Investment Fraud Prevention

1. Investment Fraud Prevention Presented by: Cornell Securities Law Clinic

2. Before You Invest… Know Yourself! Issues to consider when investing and fitting investments to your needs

3. Know Yourself • What kind of investor are you? • What is the stage of your career? • Retirement? • No supplemental income to grow savings • Living expenses come from savings • Mid-career? • Income from working can contribute to savings and expenses • Time to recover if lose money • KEY POINT – investors are different!!!

4. Types of Investments Stocks or Equities Bonds and Notes And many complicated variations…

5. Stocks/Equities • Ownership share of a company • Profit when the company profits; lose when the company loses • Sources of value: • “Dividends” • “Appreciation” • No guaranteed income, from either source • Significant chance of losing money, at least in the short term • Appropriate for you?

6. Bonds and Notes • Loans to the company • Company pays interest and loaned amount • Sources of value: • Interest payments • Principal payment • Guaranteed income (usually) • Lower chance of loss (usually) • Appropriate for you?

7. Understand Your Preferences and Needs Risk and Return Diversification Liquidity

8. Risk and Return • “Return” – how much investment will grow/shrink • “Risk” – how much returns will vary • FUNDAMENTAL PRINCIPLE – the more return you want, the more risk you must take • So… simply choosing more return is not always better! • Appropriate for you?

9. Diversification • Investing in MULTIPLE investments is better than fewer • Reduces wide swings upon different events • Invest 50/50 in both? Always get 5%! • Appropriate for you?

10. Liquidity • Accessing funds easily versus committing funds for extended periods • Penalties • Undermining long-term strategies • Appropriate for you?

11. REMEMBER!!! A higher return may not mean a “better” investment Determine your needs and desires Match your investments to your needs

12. Warning Signs of Investment Fraud If it sounds too good to be true… it probably is.

13. How to Avoid Becoming a Victim Focus on “red flag” language Risk-free: There is no such thing! Avoid hasty decisions Understand the product Deal only with those with proven track records

14. Focus on red flag language • “Double your money!” • “83% annual return on your investment!” Be skeptical of unusually high rates of return • What to do: Compare promised returns with available alternatives

15. Focus on red flag language • "This is a can't-miss opportunity!" • "This stock is guaranteed to take off.“ • Be wary of “guaranteed” returns. • All investments involve some risk.

16. Focus on red flag language "I just received an inside tip that this stock is going to take off." • Claims of inside information are almost always a tip off to a scam. • Trading on nonpublic information is a crime.

17. Focus on red flag language • Use of “professional” designations like “Senior Specialist" • Creates a false level of comfort by implying a certain level of training on issues important to the elderly • But training is sometimes nothing more than marketing and selling techniques targeting the elderly.

18. Risk-free: There is no such thing! • "There's no way you can lose money on this. There is no downside." • "As safe as a C.D." • All investments involve some risk. Keep in mind that potentially high profit investments are high risk.

19. Avoid hasty decisions Salespersons may use high-pressure sales tactics, including: • Demanding an immediate decision • Creating a false sense of urgency • Refusing to accept “no” for an answer. What to do: Talk it over with someone you trust and perform your own research.

20. Understand the product The more you know, the better informed your decision. Be cautious of salespeople who try to keep you in the dark by: • Refusing to provide information • Discouraging you from conferring with those you trust before buying • Obscuring the fraud by focusing on current events that make the investment sound more legitimate.

21. Understand the product What to do: • Ask for written information about the investment and the firm • Perform your own research • Do not rely on the salesperson’s claims without independent verification

22. Deal only with those with proven track records Be skeptical of cold calls and unsolicited mailings from people you don't know. Ask yourself: why would a total stranger tell me about a really great investment opportunity?

