Pervasiveness of securities fraud
The Securities Investor Protection Corporation (SIPC) reports that the Federal Trade Commission, FBI, and state securities regulators estimate that investment fraud in the United States ranges from $10–$40 billion annually. Of that number, SIPC estimates that $1–3 Billion is directly attributable to microcap stock fraud.
Fraudulent schemes perpetrated in the securities and commodities markets can ultimately have a devastating impact on the viability and operation of these markets. Class action securities fraud lawsuits rose 43 percent between 2006 and 2007, according to the Stanford Law School Securities Class Action Clearinghouse.
During 2006 and 2007, securities fraud class actions were driven by market wide events, such as the 2006 backdating scandal and the 2007 subprime crisis. Securities fraud lawsuits remained below historical averages. Some manifestations of this white collar crime have become more frequent as the Internet gives criminals greater access to prey.
The trading volume in the United States securities and commodities markets, having grown dramatically in the 1990s, has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants.
Securities fraud is becoming more complex as the industry develops more complicated investment vehicles. In addition, white collar criminals are expanding the scope of their fraud and are looking outside the United States for new markets, new investors, and banking secrecy havens to hide unjust enrichment.
A study conducted by the New York Stock Exchange in the mid-1990s reveals approximately 51.4 million individuals owned some type of traded stock, while 200 million individuals owned securities indirectly. These same financial markets provide the opportunity for wealth to be obtained and the opportunity for white collar criminals to take advantage of unwary investors.
Recovery of assets from the proceeds of securities fraud is a resource intensive and expensive undertaking because of the cleverness of fraudsters in concealment of assets and money laundering, as well as the tendency of many criminals to be profligate spenders.
Sometimes the losses caused by securities fraud are difficult to quantify. For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.
Characteristics of victims and perpetrators
Any investor can become a victim, but persons aged fifty years or older are most often victimized, whether as direct purchasers in securities or indirect purchasers through pension funds. Not only do investors lose but so can creditors, taxing authorities, and employees.
Potential perpetrators of securities fraud within a publicly traded firm include any dishonest official within the company who has access to the payroll or financial reports that can be manipulated to:
1. overstate assets
2. overstate revenues
3. understate costs
4. understate liabilities
Enron Corporation exemplifies all four tendencies, and its failure demonstrates the extreme dangers of a culture of corruption within a publicly traded corporation.
The rarity of such spectacular failures of a corporation from securities fraud attests to the general reliability of most executives and boards of large corporations.
Most spectacular failures of publicly traded companies result from such innocent causes as marketing blunders (Schlitz), an obsolete model of business (Penn Central, Woolworth's), inadequate market share (Studebaker), non-criminal incompetence (Braniff).
Types of securities fraud
Fraud by high level corporate officials became a subject of wide national attention during the early 2000s, as exemplified by corporate officer misconduct at Enron. It became a problem of such scope that the Bush Administration announced what it described as an "aggressive agenda" against corporate fraud.
Less widely publicized manifestations continue, such as the securities fraud conviction of Charles E. Johnson Jr., founder of PurchasePro in May 2008. FBI Director Robert Mueller predicted in April 2008 that corporate fraud cases will increase because of the subprime mortgage crisis.
Dummy corporations may be created by fraudsters to create the illusion of being an existing corporation with a similar name. Fraudsters then sell securities in the dummy corporation by misleading the investor into thinking that they are buying shares in the real corporation.
According to enforcement officials of the Securities and Exchange Commission, criminals engage in pump-and-dump schemes, in which false and/or fraudulent information is disseminated in chat rooms, forums, internet boards and via email (spamming), with the purpose of causing a dramatic price increase in thinly traded stocks or stocks of shell companies (the "pump"). When the price reaches a certain level, criminals immediately sell off their holdings of those stocks (the "dump"), realizing substantial profits before the stock price falls back to its usual low level. Any buyers of the stock who are unaware of the fraud become victims once the price falls.
The SEC says that Internet fraud resides in several forms:
• Online investment newsletters that offer seemingly unbiased information free of charge about featured companies or recommending "stock picks of the month." These newsletter writers then sell shares, previously acquired at lower prices, when hype-generated buying drives the stock price up. This practice is known as scalping. Conflict of interest disclosures incorporated into a newsletter article may not be sufficient. Accused of scalping, Thom Calandra, formerly of MarketWatch, was the subject of an SEC enforcement action in 2004.
