Classic Frauds Revisited

1
Classic Frauds Revisited

• Jeffrey D. Spill
• Deputy Director for Enforcement
• New Hampshire Department of State
• John Curry
• Special Agent In Charge
• North Carolina Secretary of State

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Purpose

• Identify the building blocks of classic fraud
• Examine six categories of schemes that have been
  used on investors with great success over the
  years
• Equip you to recognize and appropriately handle
  each type in the field

3
Building Blocks

• There has to be a security
• Check for an investment contract
• Does it satisfy the Howey test?
• Not all notes are securities, Reves v. Ernst
  Young

4
The Oldies but Goodies

• Ponzi, Multi-level marketing and Pyramids
• FOREX/Foreign Currency Exchange
• Real Estate Investments
• Pump Dump
• Promissory/Prime Bank Notes
• Oil Gas Wells, Pay Phones and ATMs

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Ponzi, Multi-level Marketing, and
Pyramids

• Ponzi Usually involves horizontal investing and
  a pooling of money to the promoter
• Multi-level marketing of a product of some type
• Pyramids Usually involves multi-level
  distribution and vertical investing

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Ponzi, Multi-level Marketing and
Pyramids- How it Works

• Investment Contract SEC v. Koscot, SEC v.
  GlennTurner, Trivectra
• Common Enterprise
• Horizontal Commonality, Salcer v. ML
• Strict Vertical Commonality, Brodt
• Liberal Vertical Commonality, Villeneuve v.
  Business Concepts, Koscot

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Ponzi, Multi-level Marketing and
Pyramids- How it Works

• Solely Through the Effort of Others
• Promoter activities
• Investor activities
• Koscot and Trivectra

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Multi-level Marketing, Ponzi and Pyramids

• Violation of Anti-fraud Restrictions of Section
  101 of the Uniform Act
• Mathematical impossibility

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Forex / Foreign Currency Exchange Fraud

• Latin for Give Me Your Money

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Forex

• "With a 10,000 deposit, you can make 1,000 a
  month!
• Risk options
• I can take the risk away.
• "You take only as much risk as you see
  fit."
• "Whether the stock market moves up or down, in
  the currency market you will always make a
  profit."

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Forex Fraud

• Forex fraud is any fraud that entices investors
  by a promise of high returns using Foreign
  Exchange investments
• Forex con artists may or may not actually invest
  in Foreign Exchange

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Forex

• Sounds sophisticated
• Highly specialized
• Mystique attracts unsophisticated investors
• Not widely understood

13
Forex Fraud

• Foreign currency contracts may be legitimately
  traded either on a recognized futures exchange or
  in the "interbank market," which generally
  involves trading between large institutions such
  as banks and corporations

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Forex Fraud

• Fraudulent currency trading firms often tell
  customers that their trading is done in the
  "interbank market" on their behalf
• Many currency traders ask customers to give them
  "margin," often sums in the range of 1,000 to
  5,000, leveraging the investment

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Forex Fraud

• Margin trading can make investors responsible for
  dollar losses that greatly exceed the margin
  amount they deposited
• The victims of these frauds are actually being
  sold a position in a currency forwards market
  which is both completely unregulated and provides
  no guarantee that the promoter has secured the
  forward position in the traded currency

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Forex Fraud

• Up to 50 commission on each deal
• Deceptive, misleading and high-pressured sales
  solicitations 
• Failure to supervise employees and agents in the
  conduct of their commodity futures activities
• Churning accounts

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Forex Fraud

• Representatives unregistered
• Misrepresent the likelihood of loss
• Misrepresent the risk
• Huge losses by investors

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Real Estate Investments

• (Swamp) Land in Florida !

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Real Estate Investments-
How it Works

• Investments sold in real estate portfolios or
  funds for property development
• Often properties are overseas or otherwise
  difficult for investors to verify
• Real estate holdings are non-existent or
  grossly overstated
• High returns promised. Initially may be realized
  Ponzi-style as large numbers of investors are
  recruited

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Real Estate Investments-
Investigation I

• Examine claims made in sales material
• What assets are actually held?
• What investments were actually made?
• Court house record checks
• Who owns the property now?

