ponzi schemes and investment fraud: a year later

Presented by: Craig D. Stein

205 Worth Avenue, Suite 203Palm Beach, FL 33480Tel.: (561) 659-8802

Ponzi Schemes and Investment Fraud:

A Year Later

We Will Discuss Two Types of Frauds

1. Affinity Fraud

2. General Brokerage / Investment Fraud

Affinity Fraud / Ponzi Schemes

A. What is Affinity Fraud / How does it work?

i. Nature has ingrained:



ii. Political / Economic

iii. Social / Achievement

iv. Interests

v. Religion



vii. Those you trust the most can do the most

damage


B. Affinity Fraud in the Past: “Jack and the Beanstalk”


C. Affinity Fraud in the Present:On Guard, But What do You Look For?



i. Private Rather than Public Investment

ii. Unusual or Complicated-Sounding Investments

iii. Promise and History of High Returns

iv. Short Term for High Returns



v. Continuous Stream of Returns (Despite Market

Volatility)

vi. Open Ended:

1. Opportunity for Continued Reinvestment

2. Open to New Investors Even if it does not

Appear So.



vii. Seeking out Referrals

viii. Little or No Oversight

1. Where are Funds Directed?

2. Paper Statement from independent 3rd Party

3. You Should Not be Made to Feel Uncomfortable to

Question the Investment


ix. If It’s Too Good to Be True, It Probably Is:


ix. If It’s Too Good to Be

True, It Probably Is:

1. It is Subjective Like Other Platitudes – People

Do Not Follow:

a) Don’t Judge a Book by Its Cover

b) An Apple a Day Keeps the Doctor Away


ix. If It’s Too Good to Be

True, It Probably Is:

2. People Seek What is Too Good to Be True


ix. If It’s Too Good to Be True, It Probably Is:

4. The More Financially “Successful” in Society have

Already Achieved what’s “too good to be true,”

usually by taking risks.

5. Seek guidance from 3rd Party to determine if an

investment is “too good to be true”

Economic & Financial Industry Fraud & Negligence

A. In the Past: They are regulated, So Why Do I Have to Do Anything?


B. In the Present: Tell Me What to Look For!

??



iii. Just Because Your Investments Lost Money Does Not Mean that Anyone Acted Inappropriately

Also, the Inverse – Just Because There Are Profits in Your Account, Does Not Mean You Are Suitably Invested



i. Insidious: Because they may Only Partially Dilute or Reduce Your Investments



ii. Often Hidden by Market Appreciation and Excused by Market Depreciation



iv. These often Occur in Brokerage Accounts, even with Investment Advisors and Even in Trust Accounts

iv. These Occur in Brokerage Accounts, with Investment Advisors and Even in Trust Accounts

1. Sale and Recommendation of Unsuitable Investments

a) Client Objectivesb) Risk Tolerancesc) Types of Investmentsd) Sophistication Does Not = Wealth

2. Diversification and Over-Concentration

a) Individual Stocksb) Individual Sectorsc) Types of Investments (Equities, Debt)d) Hedging

3. Churning

a) Excessive Tradingb) Who Controls Accountc) Looper Formula

4. Unauthorized Trades

a) Discretion Authorityb) Time and Price

5. Misrepresentation and Omissions

a) Why Would Broker Make Misrepresentations?

• Commissions• Reliance Upon the Information Provided

by the Brokerage Firm (ARS, LPS)• Belief in Investment - Projection

6. Sharing Profits or Selling Away

Government / Regulation

A. In the Past: Act Upon What They Know - Reactive

Government Issued Blinders


A. In the Present: Despite Good Intentions,Still Act Upon What They Know - Reactive

Still Using Government Issued Blinders


B. In the Present: Still Act Upon What They Know - Reactive

i. Increase Scrutiny Upon Those We Already Regulate

ii. Review Old Case Files

iii. They Still Cannot Know What They Do Not Know

If You Are Concerned About an Affinity Fraud…

A. Seek Advice of Another Independent and Competent Investment Professional

If You Are Concerned About an Affinity Fraud…

B. Refer to Industry Regulators – Tell Them What They Do Not Know (SEC, FINRA, State, etc.)

Closing Remarks

A. Each of You are Individuals With Different Investment Objectives and Risk Tolerances

Closing Remarks

B. Ask Your Financial Advisors; And Just As Important: LISTEN to Their Answers

i. Why is This Investment Suitable for Me?

ii. How Much Can I Lose?

iii. Am I Adequately Diversified?

Closing Remarks


iv. Are You Recommending This For Other / All of Your Clients?

v. What is Your Understanding of My Objectives and Risk Tolerances?

Closing Remarks


vi. Carefully Review your Opening Account Documentation.

Do not just sign a stack of documents.

vii. Read and Understand Your Account Statements: Ask 1) Broker, 2) Branch Manager, 3) Different Advisor

Closing Remarks

C. With Financial Fraud, It is ALWAYS a Year Later

ponzi schemes and investment fraud: a year later

Investor Relations

affinity fraud

affinity fraud

brokerage

economic amp

investment

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