Articles Posted in Investment Fraud

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Las Vegas-based MRI International Inc.’s former president/chief executive Edwin Fujinaga, Asia-Pacific executive vice president Junzo Suzuki, and general manager of Japan operations Paul Suzuki, have all been indicted on eight counts of mail fraud and nine counts of wire fraud in connection with a Ponzi scheme that defrauded thousands of victims, according to a Fox News article.

According to U.S Attorney Daniel Bodgen, the men told thousands of overseas investors that their investments were safely managed by a third party escrow agent in Nevada. Nevertheless the men are accused of using investors’ funds to pay for gambling, a private jet, and other personal expenses. The government alleges that this Ponzi scheme preyed on new enrollees’ money that they turned and used to pay early-stage investors and to give other investors incentive to take part.

According to the indictment filed by the U.S. District Court, the scheme was exposed in April 2013 after four years of operation and individually charges Fujinaga with three counts of money laundering. The document also seeks from the defendants the forfeiture of proceeds from the alleged crime. As a result the defendants could also face decades in prison if convicted.

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On May 21, 2015 the Securities and Exchange Commission announced fraud charges against Gray Financial Group, Founder and President Laurence O. Gray, and co-CEO Robert C. Hubbard IV. According to the SEC, the advisory firm and the two executives breached their fiduciary responsibility by swaying Atlanta public pension find clients to invest in alternate investments funds offered by Gray Financial Group, despite knowing the investments would violate Georgia pension laws. The pension fund clients include Atlanta’s police, firefighters, and transit workers pension funds.

The SEC alleges that Gray Financial Group and Gray “made material misrepresentations to at least one client when asked specifically about the investments’ compliance with the law,” as well as, “misrepresented the number and identity of prior investors in the fund.”

Alternative investments are often complex, high-risk, high-fee investments. Georgia law requires that public pension funds invest no more than 20% of their capital in alternative investments; however, the investments sold to two of the Atlanta pension funds in this case caused them to exceed that limit. Georgia law also prohibits public pension funds from investing in an alternative fund unless there are at least four other investors at the time of investment, but there were fewer than four investors in the funds sold to its Atlanta pension fund clients. Georgia law further provides that alternative investment funds must have at least $100 million in assets in order to be purchased by public pensions, yet the funds in this case never reached that amount of assets.

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The Securities and Exchange Commission announced on May 12, 2015 that fraud charges were being filed against ITT Educational Services Inc., as well as Kevin Modany (chief executive officer), and Daniel Fitzpatrick (chief financial officer).

According to the SEC, the national operators of for profit colleges and its two chief executives fraudulently concealed from ITT’s investors the negative financial impact on ITTof the two student loan programs called “PEAKS” and “CUSO.” ITT had provided guarantees against the risk of loss from non-performing loans that resulted in millions of dollars in liability for ITT. However, instead of disclosing these liabilities to its investors, ITT took steps to mislead them.

Those steps included, according to the SEC, making payments on delinquent student loans in order to “keep the loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice.”

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The Securities and Exchange Commission recently filed fraud charges against a Fort Lauderdale, Florida-based investment advisor and related funds in the federal district court for the Southern District of Florida. The SEC’s complaint names Frederic Elm (formerly known as Frederic Elmaleh), his unregistered advisory firm Elm Tree Investment Advisors LLC, and three funds: Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP.

According to the SEC, Elm perpetrated a Ponzi scheme – in effect recycling new investor money to earlier investors, and using investor funds the funds for personal expenses, such as a $1.75 million home, luxury automobiles, and jewelry. In this way, Elm allegedly stole at least $17 million from unsuspecting investors. This kind of misconduct violates the anti-fraud provisions of federal securities laws and SEC rules.

The investors sent their investment funds to Elm by wire transfer or by mailing a check. Elm deposited the funds in various bank account that he controlled. In this way, Elm had custody and control over the investors’ funds, and was able to misappropriate the funds.

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The collapse in oil prices was a major shock that took a lot of people by surprise. For years the story line had been that the world was running out of oil and America was dependent on foreign oil produced by governments not friendly to U.S. interests. With dwindling supplies, the price of oil had to be higher in the future. Sellers of energy stocks and other oil and gas investments had a compelling story to tell potential investors.

Despite this oil-depletion story line, however, the sudden and sharp decline in oil prices was not really unexpected. According to Gregory Zuckerman, author of The Frackers, the U.S. experienced the largest crude oil production increase in history in 2012, and, in 2013, the U.S. increased daily output from 5 million barrels per day to 7.5 million – on a track to outproduce Saudi Arabia by 2020. As for natural gas, production increases have led to price declines of 75% since 2008. Better technologies like horizontal drilling and hydraulic fracking – a process for accessing oil and gas trapped in dense rock – have allowed these production increases and price declines to occur.

Oil and gas investment offerings have become more common in these days of low interest rates, as investors have been unable to generate enough income from bond interest and stock dividend payments. Also, state securities regulators have long warned that high oil prices have allowed promoters to generate interest in investments in energy-related business ventures.

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Investors have filed claims against UBS Wealth Management Americas totaling more than $900 million for losses in its Puerto Rican closed-end municipal bond funds, according to InvestmentNews, citing the company’s third quarter earnings report. The bond funds plummeted in value last year.