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Real Estate Investments-
Investigation II

• What real efforts were made to develop the
  property as advertised?
• Permits applied for, inspections done?

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Pump Dump

• What goes up, must

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Pump Dump- How it Works I

• Usually Involves Microcap Stocks
• Requires Market Manipulation
• Dissemination of false information
• Use of the Internet
• Use of e-mail and telephone

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Pump Dump- How it Works II

• Motivators for investment
• Medical Breakthroughs
• Phony Consumer Demand
• On-line Businesses
• Phony RE Projects
• Phony Mergers and Acquisitions

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Pump Dump- How it Works
III

• Involves Multiple Players
• Dealmakers
• Boiler Rooms Sales
• Promoters
• Traders
• Find The Source

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Promissory Note Fraud

• Promising Delivering High
• Interest, Commissions and
• Losses !

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How It Works I

• Often a fictitious business promotion
• The con artist hires a marketing firm to develop
  a flashy sales program
• The con artist hold seminars to entice insurance
  agents to join a network of sellers
• Interest rates are very attractive

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How It Works II

• Investments are marketed as safe with guaranteed
  yields
• Initial investors begin receiving high monthly
  interest payments
• More investors are recruited based on early
  results
• Everyone is happy, briefly

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How It Works III

• At the end of the initial investment period,
  investors happily rollover
• Agents are happily receiving big commissions
• Eventually new investors dry up
• Money runs out and the company offering the notes
  disappears

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Investigation I

• Is the seller registered to sell securities?
• Follow the money trail get bank records
• Where do the proceeds of the notes go?
• Who is paying the interest?
• Is there really a legitimate business?

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Investigation II

• Where are they located?
• Are they licensed?

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Oil Gas, Pay Phones and ATMs

• No, not like at your convenience store

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Oil Gas Wells- How it works

• Company sells shares of specific wells to be
  drilled
• If successful, the investor will get a share of
  the sale of oil and natural gas from that well
  for the life of well
• Affinity fraud- increasing U.S. oil production
  and decreasing foreign dependence is appealing to
  many investors

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Oil Gas- Investigation I

• When it fails- Is it Fraud or just bad luck?
• Contact state regulatory agency
• No permit sought willful intent
• If company is drilling or has other wells
  already operating, was investors money misused
  in completing/operating these?
• State agency employees often know facts and hear
  rumors (leads) from the field

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Oil Gas- Investigation II

• Check advertising for outrageous claims and
  promises, Internet and blogs also.
• Examine bank records for inappropriate
  expenditures and outright theft.

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Pay Phones ATMs- How it
Works I

• Investment Contracts are sold, often for more
  hardware than is ever purchased
• Lease payments buy backs offered
• Guarantees make third party management the only
  option
• Not a viable business
• Poorly/superficially managed
• Not profitable

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Pay Phones ATMs- How it
Works II

• False Promises made
• Agreements in place to put ATMs in all Las
  Vegas casinos
• 18 return each month
• Cant lose
• In Ponzi fashion, early investors paid with funds
  from subsequent investors

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Pay Phones and ATMs- Investigation

• Obtain records of hardware sales from
  manufacturers
• Obtain installation, activation and phone company
  billing records
• Obtain bank and business records
• Interview employees
• Locate inventory assets

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General Investigative Issues-I

• Gather all paper and read it carefully
• Check registrations
• Interview victims thoroughly
• Talk to the seller/promoter

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General Investigative Issues-II

• Internet searches may disclose action taken in
  other jurisdictions
• Use NWCCC data searches surgically
• Cast your nets broadly when seeking information
  sources, witnesses and physical and financial
  evidence

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General Investigative Issues III

• Follow the money where did it come from and
  where did it really go?
• Good relationships help detail oriented
  Investigators!

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Take Action

• Cease and Desist Order/TRO
• Other Administrative or Civil Actions
• Seizure of Assets/ Appointment of
• Receiver
• Criminal Prosecution

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Classic Frauds Revisited

• Thank you for attending-
• Classic Frauds Revisited !