By Joseph Woodruff and Wynne James

Here's the last of three red flags that ought to warn an investor to either stay out of the water to begin with, or make an immediate exit.

3.  Generic account statements

Publicly traded investment securities are purchased and sold through “exchanges” such as the New York Stock Exchange, the NASDAQ, the Chicago Board of Trade and other similar markets both in the United States and abroad.  A stock broker or investment fund manager is not physically going to take an investor’s cash, go to the floor of the NYSE, purchase shares of a company and hold them for the investor’s account. 

Instead, a legitimate broker will place orders for stock trades through a registered broker/dealer that is a member of the National Association of Securities Dealers (NASD).  This registered broker/dealer will close the actual stock purchase and sale transactions either directly, or through intermediary entities that are “members” of the various stock exchanges.  A legitimate broker will furnish his or her customers with periodic account statements that disclose all of the activity in their accounts.  These statements will usually be on a form generated by the registered broker/dealer and will contain certain disclosures required by securities laws and regulations.

An investor should immediately question the bona fides of a document purporting to be an account statement of transactions in publicly traded securities that does not disclose the registered broker/dealer through which the trades were processed. The simplest explanation for such a document is that it is a complete fabrication intended to conceal from the investor the fact that his “investment manager” has stolen the money instead of investing it.

By Joseph Woodruff and Wynne James

Here's the second of three red flags that ought to warn an investor to either stay out of the water to begin with, or make an immediate exit. 

2.  The money manager wants a loan

Frequently, the perpetrators of a securities fraud manage to avoid detection because the investors receive periodic distributions of money.  These distributions are often made possible because, in classic Ponzi scheme style, the perpetrator is using the cash contributed by new investors to make payments to old investors.  Because there is no genuine value in the investment, whenever an investor wants to liquidate his or her position, the perpetrator needs to raise cash quickly.

We have seen instances where the perpetrator, often in an effort to raise funds quickly, turns to unwary investors and asks them for personal loans.  It is highly irregular and inappropriate for an investment manager to borrow money from his clients, and such a request is a warning of fundamental problems with the manager and the investment account.

By Joseph Woodruff and Wynne James

Just like the flags staked out on the beach warning swimmers to avoid the undertow, there are signs that should warn investors of the possibility that their securities accounts are at risk of being pulled under by fraudulent managers or promoters.

In the last 12 months, we have seen the exposure of at least four massive frauds that have swallowed up tens of millions of investor dollars. 

What could investors have looked for that might have been warning signs that their portfolios were exposed to risks other than general market conditions?  Below is the first of three red flags that ought to warn an investor to either stay out of the water to begin with, or make an immediate exit.  We’ll provide the rest in the days ahead.

1.  A promised return too good to be true

Fraudulent securities deals frequently promise the investor a return that “beats the market” or carries with it “no way to lose your money.”   A now-defrocked insurance broker named B. Don James was recently sentenced to federal prison for crimes arising out of a fraudulent investment scheme in which he made both promises.  He was selling promissory notes that guaranteed a 10 percent return.  The principal amount contributed by the investor was supposedly going to be pooled with money from other investors and used to finance insurance premiums on policies purchased by James’ insurance customers.  James promised the investors that if a customer defaulted on the premium finance repayment, then the insurance policy would be cancelled and the unearned premium refunded, thereby making the investor whole.

His victims testified that James told them, “The only way you can lose you money is if I steal it.”  At least that statement was proven to be true.

By Wynne James and Joseph Woodruff

In our last posting we discussed that overtures from illicit investment promoters often begin with the “cold call.”  We think that investment calls from people representing companies you’ve never heard of should be cause for immediate rejection.  If they’re so successful, why do they need your money (particularly when they’re paying salesmen 10-15 percent of what you invest, plus overhead)? 

Nevertheless, let’s assume your sense of adventure, not to mention the allure (and, too often, promise) of amazingly high profits, leads you to throw caution to the wind.  We do think you ought to try to check out the company promoting its investments.  How can you do that? 