UBS had sold more than $10 billion of the funds through 2012, according to the article. Investors have alleged fraud, misrepresentation and unsuitable recommendations against UBS and its brokers in connections with the sales. In addition, at least one UBS broker persuaded some investors to take out loans and invest the proceeds in the funds in violation of UBS policies. UBS has reportedly set aside millions of dollars to cover anticipated liability.

Separately, the Puerto Rican division of UBS Wealth Management Americas, has reportedly agreed to pay $5.2 million to Puerto Rico regulators to settle charges that the firm’s brokers improperly sold these funds to investors. Of the $5.2 million, approximately $1.7 million is earmarked for reimbursing 34 “mostly senior, low-net-worth” investors, who were heavily concentrated in the closed-end funds. The other $3.5 will be deposited into the commission’s investor education fund.

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On August 26, 2014, a federal district court in Atlanta ordered Blake Richards of Buford, Georgia to pay approximately $1.7 million of money that he obtained from investors by fraudulent means, plus interest of nearly $50,000 and a civil penalty of $80,000. The money is to be paid to and held by the district court until further order. Unfortunately, Richards claims to be indigent, and the investors he defrauded are unlikely to recover any money from Richards, although they may have claims against LPL Financial. At least two of the investors defrauded by Richard were elderly and most of the misappropriated funds were from retirement savings and life insurance proceeds.

Richard was associated with LPL Financial, which is a brokerage and investment advisory firm headquartered in Boston. Richards’ financial advisory firm, Lanier Wealth Management, LLC, which operated like a branch office of LPL Financial, is located in Buford, Georgia.

When the investor victims had money to invest, Richards would have them write checks to entities he controlled. The entities were named Blake Richards Investments and BMO Investments. Richards told his victims that he would cause the money to be invested, but he actually siphoned off the money and used it for his personal benefit.

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As if ISIS terrorists, ebola, militarized police, and race riots are not enough, we now read in the Atlanta Business Chronicle that white collar crime is on the rise (“White Collar Crime Wave,” by Dave Williams, August 22-28, 2014). Prosecutors report a significant increase in white collar criminal activity, according to the article. One former federal prosecutor was quoted as saying: “It’s a national trend.”

White collar crime includes various forms of financial fraud. Examples include Ponzi schemes (think Madoff, where cash flow from newer victims was used to pay previous investors until the house of cards collapsed) and affinity fraud. In an affinity fraud scenario, the investment promoter gains credibility and hooks victims by playing up things they have in common.

Perhaps the most common and outrageous example of affinity fraud that is the proverbial “wolf in sheep’s clothing” who preys on church members. The article mentioned the sad case of Ephren Taylor II, the purported wealth builder who defrauded members of a prominent Atlanta church out of millions of dollars.

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Private placements are investments that have not been registered with the United States Securities and Exchange Commission. The lack of registration is either unlawful, or lawful due to an exemption from registration under the securities laws. Private placement investments are always high-risk investments that are complex, not transparent, and illiquid (cannot be readily sold) – despite the fact that they are often presented as having little or no risk, and are sometimes fraudulent.

Issuers of private placement investments often employ unregistered brokers and financial advisers to sell them to individual (or retail) investors. The sellers of private placements typically receive outsized commissions, and thus do very well indeed. On the other hand, many investors who could ill afford it have lost a substantial portion of their life savings by investing in private placements.

The SEC recently published an Investor Alert identifying 10 red flags that an unregistered offering (private placement) may be fraudulent. The red flags include such things as promises of high returns with little or no risk; involvement of unregistered sales people; high-pressure sales tactics; amateurish, sloppy or no documentation; absence of the “usual suspects” involved in “legitimate” private placements (lawyers, accountants, etc.); the old “mail drop as corporate address” trick; cold call solicitations; and phony backgrounds of managers or promoters.

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Banking giant J. P. Morgan Chase has reached a deal with federal prosecutors to avoid criminal prosecution for its role in the Bernard Madoff Ponzi scheme. According to the prosecutors, J. P. Morgan, which had custody of Madoff accounts, witnessed suspicious money transfers, too-good-to-be-true investment returns, unverifiable trading activity, and the use of a one-man accounting firm. But while the bank connected the dots, filed a suspicious activity report with British officials, and was concerned enough to withdraw its own money from Madoff feeder funds, it failed to protect investors in that it “never closed or even seriously questioned Madoff’s Ponzi-enabling 703 account,” according to U. S. Attorney Preet Bharara.

The nation’s largest bank faced two felony charges of violating the Bank Secrecy Act because it did not file a Suspicious Activity Report after witnessing red flags about Madoff and did not have appropriate anti-money laundering compliance procedures in place. The charges come on top of other legal woes at J. P. Morgan, including a $13 billion settlement with the U. S. government in connection with its mortgage practices that led up to the financial crisis.

Madoff reportedly perpetrated his Ponzi scheme through accounts at J. P. Morgan from 1986 up until his arrest in 2008. Almost all of his clients’ funds were deposited at J. P. Morgan, and money flowed into and out of those accounts. In October 2008, one of J. P. Morgan’s analysts wrote a memo indicating that the bank could not verify Madoff’s trading activities or custody of assets. It also questioned Madoff’s “odd choice” of using a small, unknown accounting firm. Also in October 2008, J. P. Morgan filed a report with British regulators that stated in part that Madoff’s purported investment returns were “too good to be true.”