Investment Fraud - University of North Carolinaold.northcarolina.edu/conferences/oia/6-2016/Session 2 - Investment... · Investment Fraud Guarding Your ... elaborate FOREX Ponzi scheme

Investment Fraud

Guarding Your (& Clients’) Assets in a Scary World

John MaronDirector, Investor Education Program

NC Dept. of the Secretary of StateSecurities Division

PO Box 29622Raleigh, NC 27626-0622

(919) [email protected]

� This workshop is presented as aneducational experience and theinformation provided should not beconstrued as legal advice

� The views expressed are those ofthe presenter

� Presenter believes all information istruthful and accurate; however,mistakes can occur and laws andregulations may change

Disclaimer

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�Between 2004-2011, open securities and commodities fraud investigations increased from 1,139 to 1,846 (+62%).

�During this time period, the losses associated with these types of schemes have increased to billions of dollars.

�In response, the FBI has added 91 agents since 2008 (+61%).(Source: FBI’s 2010-2011 Financial Crimes Report)

Investment Fraud

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Investment Fraud -- Effects

NC Department of theSecretary of State

Hon. Elaine F. Marshall

Secretary of State

Investment Fraud

NC Dept. of the Secretary of StateAdministers and Enforces:

NC Securities Act (N.C.G.S. § 78A)

NC Investment Advisers Act (N.C.G.S. § 78C)

NC Commodities Act (N.C.G.S. § 78D)

What is a “security”?

Full definition is found at N.C.G.S. §78A-2(11); however, in general:

A “security” is any investment in which the investor has a reasonable expectation of making a profit as the result of the managerial or entrepreneurial efforts of others.

1. With limited exceptions, anyone who sells a security or provides investment advice must be licensed and registered with the Securities Division.

2. With limited exceptions, all securities must be registered with the Securities Division.

Registration Requirements

For More Information

NC Securities Division (1-800-688-4507)www.SOSNC.gov

Types of Scams• I immigrated to the

US in 1903 at age 20.• In 1920, I devised a

scheme that still bears my name today.

• I opened a company in Boston telling investors that I could provide a 100% return in just 90 days.

Types of Scams• I was deluged by

investors, taking in $1M in one 3-hourperiod.

• I went from being penniless to exceedingly rich to penniless and imprisoned in less than a year.

Types of Scams• By the time I was exposed, I

had taken investors for $10M - $15M while only investing ~$50.

• What is my name?

My name is:

Charles Ponzi

and similar scams are referred to even today as “Ponzi Schemes.”

Not “Fonzi”!

Types of Scams• By the time I was exposed, I

had taken investors for $10M - $15M while only investing ~$50.

• What is my name?

My name is:

Charles Ponzi

and similar scams are referred to even today as “Ponzi Schemes.”

Ponzi Schemes Are Alive & “Well”

This fellow was convicted of pulling off the biggest Ponzi scheme in history.


He is believed to have “made off” with $20 billion ininvestor money.

Madoff’s Ponzi Scheme


Madoff used to live here.

He used to own this.


Now he lives here.

Scheduled Release Date:11/14/2139

� Lived in Catawba Co.� Active from 1991-2008� Sold fake promissory

notes� Snared approximately

500 investors, bilking them out of ~$25M

� Victims included:� Friends� Church members� Family

� Even Mother and Father!

Ponzi Schemes Are Alive & “Well”(Even in North Carolina!)

J.V. Huffman, Jr.

� Pleaded guilty in Jan ‘10 to 28 felony counts, including 14 counts of securities fraud

� Sentenced to 30 – 40.5 years


J.V. Huffman, Jr.DOC Number: 1188382

� Queen Shoals, LLC; Queen Shoals II, LLC & Select Fund LLC

� 2006-09 took +$30M from 100+ investors by falsely claiming profitable trading in T-bills, precious metals & foreign currencies

� 5-yr prom notes guaranteeing 8-24% via “non-depletion accounts”

� Pled guilty 7/09 to securities & mail fraud & sentenced 3/11 to 22 yrs in prison. 11/11 ordered to pay $24M in restitution & civil penalties


Sidney S. HansonFed. Reg. #23422-058

• Fraud aimed at members of a group sharing a common characteristic.

• Targets: Seniors, ethnic groups, religious groups, professional or civic groups.

• Con man: “You can trust me because I’m just like you.”

Affinity Fraud

� NC Securities Division first to uncover this scheme in 2006

� Between 2004-07, they stole ~$82M from ~7000 people through an elaborate FOREX Ponzi scheme disguised as a religious charitable debt elimination program

� Investor money was used to pay each $1 million salaries, buy a private jet, luxury suites at the Atlanta Falcons and Carolina Panthers stadiums, and a $900,000 motor coach, among other things

� Found guilty in SC in Nov. 2009� Sentenced to 27-33 years in prison

in Dec. 2010 � Investors have gotten back ~.46 of

every $1 invested.

