Articles Posted in Scams

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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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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.”

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On April 12, 2013, we posted a blog entitled FINRA Charges Discount Firm with Fraudulent Sales, which detailed FINRA’s complaint against Success Trade Securities Inc, an online discount firm, and its CEO, Fuad Ahmed alleging fraudulent sales of promissory notes. New details are emerging in this case.

Yahoo! Sports reports that many of Success Trade Securities Inc.’s clients were prominent NFL and NBA players and those investors were led by Jade Private Wealth Management to invest with Success Trade Securities. This will undoubtedly make Jade Private Wealth Management a prime target for investors seeking to recover their losses.

We recommend that all investors who were directed by Jade Private Wealth Management to invest with Success Trade Securities should document all conversations that you had with Jade and preserve all written communications.

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On March 7, 2013, FINRA barred Lighthouse Point, Florida broker dealer Jeffrey Brett Rubin from the securities industry for making unsuitable recommendations to his client.

Rubin recommended to his customer, an NFL Player, to invest in illiquid, high-risk securities issued in connection with a now-bankrupt casino in Alabama. As a result, the customer lost approximately $3 million. Based on Rubin’s referrals, 30 other NFL players also invested in the casino project and lost approximately $40 million. Rubin also failed to obtain the required approval from his employers to participate in the securities transactions involving the casino.

Rubin operated a Florida-based company, Pro Sports Financial, which provided financial-related “concierge” services to professional athletes for an annual fee of $40,000. Between March 2006 and March 2011, Rubin was registered as a broker at Lincoln Financial Advisors Corporation and Alterna Capital Corporation. During this period Rubin never informed or received approval from these employers.

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Howard G. Judah and Gergory F. Jablonski, former executives at National Life Settlements LLC, were each sentenced to 10 years in prison for their parts in a $30 million investment scheme that utilized insurance agents to sell products. In 2009, the Texas Securities Board uncovered their securities fraud and selling of unregistered securities. They have since pleaded guilty.

National Life Settlements, LLC solicited money from both active and retired state employees and teachers by having funds rolled out of retirement funds and into National Life Settlements investments. According to the Texas Securities Board, the company quickly grew by using insurance agents to sell products. Agents, many of whom were not licensed to sell securities, earned more than $4 million in commissions.

However, the company never acquired the necessary life insurance policies needed to pay investors. They just paid new investors with money from earlier investors (i.e. Ponzi Scheme) and told investors that the company had received billions of dollars from the Federal Reserve.

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On February 8, 2013, the SEC announced charges that it brought against an individual living in Illinois and two companies behind a $150 million investment scheme that defrauded foreign investors seeking profitable returns and a legal path to U.S. residency through a federal visa program.

The SEC alleged that Anshoo R. Sethi created two entities, A Chicago Convention Center (ACCC) and Intercontinental Regional Center Trust of Chicago (IRCTC). Through these entities, Sethi fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China.

The complaint states that Defendants duped investors into believing that by purchasing interests in ACCC and that they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. Investors were misled to believe that their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Immigrant Investor Pilot Program, which provides foreign investors an avenue to U.S. residency by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. workers.