SECURITIES LAWS: SECURITIES LAWS: Using Financial Investigation Tools Using Financial Investigation Tools to Ferret Out Investment Fraud: to Ferret Out Investment Fraud: International Association of Financial Crimes Investigators Wayne Klein September 9, 2010 Las Vegas
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SECURITIES LAWS: Using Financial Investigation Tools to Ferret Out Investment Fraud: International Association of Financial Crimes Investigators Wayne.
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SECURITIES LAWS:SECURITIES LAWS:
Using Financial Investigation Using Financial Investigation ToolsTools
to Ferret Out Investment Fraud:to Ferret Out Investment Fraud:
International Association of Financial Crimes Investigators
Wayne KleinSeptember 9, 2010
Las Vegas
Spotting Fraud:Spotting Fraud:How does one distinguish a
legitimate investment from a fraud scheme?
Is it based on:◦The promised rate of return?◦The topic of the investment?◦Who is selling the investment?◦The documents provided to investors?
Examples.
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NASDAQ Rises 85.6% in NASDAQ Rises 85.6% in 1999:1999:
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Wall Street legend Wall Street legend Bernard Madoff Bernard Madoff arrested over '$50 arrested over '$50 billion Ponzi scheme'billion Ponzi scheme'
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Sample Solicitation:Sample Solicitation:
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The Power of The Power of Compounding:Compounding:
While earning 15% in one month is possible in commodities markets, doing so consistently is impossible – but profitable:◦After 2 years, the $10,000 becomes
$109,000.◦After 4 years, account is worth $1.2 million.◦After 6 years, $13.2 million.◦After 8 years, $145 million.◦After 10 years, $1.5 billion.◦After 12 years, $17.5 billion.
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Objectives of Securities Objectives of Securities Laws:Laws:The purpose of the securities laws
is to distinguish legitimate investment opportunities from fraud schemes.
“Trip wires” are laid out to catch violators, including those who violate the law ignorantly.
The law creates “safe harbors” for honest, legitimate investment programs.
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Separating Sheep from Separating Sheep from Wolves:Wolves:
While securities laws cover many types of transactions and can be complex, they contain three basic requirements:
Securities must be registered before sold;Sellers (stockbrokers) must be licensed;All relevant information must be disclosed.
◦Sellers must verify marketing information◦False statements are crimes◦Not disclosing negative information is a crime◦Caveat vendor, not caveat emptor.
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What Must be Disclosed?What Must be Disclosed?The prospectus must disclose:
◦Financial information about the company;◦How it will use the money raised;◦Background of company management;◦The success of prior ventures;◦Negative information such as criminal
Disclosure is where the fraud occurs:◦Fraud promoters must lie to sell the deal.
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What is a “Security”?What is a “Security”?Securities come in many forms:
◦Stocks, bonds, warrants◦Options◦Profit sharing agreements◦Evidence of indebtedness◦Notes, including many promissory notes◦Interest in oil and gas leases◦“Investment contract” securities
These can all be legitimate or can be used as the basis for fraud schemes.
Fraud techniques:Fraud techniques:Affinity fraud“Guaranteed,” no risk, high returnHigh pressure, cold callingAvoid taxes, or “IRA Approved”Bogus “credentials,” senior
designationsOnline pitchesFree lunch seminars“Off the books,” special, or private
deals“Headline” investments
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Fraud by Licensed Fraud by Licensed Brokers:Brokers:Fraud sometimes is perpetrated
by licensed firms:◦Boiler rooms◦Penny stocks, pump and dump
schemes◦Churning◦Unsuitable recommendations◦“Selling away”◦Manipulation◦Claims of insider information◦Refusal to sell manipulated stocks 14
Investigative Techniques:Investigative Techniques:Investigating securities fraud can be a lot
of fun. Techniques might include:◦Calling promoter, posing as potential investors◦Attending presentations◦Signing up for free offers, get phone pitches,
mail◦Surprise audits◦Recording sales pitches
This can be by the investigator or investors
◦Raiding boiler rooms◦Task force emphasis on certain types of
schemes15
Investigative Tools:Investigative Tools:An audit trail can almost always be
created from existing records.◦Even if the crook destroys records, bank and
investor documents can make the case.Regulatory databases contain
significant information about licensees.Regulators conduct on-site
examinations of firms to gather information.
Regulators can provide funding.Exceptional remedies may be available.
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Remedies Available:Remedies Available:Criminal:
◦Prison, finesAdministrative:
◦License revocation, cease & desist order, fines
Civil:◦Injunction, restraining order◦Appoint a receiver, conservator◦Disgorgement, rescission, fine◦Order removing officers, barring role in
future securities offerings or public company. 17
Special Advantages of Special Advantages of Securities Prosecutions:Securities Prosecutions:
Prosecutors have some unique advantages when trying securities cases:
Longer statutes of limitations:◦Generally five years – longer than other frauds.
Strict liability:◦Need not prove intent or injury.
Can show prior bad acts:◦Prosecutors can introduce evidence of prior
convictions, liens, bankruptcies, etc.Offers alone are illegal; don’t need actual
saleConvictions are won using only
documents. 18
Who Regulates and Who Regulates and Prosecutes?Prosecutes? State Securities Laws
◦ Each state has a securities law, regulatory agency
Federal Commodities Laws◦ CFTC regulates exchanges, brings enforcement◦ National Futures Association licenses brokers◦ FBI investigates and US Attorneys prosecute
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Penalties Used to be Penalties Used to be Stronger!Stronger!In 1420, a man named Prelati said the devil told him where gold ingots were buried. He required believers to give him hearts of young children. Convicted of sorcery and sodomy, he was burned alive – his ashes scattered to the wind.
Pietro d’Apone was born in 1250. He claimed alchemy skills. But, he died in prison during his trial. The trial continued. He was found guilty, so they dug up his bones and publicly burned them.
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Investors Used to be Investors Used to be Smarter:Smarter:A man named Augerello was born in Italy in 1441. He claimed to be able to turn lead into gold.
When he asked Pope Leo X for a reward for his discovery, the pope:◦“with great ceremony and much
apparent kindness and cordiality, drew an empty purse from his pocket and presented it to the alchymist, saying that since he was able to make gold, the most appropriate present that could be made him, was a purse to put it in.”
Klein & Associates is a forensic accounting and litigation consulting firm providing :◦ Receivership services, ◦ Forensic accounting,◦ Due diligence, internal
investigations,◦ Specialized subject-
matter expertise in securities, and commodities, and