Articles Posted in Investment Scam

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As contingency fee lawyers, we evaluate a steady stream of potential securities fraud cases.  We meet with investors of all ages and backgrounds who have been cheated, defrauded and tricked into making bogus investments.  We evaluate far more cases than we agree to take.

One of the most difficult types of cases that we evaluate is the so-called alternative investment case.   Alternative investments are not traditional stocks or bonds purchased through a normal brokerage firm.   Instead, these investments are offered directly by a promoter of some business scheme, perhaps an oil well, a gold mine, a real estate development, or some brand new technology.  The promoter offers the chance to get in on the “ground floor” and make enormous profit.

The alternative investment can take the form of a limited partnership interest, an LLC interest, or some other portion of a small, non-publicly traded business entity.  The investor does not get normal account statements, like a regular brokerage firm.  Instead, the investor gets a K-1 at the end of the year for tax purposes and perhaps a regular newsletter on how the gold mine, oil well (or whatever) is doing.  It’s almost always doing great!

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Stock_broker_01In the wake of the recent presidential election, speculation abounds that President-elect Trump will kill the Department of Labor’s so-called fiduciary rule, set to take effect in April 2017.  Wall Street hates the new rule, as it imposes significant obligations upon them when dealing with IRAs and other retirement accounts.

Prior to the new rule, broker-dealers liked to argue, in securities arbitrations and other lawsuits, that they had no obligation to clients other than the duty to make “suitable” investment recommendations to IRA investors.  Brokers frequently argued they owed no “fiduciary” duty to their clients and had no obligation to act in the client’s best interest.   This meant they could recommend whatever product they liked, usually the one that paid them highest commission, so long as it was otherwise suitable.

In 2015, President Obama’s Department of Labor issued a new rule, now set to take effect in April 2017, which clarifies that brokers who render investment advice to investors in retirement accounts such as IRAs are full-fledged “fiduciaries” with the obligation to act in the best interests of the investor.

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stock marketIf you have lost money in a securities investment, obviously you would be happy to recoup some of those funds.  Many companies that offer assistance with recovering lost capital, however, are likely fraudulent.  A company may sound credible, have authentic looking documents, and a fancy website, but if the deal sounds too good to be true, it probably is a scam.

Tips for Investors

  • Be a Skeptic. Assume that any “recovery” company that reaches out to you is a fake until you can independently verify it is a legitimate company – especially if it claims to be registered with FINRA. Look it up on FINRA’s BrokerCheck site and use the contact information on the BrokerCheck report to reach out to the firm.
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Prime Bank Instrument Fraud 

If you have been approached to invest in “prime bank” instruments, don’t do it!  It is a scam. Prime bank scams purportedly involve the trading of prime bank instruments issued or guaranteed by financial institutions such as the World Bank, the International Monetary Fund, or the U.S. Federal Reserve Bank.  Promoters of these supposed prime bank investments claim investors are guaranteed to receive high-yield returns in a matter of days or weeks, with little or no risk.  According to the U.S. Securities and Exchange Commission, these investments do not exist.

Fraudsters may use complex and official-sounding terms such as, debenture, bank guarantee, private funding project, offshore trading program, trading facility, or guaranteed bank note, in an effort to make the scheme seem legitimate.  Oftentimes, promoters will claim that the instruments are available by invitation only to select clients. They may claim these are the “secret” way wealthy people make money and will cite a requirement for secrecy if a potential investor asks for references.  Some goes so far as to have investors sign official-looking non-disclosure agreements.

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One scam still making the rounds is the fake check scam.  The way it generally works is this.  You receive an authentic-looking check in the mail that appears to be from a real company. Along with the check, you receive instructions to deposit the check and transfer a portion of the money to someone else.  A few days later your bank informs you that the check was counterfeit and you are now liable for the amount of money transferred out (usually thousands of dollars) and the bank fees for checks you had written that bounced.

FINRA recently issued an Investor Alert warning of two variations of the fake check scam – the mystery shopping scam and the modeling scam.

How the check cashing scams work

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mosquito-on-my-hand-1385575The SEC has issued an Investor Alert regarding fraudsters attempting to profit by exploiting the dangers associated with the Zika virus.  For those not following the news, Zika is a tropical disease transmitted by mosquitoes.  Outbreaks have been reported in South America, with cases popping up in the United States.  Zika infections in pregnant mothers have recently been linked to microcephaly in babies, i.e., babies born with heads much smaller than expected, leading to significant public health concerns.