• Bulletin boards that often contain fraudulent messages by hucksters.
• E-Mail spams from perpetrators of fraud. • Phishing Insider trading
There are two types of "insider trading".
The first is the trading of a corporation's stock or other security by corporate insiders such as officers, key employees, directors, or holders of more than ten percent of the firm's shares. This is generally legal, but there are certain reporting requirements.
The other type of insider trading is the purchase or sale of a security based on material non-public information. This type of trading is illegal in most instances. In illegal insider trading, an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise misappropriated.
Microcap stock fraud In microcap fraud, stocks of small companies of under $250 million market capitalization are deceptively promoted, then sold to an unwary public. This type of fraud has been estimated to cost investors $1–3 billion annually.
Microcap fraud includes pump and dump schemes involving boiler rooms and scams on the Internet. Many, but not all, microcap stocks involved in frauds are penny stocks, which trade for less than $5 a share.
Many penny stocks, particularly those that sell for fractions of a cent, are thinly traded. They can become the target of stock promoters and manipulators. These manipulators first purchase large quantities of stock, then artificially inflate the share price through false and misleading positive statements. This is referred to as a pump and dump scheme. The pump and dump is a form of microcap stock fraud. In more sophisticated versions of the fraud, individuals or organizations buy millions of shares, then use newsletter websites, chat rooms, stock message boards, press releases, or e-mail blasts to drive up interest in the stock.
Very often, the perpetrator will claim to have "inside" information about impending news to persuade the unwitting investor to quickly buy the shares. When buying pressure pushes the share price up, the rise in price entices more people to believe the hype and to buy shares as well. Eventually the manipulators doing the "pumping" end up "dumping" when they sell their holdings.
The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate. But it has also drawn high profile public personalities into the sphere of regulatory oversight.
Though not a scam per se, one notable example is rapper 50 Cent's use of Twitter to cause the price of a penny stock (HNHI) to increase dramatically. 50 Cent had previously invested in 30 million shares of the company, and as a result made $8.7 million in profit.
Another example of an activity that skirts the borderline between legitimate promotion and hype is the case of LEXG. Described (but perhaps overstated) as "the biggest stock promotion of all time",
Lithium Exploration Group's market capitalization soared to over $350 million, after an extensive direct mail campaign. The promotion drew upon the legitimate growth in production and use of lithium, while touting Lithium Exploration Groups position within that sector.
According to the company's December 31, 2010, form 10-Q (filed within months of the direct mail promotion), LEXG was a lithium company without assets. Its revenues and assets at that time were zero. Subsequently, the company did acquire lithium production/exploration properties, and addressed concerns raised in the press.
Penny stock companies often have low liquidity. Investors may encounter difficulty selling their positions after the buying pressure has abated, and the manipulators have fled.
Further information: Accounting scandals In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. All of the leading public accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers— and others have admitted to or have been charged with negligence to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies' financial status. In several cases, the monetary amounts of the fraud involved are in the billions of USD.
Boiler room Boiler rooms or boiler houses are stock brokerages that put undue pressure on clients to trade using telesales, usually in pursuit of microcap fraud schemes. Some boiler rooms offer clients transactions fraudulently, such as those with an undisclosed profitable relationship to the brokerage. Some 'boiler rooms' are not licensed but may be 'tied agents' of a brokerage house which itself is licensed or not.
Securities sold in boiler rooms include commodities and private placements as well as microcap stocks, non-existent, or distressed stock and stock supplied by an intermediary at an undisclosed markup.
Mutual Fund fraud
2003 Mutual-fund scandal A number of major brokerages and mutual fund firms were accused of various deceptive acts that disadvantaged customers. Among them were late trading and market timing.
Various SEC rules were enacted to curtail this practice.
Bank of America Capital Management was accused by the SEC of having undisclosed arrangements with customers to allow short term trading. Short selling abuses Main articles: Pump and dump and Short and distort Abusive short selling, including certain types of naked short selling, are also considered securities fraud because they can drive down stock prices. In abusive naked short selling, stock is sold without being borrowed and without any intent to borrow.
