Avoiding Investment Pitfalls

1. Avoiding Investment Pitfalls Texas State Securities Board Denise Voigt Crawford Securities Commissioner

2. Introduction • Investing requires serious planning and diligent investigation prior to investing • Seniors are particularly at risk for investment fraud • It is important to know what questions to ask and to whom to ask them prior to investing

3. Topics of Discussion • Checking out the investment professional • Investigating the investment product • Current trends • Warning signs to be on the lookout for • Asking the tough questions • We will use scenarios to illustrate several securities solicitations

4. Scenarios • The scenarios used in this presentation are for educational purposes. Fictional names have been used for individuals, entities, and programs. Any similarity between the scenarios and any real individual, entity, or program is purely coincidental.

5. Checking out the investment professional • Background checks: • The State Securities Board is the bestsource for records. Call us for information at 806-762-8010 or by e-mail at records@ssb.state.tx.us

6. Checking out the investment professional • Alternatively, you may go directly to national databases online: Central Registration Depository (CRD) www.nasd.com Investment Advisers Public Disclosure (IAPD) www.adviserinfo.sec.gov

7. Checking out the investment professional • Remember, just because someone is professionally licensed in one field does not mean they are registered to offer and sell securities • Insurance Salesmen • Estate Planners • Other professionals

8. Checking out the investment professional • Questions to ask include: • Is the representative registered? • For how long? • Any regulatory or criminal actions against them? • Any customer complaints?

9. Finding out about investment products • Securities should be registered unless being offered pursuant to an exemption • Public offerings/private offerings • Contact the SSB Registration Division • If not registered, ask those offering the program why they are not registered

10. Current Trends • Be cautious about “secret” offerings and products you have never heard of • Headlines breed the latest in fraudulent schemes: • Oil and Gas • Real Estate • Bird Flu

11. Current Trends • Tactics employed • Preying on insecurity • Reverse mortgages • IRA accounts • Living trusts

12. Scenario # 1 • Telephone Call • “Johnny” • Oil well drilling project • Tax benefits

13. Scenario # 1 continued • “You know how high the price of gas is nowadays” • Working Interests in the SSB #1A well in Kleberg County, Texas • $50,000 a unit • Unit= 2% WI

14. Scenario # 1 continued • Expecting to yield 500 barrels of oil a day • When the price of oil doubles, so will your profit • Using high tech drilling techniques other oil companies don’t use

15. Scenario # 1 continued • After they’ve finished talking and it’s finally your turn to talk, what questions should you ask?

16. Warning signs • High returns/low risk • Unregistered product/unregistered agent • Won’t provide audited financial statements • Does not explain how the program is supposed to generate returns for the investor (expects that the high returns will be enough to lure the investor)

17. Warning signs • Past violations with regulatory agencies • Pressure tactics in sales pitch • Documents vary from verbal representation • Program relies heavily on the abilities of the principals without disclosing much about the principal’s abilities

18. Warning signs • Evades questions asked by investors • Won’t leave advertising materials or copy of contract with the investor • Insists decisions be made quickly

19. Scenario # 2 • Insurance agent who sold you long term care insurance has something else to offer • It will provide monthly income at 15.8% and is low risk • Are you interested?

20. Scenario # 2 continued • The program works like this: • You buy equipment, consisting of a computer game terminal to be placed in shopping malls, from GameEquipment.com • You lease the equipment back to a company called WeeLease.com

21. Scenario # 3 continued • WeeLease manages the equipment, collects the payments for the price of using the equipment and sends you a monthly check equivalent to 15.8% annual returns

22. Scenario # 3 continued • This is not a security • It’s been registered as a business opportunity with the State of Texas • It’s not a security because you have the option to run the business yourself (although no one ever does) • A special fund has been created to “guarantee” return of principal

23. Scenario # 2 continued • When he comes to your home with the contract for the “opportunity,” what questions will you ask?

24. Ask the tough questions • Many people are afraid to ask tough questions out of fear of being rude • Investors have the right to know details about the program they are investing in

25. Ask the tough questions • What is the name of the company? • How long has it been in business? • Are audited financial statements available? • What is the operating history of the company?

26. Ask the tough questions • Who are the principals of the company? • Have any of the principals: • Ever filed for bankruptcy? • Been party to a law suit? • Been indicted/convicted on criminal charges? • Been the subject of a regulatory action?

27. Ask the tough questions • Is the person offering the program an officer or director of the company? • Are they registered to offer and sell securities in Texas?

28. Ask the tough questions • What is the rate of return? • Can I liquidate my investment should the need arise? • What will my funds be used for? • How will this generate returns for me? • What risks are associated with the investment?

29. Scenario # 3 • Local Business Man • In business 22 years • Active in the community and has a good reputation

30. Scenario #3 continued • Offers limited partnership interest in a real estate venture • Provides 13% annual returns • May receive monthly, quarterly, or annual payments

31. Scenario # 3 continued • The returns will be generated by building luxury homes in a local community and selling them at a low price so more people can afford them • Investor funds are used to purchase materials

32. Scenario # 3 continued • The minimum to invest is $25,000 • Investors receive the first payment within 30 days of wiring their funds to the head of the company • Business Man can provide references

33. Scenario # 3 continued • When he telephones you to check your interest in the program, what questions will you ask?

34. Answers to Investor Awareness Quiz 1. A retired teacher in West Texas is unlikely to be the victim of investment fraud. A: FALSE 2. An investment that is marketed as paying high returns with little or no risk is a good place to put one’s money. A: FALSE

35. Answers to Investor Awareness Quiz 3. A person who calls him- or herself a “senior advisor” or “estate planning professional” is licensed and qualified to sell securities to senior citizens. A: FALSE 4. Investments made through a self-directed IRA custodian are unlikely to be fraudulent. A: FALSE

36. Answers to Investor Awareness Quiz 5. Victims of investment fraud will get their money back from the government, if not from the perpetrator. A: FALSE 6. No one has as much incentive to look after your financial well-being as you do. A: TRUE

37. Q & A

38. Contact the SSB If you suspect that you or someone you know may be the victim of an investment scam, please contact the State Securities Board

39. Contact the SSB • www.ssb.state.tx.us • 512-305-8300 (Main) • 512-305-8332 (Registration) • 512-305-8392 (Enforcement) • 888-663-0009 (Toll Free)

40. Texas State Securities Board • Austin 512-305-8300 • Corpus Christi 361-887-1085 • Dallas 214-630-8681 • Houston 713-426-0336 • Lubbock 806-762-8010 • San Antonio 210-886-0153 “Investigate Before You Invest”