Legal Developments in Securities Law

Too Good to be True?: Investment Schemes to Watch Out For
Recently, the North American Securities Administrators Association (“NASAA”) released a list of the “Top 10 Financial Products and Practices” that investors should watch out for. See the NASAA’s article here.

The article lists the following products and practices:

  • PRODUCTS: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.
  • PRACTICES: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.

Although the lists above provide the most likely culprits, investors should be diligent and watch out for warning signs with any investment they seek to make. Some of these warning signs may include:

  • If the promised return of an investment seems too good to be true, it probably is. Above normal rates of return could signal a Ponzi scheme, now often associated with Bernie Madoff and Bernard L. Madoff Investment Securities. Investors may be promised large rates of return, then those returns are paid with the funds investors’ contributed, and more investors may continue to contribute as word spreads that the investment is paying off. Ultimately, however, the funds will diminish and investors will no longer receive their payments or a return of their initial investments.
  • Watch out for investments offered by individuals whose credentials cannot be verified. In a world where a multitude of information is accessible through the Internet, it is easy to research someone’s background online. Investors should particularly look out for previous securities violations, which can be investigated through the Securities and Exchange Commission’s website or the Financial Industry Regulatory Authority’s website. Some individuals may try to emphasize prior successful enterprises or ties with influential individuals – investors can investigate these issues, as well. Note the NASAA’s example of how individuals can try to use credentials to mislead investors:
    • Securities regulators in Utah came across a broker who listed “C.H.S.G.” after his name on his business card. When asked, the broker told regulators the initials stood for “Certified High School Graduate.”
  • If you are not a sophisticated investor, investments that are not offered to you by a securities professional you trust should be treated with extreme caution. Even a prospectus or financial statements that are provided to you should be carefully investigated if you are interested in the potential investment, as those documents can be fabricated. Of course, as the NASAA points out, investors are often unaware that their securities brokers or investment advisers are unregistered or unlicensed. Even when enlisting the advice of a securities professional, be sure to check the SEC’s Investment Adviser Search or FINRA’s BrokerCheck to ensure the professional is licensed to give you advice.

What to Do if You Believe Your Investment was Part of a Scheme

If you believe you may have fallen victim to a potential investment scheme because it falls into one of the NASAA’s categories or because it fits some or all of the criteria mentioned above, you should immediately preserve all documents pertaining to the investment and contact an attorney with experience in the field. You may also wish to report the conduct to the SEC (see the blog post below on the SEC’s Whistleblower Incentives). Be aware that a statute of limitations may apply.