Last month, the SEC issued a report that makes it clear that companies can use social media outlets such as Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (“Regulation FD”) as long as investors have been alerted about which social media will be used to disseminate the information.
On April 10, 2013, the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) issued joint Identity Theft Red Flags Rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities to adopt programs to detect red flags and prevent identity theft. Notably, certain state laws may also require the adoption of similar guidelines.
Additionally, entities that retain service providers must ensure that the providers conduct their activities in accordance with reasonable policies and procedures designed to detect, prevent and mitigate the risk of identity theft. A financial institution may be found in violation of the Rules if it fails to exercise appropriate and effective oversight over the engagement.
During fiscal year 2012, the SEC’s Office of Investor Education and Advocacy closed 29,291 files relating to complaints, questions, and other issues received from investors, a decrease of 4,341 files compared to FY 2011. Complaints related to Ponzi and pyramid schemes were up 1,328%. A footnote to the data states that “the vast majority of these complaints related to a particular highly publicized SEC enforcement action.” Complaints related to specific market events were up 565% which too had a footnote. In this case, the vast majority of the complaints related to a particular highly publicized initial public offering…
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:
- Check the investment professional’s background.
Details about experience and qualifications are available through the Investment Adviser Public Disclosure website and FINRA BrokerCheck.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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).
- 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.
- 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.
- 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 Securities and Exchange Commission (SEC) announced today that it obtained an emergency court order to halt a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers but bilked them of approximately $26 million over a four-year period.
Filed in the U.S. District Court for the Southern District of New York, the SEC alleges in its complaint that between 2006 and 2010, convicted felon Eric Aronson and others defrauded about 140 individual investors in PermaPave Companies, a group of firms based on Long Island, NY, and controlled by Aronson. According to the complaint, the investors were told that PermaPave had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns of 7.8% to 33%. But in reality, the complaint states, there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.
In their Ponzi scheme, Aronson and two other PermaPave executives, Vincent Buonauro Jr. and Robert Kondratick, used the new funds to make payments to earlier investors and then siphoned off much of the rest for themselves, buying luxury cars, gambling trips, and jewelry, according to the complaint. Aronson also allegedly used the investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty in 2000.
The complaint further states that when investors began demanding their money, Aronson accused them of committing a felony by lending the PermaPave Companies money at the interest rates he promised them, which he suddenly claimed were usurious. Aronson and his attorney, Fredric Aaron, then allegedly made false statements to persuade investors to convert their securities into ones that deferred payments for several years.
The SEC also charges that the defendants used some of the money raised through the Ponzi scheme to purchase a publicly traded company, Interlink-US-Network, Ltd. Several months later, the SEC said that Interlink issued a Form 8-K, signed by Kondratick, which falsely claimed that LED Capital Corp. had agreed to invest $6 million in Interlink. According to the complaint, LED Capital Corp. did not have $6 million and had no dealings with Interlink.
The U.S. Attorney’s Office for the Eastern District of New York, which conducted a parallel investigation, filed criminal charges against Aronson, Buonauro, and Kondratick.
On May 28, 2011, as part of its ongoing efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) approved for public comments (which will be accepted until July 18, 2011) proposed rules pursuant to Section 932 that would require nationally recognized statistical rating organizations (NRSROs), issuers and underwriters to make public the findings and conclusions of any due diligence reports prepared by a third-party service provider in an asset-backed securities transaction. Such third-parties would also have to furnish a certification to each NRSRO rating the securities.
Since the Dodd-Frank Act does not define “due diligence services,” the SEC has identified four categories of reviews, and thus has defined “due diligence services” in the proposed Rule 17g-10 to mean “an entity that engages in a review of the assets underlying an Exchange Act-ABS for purposes of making findings with respect to:
- quality or integrity of the information or data about the assets provided, directly or indirectly, by the securitizer or originator of the assets;
- whether the assets origination conformed to stated underwriting or credit extension guidelines, standards, criteria or other requirements;
- value of collateral securing such assets;
- whether the assets originator complied with federal, state or local laws or regulations; and
- any other factor or characteristic of such asset that would be material to the likelihood that the issuer of the Exchange Act-ABS will pay interest and principal according to its terms and conditions.”
Proposed Rule 17g-10 will also define “issuer” to include a sponsor (as defined in 17 CFR 229.11) or depositor (as defined in 17 CFR 229.1011) that participates in the issuance of an Exchange Act-ABS. The terms “originator” and “securitizer” as used in proposed Rule 17g-10 will have the meanings stated in Section 15Gf of the Exchange Act.
An issuer or underwriter is not required to furnish a Form ABS-15G if such issuer or underwriter obtains a representation from each NRSRO engaged in the rating of the Exchange Act-ABS that the NRSRO will publicly disclose the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The NRSRO must disclose the finding and conclusions of any third-party due diligence report with the publication of the credit rating in an information disclosure form prepared pursuant to new paragraph (a)(1) of Rule 17g-7 no less than five business days prior to the first sale in the offering. Rule 17g-7 as amended by the proposed rules, would require an NRSRO to disclose in the information disclosure form:
- whether and to what extent it relied upon third-party due diligence services;
- description of the information that such third-party reviewed in conducting its due diligence services; and
- description of the findings or conclusions of such third-party.
Also in accordance with Section 15E(s)(4)(C) of the Exchange Act, the SEC proposed that the format of the certification in Form ABS Due-Diligence-15E include the following line items:
- identity and address of the provider of the third-party due diligence services;
- identity and address of the issuer, underwriter or NRSRO that hired the provider of the third-party due diligence services;
- identity of each NRSRO that published criteria for performing;
- scope and manner of the due diligence performed, including but not limited to the type of assets that were reviewed, the same size of the assets reviewed, how the sample size was determined and any other type of review conducted with respect to the assets; and
- findings and conclusions resulting from the review.
In addition, any individual executing the Form ABS Due Dilignce-15E on behalf of a third-party due diligence provider will be required to represent that he/she executed the form on behalf of, and on the authority of, the third-party due diligence provider and the third-party due diligence provider conducted a complete due diligence review.
Just about any time of the day, the airwaves are filled with self-appointed financial gurus spewing their secrets for managing money and ways to get rich. But the true secrets of more than a dozen of these wealth peddlers may be in their shady backgrounds and off-the-air dealings. Here are a few examples of the bamboozlements, as disclosed by the Securities and Exchange Commission (SEC) and other authorities.
On June 13, 2011, Clifford Robertson was sentenced to 97 months for bank fraud, to be followed by 24 months for aggravated identity theft and ordered to pay $4,627,520 in restitution, according to a statement by the U.S. Department of Justice’s Federal Bureau of Investigation Dallas Field Office. The bureau’s investigation determined that Robertson claimed to be a real estate investment advisor who hosted AM radio real estate investment talk shows and in-person seminars. Robertson admitted that beginning in December 2007, he used the identity of another person to submit a fraudulent personal financial statement to a lending institution in order to obtain money by false pretenses. The loss to investors was estimated at around $3 million.
Another recent financial show host shakedown was announced in a June 3, 2011 press release by the Department of Justice’s U.S. Attorney’s office for the Southern District of Florida which said that “criminal information was filed against Anthony F. Cutaia, charging him with nine counts of mail fraud…” Cutaia, who was the host of “Talk About Mortgages and Real Estate,” a television and radio program, was also the managing member and beneficial owner of CMG Property Investment Group, LLC, which purportedly engaged in commercial real estate investments in Florida, and promised not to collect commissions or fees from the investors until the properties were sold and a profit was made. However, court papers allege that Cutaia invested little of the money and instead used it to make payments to pre-existing investors and to pay his own business and personal expenses. Legal documents further show that Cutaia filed for bankruptcy in 2007, but that case was tossed out. He filed another Chapter 7 petition on May 11, 2011.
Also exposed this year was John Farahi, a host on a Farsi language radio station in the Los Angeles area. The SEC’s complaint filed in the U.S. District Court for the Central District of California alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting NewPoint on a daily finance radio program hosted by Farahi. The SEC charges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and subsequently misled more than 100 investors into purchasing over $20 million worth of debentures that they claimed were low risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, or government or corporate bonds issued by companies backed by the funds from the Troubled Asset Relief Program (TARP). According to the SEC, most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.
On May 25, 2011, the Securities and Exchange Commission (SEC) proposed a rule to deny certain securities offerings from qualifying for exemption from registration if they involve “felons and other bad actors.”
When an individual or a company offers or sells a security such as a stock or bond, generally the offering must be registered with the SEC. However, the SEC’s Regulation D provides three exemptions that can used to avoid such registration. The most widely used exemption is Rule 506, which accounts for more than 90% of the offerings made, as well as the majority of capital raised. If an offering qualifies for the Rule 506 exemption, an issuer can raise unlimited capital from an unlimited number of “accredited investors” and from up to 35 non-accredited investors.
Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would deny this exemption to any securities offering in which certain “felons and other bad actors” are involved. This new rule is substantially similar to the bad actor disqualification provisions of another limited offering exemptive rule – Rule 262 of Regulation A – which provides for an exemption from registration for certain small offerings.
Under the proposed rule, an offering cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule (including the issuer’s predecessors and affiliated issuers, directors, officers, general partners and managing members of the issuer, 10% beneficial owners and promoters of the issuer, persons compensated for soliciting investors, and the general partners, directors, officers and managing members of any compensated solicitor) has had a “disqualifying event” identified as follows:
- Criminal conviction in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The criminal conviction would have to have occurred within 10 years of the proposed sale of securities (or five years, in the case of the issuer and its predecessors and affiliated issuers).
- Court injunction and restraining order in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries. The injunction or restraining order would have to have occurred within five years of the proposed sale of securities.
- Final order from state securities, insurance, banking, savings association or credit union regulators, federal banking agencies or the National Credit Union Administration that bar the issuer from: 1) associating with a regulated entity; 2) engaging in the business of securities, insurance or banking; 3) engaging in savings association or credit union activities, or 4) orders that are based on fraudulent, manipulative or deceptive conduct and are issued within 10 years before the proposed sale of securities.
- Certain commission disciplinary order relating to brokers, dealers, municipal securities dealers, investment companies and investment advisers and their associated persons, which would be disqualifying for as long as the order is in effect.
- Suspension or expulsion from membership in a “self-regulatory organization” or from association with an SRO member, which would be disqualifying for the period of suspension or expulsion.
- Commission stop order and order suspending the Regulation A exemption issued within five years before the proposed sale of securities; and
- U.S. Postal Service false representation order issued within five years before the proposed sale of securities.
The proposed rule would provide an exception from disqualification when the issuer can show it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed. Any pre-existing convictions, suspensions, injunctions and orders would be disqualifying. For further information, see http://www.sec.gov/rules/proposed/2011/33-9211.pdf
Many people associate the term “insider trading” with illegal conduct. But the term refers to both legal and illegal activities. The SEC’s legal version is that corporate insiders, i.e., officers, directors, employees, or anyone with at least a 10% stake in a company, can buy and sell stock in the company providing they abide by the SEC’s restrictions and transactional requirements.
In 2002, the SEC tightened its rules by adopting the Regulation Fair Disclosure to curb the practice of company executives giving securities analysts an inside track; the rules mandate that anything disclosed to an outsider must be revealed to the general public. The SEC also includes in its definition of insiders those who have “temporary” or “constructive” access to the material information, such as business associates, friends, family members, brokers, attorneys and “other tipees.” The U.S. Supreme Court ruled recently that any individual, with or without ties to the particular company, who is in possession of material information, even if the information was stolen, is an insider.
Illegal insider trading, according to the SEC, refers to the buying or selling of a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information. Insider trading violations include “tipping” such information, trading in securities by the person “tipped” and trading by those who misappropriate the information.
The SEC considers the prosecution of insider trading violations a top priority. The exhaustive publicity of illegal insider trading cases sends a strong message that no one is outside its radar. A spokesperson for the Division of Enforcement said that the SEC is aggressively rooting out and identifying hard-to-detect insider trading by connecting patterns of trading to sources of material nonpublic information, whether those sources are law firms, banks or others with a duty to keep the information confidential. Prosecutors add that illegal trading is now easier to prove as direct evidence of fraudulent intent can be obtained through wiretaps, e-mails, text messages, social media contacts, etc. And that evidence also is useful to convince co-conspirators to turn on each other and provide even more substantial proof of fraud. Going after the violators is critical because their actions hurt individual investors and undermine public confidence that allows firms to raise money in the capital markets.
Individuals who are convicted of criminal insider trading face prison terms (the Sarbanes-Oxley Act extended the maximum length of sentences) and fines in addition to civil penalties, which can be triple the realized profit or the loss avoided. Violators also may be charged with mail and wire frauds and possibly with tax evasion and obstruction of justice. Further consequences include being barred from serving as executives or directors of public companies and being named as defendants in multi-million dollar lawsuits. Corporations are subject to penalties for failure to establish compliance programs and for failure to ensure reasonable efforts to prevent violations under the theory of “controlling person” liability. Even if an insider trading investigation does not result in formal charges, the company’s reputation may suffer from the stigma and adverse publicity.