Investors Need to be Careful About Who Has Custody of Their Money

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.

Investors should be wary of sending money anywhere other than to an account set up for them at a well-known, trustworthy financial institution. Normal operating procedure is for investment advisors to manage a client’s money held in an account at a reputable firm, which would have actual custody of the funds and safeguards in place to prevent the kind of theft alleged by the SEC.

Sudden Collapse of Oil Prices Surprised Stock Market, But Not Industry Insiders

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.

Sellers of investments are legally required to be accurate and completely truthful in marketing investments, disclosing all important risks, and are prohibited from recommending investments that are unsuitable for the investor. But sellers do not always do that. Investors who lost money in energy-related investments that were either unsuitably risky for them, or whose sellers misrepresented or failed to disclose important risks, have valid legal claims to recover those losses.

LPL Financial Representative Operating in Buford, Georgia Defrauded Investors Out of $1.7 Million in Savings

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.

One of Richards’ victims was a woman he had dated. Her father became another victim. Still another victim was a woman who received over $200,000 in life insurance proceeds when her husband had died of pancreatic cancer. Richards cultivated a relationship of seeming trust, going so far as to deliver pain medication to her husband during a snowstorm in his 4-wheel-drive vehicle.

Richards provided fictitious account statements detailing non-existent investments. At least one of the statements purported to be on LPL Financial letterhead. When Richards was questioned or challenged by a victim, he always had an answer. When one victim asked Richards why she had not received statements from LPL Financial, he told her that her accounts had not been “linked” properly. When another questioned him about the status of her supposed investments, Richards showed her a phony statement generated by an internet-based software program.

In addition to losing the money entrusted to Richards, one victim’s social security check was subjected to garnishment by the IRS, because of an improper IRA distribution that was caused by Richards, and which he promised to correct, but did not.

There are some lessons to be learned from this awful story. Investors should never give custody of their money to an individual or a business they do not have good reason to believe is legitimate and reputable. If you do not have the time and/or expertise to invest the money wisely yourself, you are probably better off obtaining advice from a fee-only financial planner (i.e., one who does not act as a broker or invest the money for you) and implementing the plan by investing in well-diversified stock and bond index funds, keeping an appropriate amount (a “rainy day fund”) in relatively safe and liquid investment like a certificate of deposit or money market fund. Money that you may need to access sooner in the next three years should never be invested in stocks or other volatile investments. To learn more, read books on investing by John C. Bogle, the founder of Vanguard mutual funds and the person widely credited with inventing index funds.

Any time you have a question about your investments – either proposed or already made – we would be happy to share our experience. Brokers and investment advisors have certain duties to investors that, when breached, give rise to legal rights to recoup investment losses caused by the breach. For many years now, we have represented investors in securities arbitrations against brokerage firms and financial advisers, helping them to recover losses in unsuitable investments. It is certainly possible to recover such investment losses in securities arbitration. However, we would prefer to help you avoid bad investments in the first place.

Prosecutors Say Financial Fraud is On the Rise

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.
Elder financial exploitation is another tragic and infuriating example of the kind of white collar criminal activity that is on the rise.
Victims of financial fraud, through no fault of their own, undergo a kind of vertigo similar to that experienced by a pilot, who, in a crisis, must decide whether to trust his or her own strong instinct (which is typically the tragic mistake) or what the instruments are showing, which seems to be counterintuitive. Similarly, victims of financial fraud often report that they experienced conflicting signals: the signal from the fraudster, who is often a polished and convincing confidence (con) man versus an internal warning bell that something is not quite right about this opportunity or the person conveying it.
When it comes to deciding whether to invest, especially in an alternative or unconventional investment, investors are well-advised to be skeptical, and act accordingly. If the business is so great, why do they need financing from investors like me? Why haven’t banks or professional venture capitalists provided financing? If the opportunity is so great, why is the promoter selling instead of buying?
The Doss Firm represents people from all walks of life who are victims of financial fraud. If you have fallen victim to financial fraud, you should consult with attorneys who have experience representing investors, because you may be able to recover some or all of your losses. You should do so promptly, because time limits, such as statutes of limitation, can bar some or all of your claims.

Unregistered Investments Are Almost Always Unsuitable, and Are Often Fraudulent

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.

While it is true, as the SEC indicates, that some private placements may be used by legitimate businesses to raise capital, it is also true that private placements may be fraudulent investment schemes. Even if a private placement is legitimate, it is always improper for an investment adviser or broker to recommend that an individual investor invest a substantial percentage of his or her liquid net worth in such investments due to the risk of losing everything you invest.

The laws requiring registration of securities offerings are designed to protect investors, though that protection may be illusory. Generally, unregistered securities can only be sold to so-called “accredited investors.” For an individual to be considered an accredited investor, he or she must either have annual income of over $200,000 for the prior two years (or $300,000 jointly with a spouse), or have a total net worth of over $1 million above the value of the primary residence and any loans secured by it.