The first thing to understand is that you’re being sold a security, just like a stock or bond.  That means that the company is subject to federal and state securities laws.  Without going into the complexities of those laws, and they are complex, there are a few things you can do to investigate the company trying to sell you an investment. 

First, the most handy and helpful informational tool available is Google.  Enter the name of the company and the president of the company (if you don’t have it, ask for it – and if you’re told it’s not important, well, there’s a red flag).  You’d be amazed at the information available on Google.  Look for newspaper articles, actions by state securities regulators and anything else that pops up.  Two cautions: 1)  if you see articles about the company doing really big deals, particularly international deals, think twice.  Too often these companies have names the same as or very close to that of very successful, large companies.  Adopting very similar names is a way to get credibility.  2)  If you see articles that make the company look like an industry leader, consider that it may have been placed by or on behalf of the company – simple public relations. 

Other places you can look include the websites of large newspapers in the area of the company’s offices.  You may have to go to the newspaper’s “archive” section, since newspaper websites rarely maintain stories on their primary pages for more than a few weeks. 

You might also check the websites of state securities regulators.  These are easily accessed on Google by typing in the name of your state plus the words “securities division.”  Once you’re in the state website, look for the areas on “enforcement actions,” “administrative actions” or “cease and desist orders”.  The absence of any information about a company on any particular state securities division website is not an endorsement.  These regulators, while conscientious and capable, are often understaffed and rarely start an investigation unless someone has made a complaint.  Further, there is no centralized national informational data base, but we suggest you check the securities division websites of at least the state in which you live and the state in which the company has its main offices.  Since these searches don’t really take a lot of time, you might also check the securities division websites of big states in which there are a lot of potential investors – such as California, Pennsylvania and Illinois. 

What we’ve given you is a place to start, and we’ll continue to give you tips on how to investigate (and evaluate) a potential investment.  Remember that high investment returns are almost always a result of high risk, but don’t compound or increase the risk by investing with a company that only wants your money. 

By Wynne James and Joseph Woodruff

Welcome to the Investment Scams Blog. This is our first posting. We hope this will be informative, with the goal of saving you money and heartache. Every investment has risk, but investing with untrustworthy people or companies adds a component to an investment you shouldn’t have, and it virtually guarantees you’ll lose your money.

Why are we doing this Blog? We’ve been representing investors who’ve lost money in these deals for some time, and we’ve tried to put together a profile of the average investor who gets taken to the cleaners. We haven’t been able to do it. Perhaps some psychologist can, but the average person would probably have some trouble locating it. Our experience indicates that all types of people, men and women, of all ages, and interestingly enough, people with little money and people with millions, end up investing. So we’ve decided to focus on what to look for. If you’ve got a personality that isn’t risk averse, then we’re going to try to help you take risks somewhat intelligently. We don’t know what a good deal is or isn’t, and we’re not experts in any industry. But we’ve picked up some ways that shady characters entice investors, and we’ll share and discuss those with you. Think of these as caged canaries in a coal mine: if you see that canary getting woozy, break off discussions and get out.

We also want your comments and feedback. We’ll post them and answer your questions if we can.

So let’s start with the way illicit companies often start: with the cold call. You get a call from some guy you don’t know about a great investment opportunity. He may talk to you for a while, perhaps even several times, about your investment philosophy, but eventually he’ll tell you about a great deal that’s too good to pass up. Where did this guy get your name? You probably don’t know this, but these companies can purchase lists of thousands of prospects. He’s very likely working off a script that’s been provided to him (we’ve seen actual samples), and one of the requirements of his job is to make 300-400 phone calls a day.  He’s also very likely had some training in how to generate your interest and trust.

The chances are very high that his calling you is a violation of federal and state securities laws (but only if you make an investment – more about that on a later posting). Legitimate companies don’t have salesmen making hundreds of cold calls all over America (and some other countries). So, a very good rule of thumb – don’t invest with anyone who cold calls, no matter how nice and personable he may be.

So that’s it. Pretty simple, although some other things we’ll tell you will be a little more complicated. Helping you avoid loss is our goal.