The practice of spreading false information about stocks, to drive down their prices, is called "short and distort." During the takeover of Bear Stearns by J.P. Morgan Chase in March 2008, reports swirled that shorts were spreading rumors to drive down Bear Stearns' share price. Sen. Christopher Dodd, D-Conn., said this was more than rumors and said, "This is about collusion.
Ponzi scheme A Ponzi scheme is an investment fund where withdrawals are financed by subsequent investors, rather than profit obtained through investment activities. The largest instance of securities fraud committed by an individual ever is a Ponzi scheme operated by former NASDAQ chairman Bernard Madoff, which caused up to an estimated $64.8 billion in losses depending on which method is used to calculate the losses is used prior to its collapse.
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws. Offers of risky investment opportunities to unsophisticated investors who are unable to evaluate risk adequately and cannot afford loss of capital is a central problem. Securities fraud can also include outright theft from investors (embezzlement by stockbrokers), stock manipulation, misstatements on a public company's financial reports, and lying to corporate auditors. The term encompasses a wide range of other actions, including insider trading, front running and other illegal acts on the trading floor of a stock or commodity exchange.
Arizona Department of Public Safety Private Investigative Agency # 1569631
Arizona State Legislature Arizona Law 32-2401. Definitions, describes a Private Investigator as
16. "Private investigator" means a person other than an insurance adjuster or an on-duty peace officer as defined in section 1-215 who, for any consideration, engages in business or accepts employment to:
(a) Furnish, agree to make or make any investigation for the purpose of obtaining information with reference to:
(i) Crime or wrongs done or threatened against the United States or any state or territory of the United States.
(ii) The identity, habits, conduct, movements, whereabouts, affiliations, associations, transactions, reputation or character of any person or group of persons.
(iii) The credibility of witnesses or other persons.
(iv) The whereabouts of missing persons, owners of abandoned property or escheated property or heirs to estates.
(v) The location or recovery of lost or stolen property.
(vi) The causes and origin of, or responsibility for, a fire, libel, slander, a loss, an accident, damage or an injury to real or personal property.
(b) Secure evidence to be used before investigating committees or boards of award or arbitration or in the trial of civil or criminal cases and the preparation therefor.
(c) Investigate threats of violence and provide the service of protection of individuals from serious bodily harm or death.
Lured by the promise of astronomical profits and the chance to be part of an "exclusive, international" investing program, investors are once again falling prey to bogus "prime bank" scams.
These fraudulent schemes involve the purported issuance, trading, or use of so-called "prime" bank, "prime" European bank or "prime" world bank financial instruments, or other "high yield investment programs" ("HYIP"s).
The fraud artists who promote these schemes often use the word "prime" or a synonymous phrase, such as "top fifty world banks" to cloak their programs with an air of legitimacy. They seek to mislead investors by suggesting that well regarded and financially sound institutions participate in these bogus programs.
But prime bank and other related schemes have no connection whatsoever to the world's leading financial institutions or to banks with the word "prime" in their names.
Maverick has been at the forefront in investment fraud investigations for nearly 20 years. This is many years before any other Investigative Agency. With the Bernie Madoff type of sophisticated investment schemes, you cannot afford to be wrong about your investments.
Operators generally set up a website offering an "investment program" which promises returns as high as 45% per month or 6% a day, disclosing little or no detail about the underlying management, location, or other aspects of how money is to be invested. These fraudulent schemes involve the purported issuance, trading, or use of so-called 'prime' bank, 'prime' European bank or 'prime' world bank financial instruments, or other 'high yield investment programs.' (HYIP's) The fraud artists seek to mislead investors by suggesting that well regarded and financially sound institutions participate in these bogus programs. The con artists behind HYIPs are experts at using social media including YouTube, Twitter and Facebook to lure investors and create the illusion of social consensus that these investments are legitimate.