Religion-Based Affinity Fraud

Fed. Reg. #15780-171

Fed. Reg. #15781-171

Fed. Reg. #94223-071

The Three Hebrew Boys

So, Why Am I Here?

Because…

We Want a Symbiotic Relationship

We Know You’re Busy

But You Can Help Us

But You Can Help Us

We have the broad stroke. You have the focused beam.

We Have Lots of Tools

�Under North Carolina law, we can obtain all pertinent records from your client’s broker.

�We can subpoena bank records.

�We can do a line by line analysis of your client’s investments to determine if it is legitimate, if it is suitable, and if there is a problem.

Our Authority

We Can Be Superheroes!

We Can Untangle the Web

An Example – Jotham Pruitt

“The former chief executive officer of a Durham financial services company is one of three men in trouble with federal authorities and linked to a multi-million dollar marijuana ring.”

-- WRAL.com07-24-2015


Final Order 6/14/2011



� Pruitt pleaded guilty to one count each of bank fraud, filing false tax returns and money laundering. (Sentencing pending: Could face up to 53 years in prison and $700K fine.)

� Attorney Joseph Lee Levinson pleaded guilty to one count of conspiracy to make false statements to federally insured financial institutions. (Sentencing pending: Could face up to 5 years in prison & $250K fine.)

� Charges against other individuals still pending.

In general, look for Anything Odd or Unsual

Look for the Red FlagsUnsual

Lack of Documentation

Missing documents (i.e., Form 1099) that an investor should receive can mean someone is trying to hide fraudulent activity.

Look for the Red Flags

Hand Written Tax Documents

Hand written documents are legal, but they are unprofessional and can be an indication of fraud.If you went to a doctor and he did not have a stethoscope and asked you to reuse the paper gown, that would just not seem professional.


Exotic InvestmentsComplex, exotic investments (hedge fund options, foreign currencies, precious metals, etc.) can confuse investors and are often used by con-artists to hide their theft.If you are not familiar with it and have to investigate what an investment is, then it is probably an exotic investment.


Lots of TradesIf you see excessive or unauthorized trading in an investment account, it could be a sign the brokerage firm or broker is not working in their client’s best interest.If Schedule D is getting long, something could be amiss.Too much trading may sink your client’s financial ship.


Unusual Gains or Losses

If your client’s current return differs a great deal from past returns and shows unusual gains or losses, they could possibly be a victim of fraud.


Being Paid in Stock

A stock is worth what you can sell it for and values change. At a minimum, a client should make sure the stock is registered.The stocks may be reported on a 1099 or W-2.


1035 ExchangeA 1035 insurance policy exchange may indicate your client has been persuaded to move from one reasonable investment into a similar replacement for the purpose of generating a commission to the broker.Annuities are meant to be long term investments. An annuity is a 10-15year time horizon, but statistics are showing the average time held is just 18 months.


Distribution from a Qualified Plan that was not Rolled Over

A lump-sum distribution from a retirement, college savings or other tax deferred plan that is not rolled over into another plan could indicate theft or fraud.There should be documentation that it was put into another qualified plan, or used as originally intended.


Lower Interest or Dividends than Previously Reported

If the amount of interest or dividends your client is reporting has decreased significantly from what was reported previously, this may be a sign that the client has been lured away from safe, income-producing investments and towards riskier ones.


1031 Like-Kind Exchanges

All 1031 exchanges should be scrutinized. Decreasing active participation in an investment increases the potential for fraud.In a 1031 exchange, it might be logical to sell cows to buy sheep, but not logical to buy shoes.


� Lack of Documentation� Unusual Gains or Losses� Being Paid in Stock� Distribution from a Qualified Plan that was not Rolled

Over� Missing Interest or Dividends When Reported Previously� Exotic Investments� Handwritten Tax Documents� Large Number of Trades� 1035 or 1031 Exchanges

Know the Red Flags

Conclusion

• If an investment sounds too good to be true –

IT IS!!!• Don’t let embarrassment

prevent you from calling the Securities Division.

• Don’t invest until you call the Securities Division (1-800-688-4507) to check the registration of the product and promoter.

NC Dept of the Secretary of StateSecurities Division


Phone: (800) 688-4507

Email: [email protected]

Internet: http://www.sosnc.gov

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Who to Contact for Assistance/Referral

Questions about Securities Offerings:(919) 733-3924 or (800) 688-4507

NC Department of the Secretary of StateSecurities Division


Investor Education Presentations:John Maron

Director, Investor Protection & Education Services(919) 807-2106 or [email protected]