According to the SEC, fraudsters are attempting to sell investments in companies supposedly developing treatments or other products for Zika.  Scams could include so-called “pump-and-dump” schemes, whereby fraudsters encourage investors to buy shares in a company or a fund by spreading rumors that the company is involved in developing a treatment or cure for Zika.  The rumors prompt investors to buy the shares, thus driving up the price.  The fraudsters then sell their shares while the price is high but before the truth is revealed.  Penny stocks are particularly susceptible to this kind of fraud.  As always, be wary before sinking a significant sum of money in penny stocks.

The SEC recommends that investors use common sense before putting money in a Zika-related investment.  Specifically, before making any investment – especially one tied to Zika – an investor should do the following:

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The Financial Industry Regulatory Authority (“FINRA”) has issued an investor alert regarding scams pitching investments in marijuana-related stocks.

Currently, medical marijuana is legal in 20 states and the District of Columbia. Recreational marijuana is legal in Colorado and Washington state. With all the press surrounding the legalization of marijuana, FINRA has already seen scams involving investments in marijuana-related companies. According to FINRA, the scams it has seen are classic “pump and dump” schemes.

The fraudsters “pump” up the price of a small, thinly traded company, with little or no history of financial success, by making overly optimistic, oftentimes false and misleading, statements concerning the financial prospects and growth potential of the company. FINRA cites an example of a company that issued over 30 press releases in a short period of time indicating the stock could soon double its price. When the price of the shares reaches its peak, the scammers then “dump” all of their shares at a profit and leave the legitimate investors holding worthless stock.

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The Securities and Exchange Commission (“SEC”) announced that it has settled with two of the defendants in an offering fraud case involving a purported $11 billion gold mine. In July 2012, the SEC charged a father, son and daughter with perpetrating a $2.7 million securities fraud on approximately 140 investors in 23 states. Harry Dean Proudfoot III, Matthew Dale Proudfoot, Laurie Anne Vrvilo and their Oregon-based company, 3 Eagles Research & Development LLC (“3 Eagles”), allegedly told investors that 3 Eagles would extract gold worth more than $11 billion from its mine in Ohio resulting in a 35% return to investors.

According to the SEC, in reality, the majority of investors’ funds were used to purchase cars, jewelry and vacations. In addition, the SEC claims that 3 Eagles did not own rights to much of the land it was purportedly mining for gold and because investors’ funds were misappropriated for personal expenses, the company did not have the necessary funds to start production of the mine.

The SEC announced that Matthew Proudfoot and Laurie Anne Vrvilo agreed to permanent injunctions prohibiting future securities violations and to disgorgement of the $2.7 million raised from investors between September 2009 and October 2011. The SEC’s action against 3 Eagles and Harry Proudfoot is still pending.

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Jeff Atwater, Florida’s Chief Financial Officer (“CFO”), announced that Wellington resident, Richard Incandela, was convicted of defrauding two Tampa senior citizens out of nearly $490,000. Incandela was sentenced to 34 months in prison to be followed by 25 years’ probation. In addition, he was ordered to pay full restitution to the victims.

According to the Sun-Sentinel, Incandela met the elderly couple at a Tampa-area church. The couple told Incandela that they wanted to find a way to make sure their mentally handicapped grandson would be cared for after their deaths. According to investigators, Incandela proposed that the couple buy life insurance policies that would later be sold in a Stranger-Originated Life Insurance (“STOLI”) transaction, also known as a life settlement. STOLI and life settlement transactions are financial transactions in which the owner of a life insurance policy sells an existing policy to a third-party for an amount that is more than the policy’s cash value but less than its face value. The couple told Florida investigators that they did business with Incandela, in part, because they believed he was a fellow Christian.

Investigations conducted by the Florida Department of Financial Services’ Insurance Fraud and Agent and Agency Services divisions found that between December 2007 and September 2009, the Tampa couple gave Incandela $489,426 for what they believed were insurance premiums. According to investigators, no insurance policies were ever obtained and the monies were kept by Incandela for his own personal use. CFO Atwater confirmed that Incandela has never been licensed to sell insurance in Florida. Incandela was arrested and charged with fraud and selling insurance without a license in 2010.