Though Ponzi schemes have existed since at least the early 1900s, the rise of digital payment systems has made it much easier for operators of such websites to accept payments from people worldwide. Electronic money systems are generally accepted by HYIP operators because they are more accessible to operators than traditional merchant accounts. Some HYIP operators opened their own digital currency companies that eventually folded; these companies include Standard Reserve, OSGold, INTGold, EvoCash, and V-Money. StormPay was started in the same way in 2002, but has remained in business even though the HYIP that it was created to serve was shut down by Investigators. Paypal has also taken great care in shielding their customers from phishing scams and spoof emails but sometimes, even that isn't enough.
Some HYIPs have incorporated in countries with lax fraud laws to secure immunity from investor laws in other countries. The operators have been known to host their website with a web host that offers "anonymous hosting". They will use this website to accept transactions from participants in the scheme.
Unfortunately the main Character / Thief/ Orchestrator of these schemes has set up a shield of lesser thieves to insulate him from prosecution. Lesser Thieves will take the brunt of the publicity and all the prosecution.
Thusly, the same small group of Main Character's appear more than once in our prior cases. They have only set up in a new location with a new set of "Salesman" to help insulate them once more.
The Orchestrator will also be surrounded by Good Honest, Well-known or Legitimate People. They are unaware of who their new friend is and the Con-Man likes it that way. Their proximity and their "air" helps cover his smell. (see picture to right)
Fortunately, If you inquire before you invest... We may have a file on them already and we can warn you beforehand.
Hopefully You will read the tips on investment before you invest your hard earned cash.
High Yield Investment Fraud is rampant.
Avoid Investment Fraud
Ask questions. Fraudsters are counting on you not to investigate before you invest. It's not enough to ask for more information or for references fraudsters have no incentive to set you straight.
Investigate before you invest. Unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions. Understand a company's business and its products or services before investing.
Know the salesperson. Spend some time checking out the person touting the investment before you invest even if you already know the person socially.
Be wary of unsolicited offers. Be especially careful if you receive an unsolicited pitch to invest in a company, or see it praised online, but can't find current financial information about it from independent sources. It could be a pump and dump scheme. Be wary if someone recommends foreign or off-shore investments. If something goes wrong, it's harder to find out what happened and to locate money sent abroad.
Protect yourself online. Online and social marketing sites offer a wealth of opportunity for fraudsters. Know what to look for. Make yourself knowledgeable about different types of fraud and red flags that may signal investment fraud. How do successful, financially intelligent people fall prey to investment fraud? Researchers have found that investment fraudsters hit their targets with an array of persuasion techniques that are tailored to the victim's psychological profile. If it sounds too good to be true, it is. Watch for phantom riches. Any investment opportunity that claims you'll receive substantially more could be highly risky and that means you might lose money. Be careful of claims that an investment will make incredible gains, is a breakout stock pick or has huge upside and almost no risk! Claims like these are hallmarks of extreme risk or outright fraud.
Guaranteed returns aren't. Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. If your money is perfectly safe, you'll most likely get a low return. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are guaranteed or can't miss. Don't believe it.
Everyone is buying it. Watch out for pitches that stress how everyone is investing in this, so you should, too. Think about whether you are interested in the product. If a sales presentation focuses on how many others have bought the product, this could be a red flag.
Pressure to send money RIGHT NOW. Scam artists often tell their victims that this is a once-in-a-lifetime offer and it will be gone tomorrow. But resist the pressure to invest quickly and take the time you need.
Reciprocity. Fraudsters often try to lure investors through free investment seminars, figuring if they do a small favor for you, such as supplying a free lunch, you will do a big favor for them and invest in their product. There is never a reason to make a quick decision on an investment. If you attend a free lunch, take the material home and research both the investment and the individual selling it before you invest. Always make sure the product is right for you and that you understand what you are buying and all the associated fees.
In the photo above is an example of what I referred to at the left. "Surrounded by Good Honest, Well Known or Legitimate People"
In this photo taken at HM The Queen's Blackcat Ball in London. An exclusive invitation only party for the very rich and or the very famous.
In this picture is
1 Ex-federal Agent (Maverick Investigations.),
2 M.I. employees,
1 Magazine Editor,
1 British Diplomat,
1 Chemical Co. Owner,
and 1 Con-Man who's last known address was in LA County jail, where he was awaiting prosecution for High Yield Investment Fraud.
Who is who?
How can you tell them apart? Answer: Investigation
Investigate BEFORE you invest.