Now, it is still true that $1 million is a lot of money, but it is not nearly as much as it used to be back when these “accredited investor” rules were written. The “accredited investor” requirement is supposed to protect investors but, arguably, the income/net worth cut-off is too low. It is based on a false premise that anyone with $200,000 or $300,000 annual income or a net worth of $1 million is wealthy and, therefore, able to bear the loss of his or her entire investment, even if that investment is all or a substantial portion of that person’s net worth.

The bottom line is that private placements (even if they are not outright frauds) are almost always unsuitably risky and illiquid for individual investors. They should not be recommended to most individual investors by brokers or investment advisers, and would not be recommended were it not for the high sales commissions. If such an investment is presented to you, the best response is to “just say no.” If the opportunity was so great, venture capitalist investors would invest and the issuer would not need to be raising money from people like you and me. More appropriate, liquid, and less risky investment alternatives that do not pay the seller high fees or commissions are usually available.

If you are stuck in one of these investments, you may be able to get your money back by undoing the sale (a legal remedy called rescission). We would be glad to discuss your options with you, so feel free to give us a call.

J. P. Morgan Chase Avoids Criminal Prosecution for Hosting Madoff Fraud

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.”

J. P. Morgan will pay approximately $2.24 billion to settle criminal charges plus another $350 million in civil penalties. In return, the U. S. will defer prosecution of the bank for two years as long as the bank complies with certain provisions, including reforming its anti-money laundering policies and cooperating with ongoing investigations. No individual executives at J. P. Morgan Chase were charged with a crime.

In addition to the criminal case settlement, the trustee for the liquidation of Bernard L. Madoff Investment Securities, LLC (“BLMIS”) appointed by the Securities Investor Protection Act (SIPA), Irving H. Picard, announced recovery agreements with J. P. Morgan totaling approximately $543 million for the benefit of BLMIS customers, for which bankruptcy court approval is being sought. The SIPA trustee has recovered approximately $9.783 billion for the BLMIS Customer Fund, or about 56% of the $17.5 billion that was lost in the Madoff ponzi scheme, according to a press release from the office of Mr. Picard.

While $1.7 billion is reported to be the largest bank forfeiture in history, investor advocates have been critical of the criminal case settlement. In particular, they criticize the failure to charge individual bank executives, who may have turned a blind eye to Madoff’s fraud, with a crime. They also criticize the leniency of the settlement terms as amounting to an ineffective deterrent.

Professional Athlete Wealth Management Group Allegedly Involved in Discount Firm’s Fraudulent Sales Case

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.

In the complaint, FINRA alleged that players were typically introduced to Success Trade by representatives of Jade Management, including prominent Jade adviser Jinesh “Hodge” Brahmbhatt. In turn, Success Trade is alleged to have made at least $1.25 million in payments to Jade Management since March 2009. Furthermore, Success Trade funded Jade Management’s business from approximately March 2009 through March 2010.

Brahmbhatt is currently registered in the financial advisors program established by the NFL Player’s Association. Brahmbhatt spoke to Yahoo! Sports Wednesday night and said he still does not know whether Success Trade was operating a Ponzi scheme with investor money.

According to multiple sources that spoke to Yahoo! Sports, several professional athletes have either been contacted or been urged to contact investigators from the U.S. Department of Justice, the FBI and the SEC.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

FINRA Bars Florida Broker for Unsuitable Recommendations to 31 NFL Players

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.

Furthermore, Rubin received a 4% ownership stake and $500,000 from the Casino project promoter for the above referrals.

“This case demonstrates how broker misconduct can target high-income, inexperienced and vulnerable investors,” said Brad Bennett, FINRA’s enforcement chief.

The FINRA action did not name any of the NFL clients who lost money, but news reports identified some of them as: Fred Taylor, Jevon Kearse, Terrell Owens, Plaxico Burress, Clinton Portis, Roscoe Parrish, Gerard Warren, Kyle Orton, Greg Olsen, Santonio Holmes and Santana Moss.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

Former Life-Settlement Executives Sentenced to 10-Years in Prison for Ponzi Scheme

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.

Following the probe in 2009, the company was placed in receivership, and investors received about two-thirds of their investments back.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

SEC Stops Investment Scheme Aimed at Foreign Investors

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.

The SEC stopped this scheme in its application stage at the U.S. Citizenship and Immigration Services. The SEC filed its complaint early, under seal, and obtained an emergency court order to protect the remaining $145 million in investors’ assets that were still at risk of being misappropriated. The case was unsealed on February 8, 2013.

Stephen L. Cohen, Associate Director in the SEC Division of Enforcement, stated “Sethi orchestrated an elaborate scheme and exploited these investors’ dream of earning legal U.S. residence along with a positive return on their investment in a project that was not nearly the done deal that he portrayed… the good news is that working closely with USCIS, we intervened early and stopped him from getting very far, and the asset freeze preserves nearly all of the money invested.”

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation