For the Protecting Your Wealth report, click here.
The economy may be down and even out, but one sector isn't hurting much: investment scamming.
That Bernard L. Madoff is spending the rest of his natural life behind bars for running history's biggest scam doesn't seem to be acting as a deterrent. Regulators and prosecutors are handling plenty of new cases charging that fraudsters hosed innocent investors on a variety of fronts. Some are outright thefts, often Ponzi schemes in which the accused promoter siphoned off much of the money for personal purposes.
But in a reflection of the uncertain times, many of the cases involve false representations that a given investment touting above-average returns was guaranteed, low risk or even no risk.
There certainly are a number of lessons in scrutinizing investments that can be learned from perusing recent civil court filings by the Securities and Exchange Commission. For 12 warnings signs that the investment you're contemplating may be a scam, click on the nearby picture of the used car salesman.
Some cases entail several allegedly deceptive elements. In the Salt Lake City area–a notorious long-time hotbed of scams–a federal judge just ordered Brian J. Smart and his misleadingly named company, Smart Assets Inc., to cough up $4.7 million. An SEC lawsuit alleged that Smart peddled a “conservative, liquid investment opportunity” to senior citizens that in reality was anything but. “Smart was misappropriating funds for his own personal use, investing in illiquid and ill-fated real estate ventures and using proceeds from new investors to make payments to earlier investors,” the SEC wrote, describing the textbook definition of a Ponzi.
In Philadelphia, the SEC yesterday charged Sam Otto Folin and two companies he controls, Benchmark Asset Managers LLC and Harvest Managers LLC, with raising $8.7 million by falsely promising "socially responsible" investing in safe securities offering above-average returns. In reality, the SEC alleged, Folin used the money to pay off earlier investors and live well. Folin agreed to pay back the $8.7 million plus interest and a ban from the securities industry.
In mid-June the SEC obtained a consent court order in Dallas against Norman F. Germany of Jackson, Miss. and two of his companies, E.B. German & Sons LLC and Germany Energy Co. The allegation: German raised more than $600,000 in loans from investors by talking up his two “producing” oil and gas projects in Mississippi. The problem, the SEC said, is that “he knew they were not, and that, instead of using offering proceeds for oil and has related expenditures, Germany diverted these funds to personal expenses.”
Another persistent problem is affinity fraud, in which the cons approach prospective investors on the basis of a shared characteristic: religion, nationality, fraternal organization. In March the SEC in Miami won a court order against Gaston E. Cantens and Teresita Cantens, a husband and wife the agency said targeted hundreds of fellow Cuban-Americans to the tune of $135 million. Through their Royal West Properties Inc., the SEC said in court, they sold “no risk” promissory notes with annual returns of 9% to 16% but in reality ran a Ponzi while skimming off $20 million for personal expenses.
The news can be read by anyone. With hedge funds all the rage, the SEC alleges in a civil lawsuit, John Clement of Encinitas, Calif. raised $2.1 million from San Diego-area investors by “promising” monthly returns of 1% to 2% in his alluring named Edgefund LP. In reality, the feds said in getting a court order freezing assets, he “misappropriated and misspent all of the investor funds.” Clements has denied all the charges and has asked for a jury trial.
Sometimes, it is difficult not to blame the victims. For years authorities repeatedly have issued warnings there are no such things as “prime bank” securities, investments supposedly issued by large international financial institutions that pay fabulous returns with no risk. But according to a recent SEC civil complaint in Atlanta, that didn’t stop Michael L. Rothenberg and his company, Four Five LLC, from coaxing $1.7 million out of investors with promises of a 300% return every 14 days from such investments. Rothenberg admitted nothing but consented to a court order coughing up his "ill-gotten gains" and barring him from doing fraudulent things.
Claims grounded on new technology remain a fertile area of investor misrepresentation. A pending civil case by the SEC in Washington, D.C. says that CEO Mary A. Grace and her public company, e-Smart Technologies Inc., wooed investors by claiming its multi-functional biometric ID verification system “had certain technical capabilities that it did not actually possess.” Grace and her firm have not responded in court to the lawsuit.
Anyone can get stuck with a crook. But there are cheap and easy ways you can vet prospective financial pros ahead of time.
For the full Protecting Your Wealth report, click here.
Follow William P. Barrett on Twittter by clicking here.
