Ponzi Schemes and Investment Fraud: A Year Later

Ponzi Schemes and Investment Fraud:A Year Later
Presented by: Craig D. Stein
205 Worth Avenue, Suite 203
Palm Beach, FL 33480
Tel.: (561) 659-8802

We Will Discuss Two Types of Frauds
Affinity Fraud
General Brokerage / Investment Fraud

Affinity Fraud / Ponzi Schemes
A. What is Affinity Fraud / How does it work?
Nature has ingrained:

Political / Economic
Social / Achievement
Interests
Religion

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?

Private Rather than Public Investment
Unusual or Complicated-Sounding Investments
Promise and History of High Returns
Short Term for High Returns

Continuous Stream of Returns (Despite Market Volatility)
Open Ended:
Opportunity for Continued Reinvestment
Open to New Investors Even if it does not Appear So.

Seeking out Referrals
Little or No Oversight
Where are Funds Directed?
Paper Statement from independent 3rd Party
You Should Not be Made to Feel Uncomfortable to Question the Investment

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

It is Subjective Like Other Platitudes – People Do Not Follow:
Don’t Judge a Book by Its Cover
An Apple a Day Keeps the Doctor Away

People Seek What is Too Good to Be True

The More Financially “Successful” in Society have Already Achieved what’s “too good to be true,” usually by taking risks.
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!
??

B. In the Present:
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

B. In the Present:
Insidious: Because they may Only Partially Dilute or Reduce Your Investments

B. In the Present:
Often Hidden by Market Appreciation and Excused by Market Depreciation

B. In the Present:
These often Occur in Brokerage Accounts, even with Investment Advisors and Even in Trust Accounts

These Occur in Brokerage Accounts, with Investment Advisors and Even in Trust Accounts
Sale and Recommendation of Unsuitable Investments
Client Objectives
Risk Tolerances
Types of Investments
Sophistication Does Not = Wealth

Diversification and Over-Concentration
Individual Stocks
Individual Sectors
Types of Investments (Equities, Debt)
Hedging

Churning
Excessive Trading
Who Controls Account
Looper Formula

Unauthorized Trades
Discretion Authority
Time and Price

Misrepresentation and Omissions
Why Would Broker Make Misrepresentations?
Commissions
Reliance Upon the Information Provided by the Brokerage Firm (ARS, LPS)
Belief in Investment - Projection

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
Increase Scrutiny Upon Those We Already Regulate
Review Old Case Files
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
Why is This Investment Suitable for Me?
How Much Can I Lose?
Am I Adequately Diversified?

Closing Remarks
Are You Recommending This For Other / All of Your Clients?
What is Your Understanding of My Objectives and Risk Tolerances?

Closing Remarks
Carefully Review your Opening Account Documentation. Do not just sign a stack of documents.
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

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Ponzi Schemes and Investment Fraud: A Year Later

by Stein & Stein, P.A. on Nov 20, 2009

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Ponzi Schemes and Investment Fraud: A Year Later — Webinar Transcript