagement continuation. SI had conducted investigations of these subjects three years prior when our client initially began its consulting engagement with them. No negative information was located in the previous investigations; however, our client quickly learned the value of conducting periodic updates.

The new investigation revealed recently filed federal indictments charging both subjects with aiding and abetting in the evasion of taxes owed on their salaries between 2006 and 2008, amounting to more than $450,000 each. The government also charged that subject #1 directed his wife to evade income taxes on her salary between 2004 and 2007 by claiming as many as 99 exemptions on her W-4. Additionally, searches of the State Real Estate Board disclosed a pending disciplinary action against subject #2 for “misstating a material fact” that “included fraud.” Both subjects had filed personal Chapter 7 bankruptcies in December 2008 and had been named as debtors in multiple judgments and tax liens for amounts ranging from $35,000 to $2,300,000. The subjects had begun their start-up company three years earlier with clean records, but in short-order they had become a liability to our client.

SI was engaged to investigate a national company along with two of its principals as part of our client’s risk management program. The company’s ads have appeared almost daily in major newspapers and on the Internet, and the merits of its consumer services (for confidentiality, we can’t say what they are) have been touted in the professionally scripted testimonials of “real” customers. But SI’s investigation found media reports and court documents showing that the claims were not so credible. There is a pending federal class-action lawsuit against the company and its principals alleging several fraudulent business practices, including the misleading advertising of a service guarantee that “is riddled with restrictions, waivers and limitations” and service enrollments without authorization. Six additional lawsuits for similar causes of action are pending in various county-level courts.

Further, SI’s investigation uncovered the checkered backgrounds of the two principals behind the company. Searches of bankruptcy records revealed that both subjects had filed for protection from creditors – and in the co-founder’s case, had filed multiple times. Also missing from the company’s pitch was that the co-founder’s previous career in a similar business culminated in a federal judge’s order barring him from “promoting, offering for sale, performing or distributing any product or service related to [consumer] services.”  Had our client’s decision-makers relied on the company’s presentation of itself and its principals, they would not have been able to realistically assess the risk of engaging in business with the subjects. While a search of media stories might reveal complaints against a potential client, it’s a full in-depth investigation that brings all the pieces together.

A holding company’s claim that it “had the funds and network to take the action necessary to complete business deals” was put to the test in an SI background investigation. Searches of civil records located a lawsuit filed in 2008 in which the holding company sued the United States of America, the Drug Enforcement Agency, and Internal Revenue Service for return of approximately $24.5 million seized from bank accounts in Florida. The government’s response to the holding company’s claim disclosed that there was an ongoing criminal investigation in Arizona involving drug trafficking and related international money laundering enterprises. The seizure of the funds resulted from evidence gathered during the investigation.

In addition to the foregoing, the government stated that it was still investigating whether there were any victims of fraud because the investigation made it apparent that many of the entities associated with the seized accounts had no legitimate business activity, are shell companies, and have failed to comply with reporting requirements in Florida regarding their purported operational activities. The government specifically noted that the holding company’s Web site appears to promote an investment scheme with unrealistically large interest returns which typically is consistent with a fraudulent investment operation and, in fact, agents have received statements from individuals reporting that they have invested in a program that promised incredibly high rates of return. The government’s investigation led it to conclude that the holding company failed to establish it is an entity of substance and not composed of a series of shell companies simply moving money around in a money laundering exercise to conceal the ownership, source, and control over the funds.

A pharmaceutical company already engaged in a long-term business relationship with an accounting firm, as part of its rebranding, brought on several new executives, including a chief financial officer. After learning that this client had not performed background investigations on these individuals, the accounting firm ordered due diligence investigations from SI.

Everything looked great with the chief financial officer: an MBA degree from a prestigious university was confirmed, as well as employment history in financial positions with large companies.

However, in digging deeper, SI’s investigation discovered that the subject, in his capacity of chief financial officer at a previous employer, had been named as a defendant in several federal lawsuits, including a civil complaint filed by the Securities and Exchange Commission which alleged that the subject falsified financial documents. The subject paid $50,000 in fines to the SEC without admitting or denying the charges and agreed to a permanent injunction. His CPA license was revoked, and he was expelled from the AICPA. The former employer was forced to restate its earnings which, in turn, resulted in a shareholders’ class-action lawsuit against the subject and the company. Unrelated to the securities matters, an open federal tax lien filed in 2008 for $469,500 against the subject was located in searches of his previous jurisdiction of residence.