23. Deal only with those with proven track records What to do: • Make sure that the salesperson is registered to sell securities in NY. • Use BrokerCheck at www.finra.org

24. How to Avoid Becoming a Victim Focus on “red flag” language Risk-free: There is no such thing! Avoid hasty decisions Understand the product Deal only with those with proven track records

25. Scams Common Scams and How to Recognize Them

26. Scams • Today we will cover: • The Pump & Dump • Ponzi Schemes • Pyramid Schemes • Viaticals • What are they? • Main identifiers of each

27. Scams • Can happen to anyone • Busy people, those in or approaching retirement, and professionals are all targets • Can arise from a group affiliation • One scam arose from a church in FL

28. Scams can be difficult to spot • Hoaxes are becoming increasingly sophisticated • Scam Artists may appear reputable • Many have offices & take out advertisements • Seem perfectly reasonable and legitimate

29. Stock Scams: The Pump & Dump • Scam artists will tout some unknown company • Investors buy in and drive up the price (the PUMP) • On thinly traded stocks, the price goes up because the perpetrators are artificially driving up the demand

30. Stock Scams: The Pump & Dump • The perpetrators then sell off their own shares (the DUMP) • When they dump, they make the money • The price of the stock falls to nothing because the perpetrators are no longer driving up the demand with their aggressive sales tactics • The investor is left with worthless stock

31. Example: Texhoma Energy

32. Variations on Pump & Dump • Unsolicited phone call • “Hot Tips” sent through email • Text message stock tips • Mistaken message on answering machine

33. Basic Features • All the variations share the following: • You are the lucky one that gets the unsolicited email, fax, or phone call • A small unknown company’s stock that is poised to make HUGE gains • Act NOW!

34. Ponzi Schemes Mr. Ponzi himself 

35. What is a Ponzi Scheme? • A Ponzi scheme is a fraudulent investment operation • Promise to pay abnormally high returns to investors out of the money paid in by subsequent investors • Eventually, the perpetrators of the fraud run out of new investors, and the whole scheme collapses

36. Recognize a Ponzi Scheme • How will you know if you are in a Ponzi scheme? • You may have been approached by someone within your group - Affinity Fraud • Illiquidity, Stalling • Abnormally high returns

37. Recent Examples • Greater Ministries International in Tampa, FL • Bilked 18,000 people out of $500 Million • In 2000, Scientology Minister Reed Slatkin • Raised $600 Million from 500 investors • Mainly Hollywood celebrities

38. Pyramid Schemes • Involves the exchange of money primarily for enrolling other people into the scheme • Pyramid Schemes are illegal • Recent pyramid scheme in upstate NY: • “Women Empowering Women”

39. Pyramid Schemes • The key thing to note is that these schemes are unsustainable! • They are mathematically destined to fail

40. How to Spot a Pyramid Scheme • Key identifiers include: • Little or no information offered about the company unless an investor participates • Vaguely phrased promises of limitless income potential, vaguely described product, or no product • Income stream depends on the commissions earned by enrolling new members

41. Viaticals • Recently in the news in Upstate New York • A viatical settlement is the sale of a life insurance policy by the policy owner before the insured dies. • Viaticals arose during the AIDS epidemic

42. How does a Viatical work? • Seller gets an immediate cash settlement at less than face value • Policies are then resold to individual investors, generally with promises of large returns – i.e. greater than 25%

43. Problems with Viaticals • Many fraudulent practices • Reselling policies several times • Allowing policies to lapse • Middlemen walking away with the $$ • Large commissions paid to salespeople to push these products

44. Summary • Common Scams • Pump & Dump • Ponzi Schemes • Pyramid Schemes • Viaticals • Main Identifier = Very High Returns

45. Variable Annuities What They Are And How to Interpret the Sales Pitch

46. Variable Annuities • What is a variable annuity? • How do variable annuities work? • What is the problem with variable annuities? • Sales Pitch • Tax Deferral • Guaranteed Minimum Death Benefit • The Right to Annuitize

47. What Is a Variable Annuity? • Variable annuities are contracts with insurance companies through which the public can invest in portfolios of stocks and bonds on a tax deferred basis.

48. How Do Variable Annuities Work? • All variable annuities are a two phase investment product: • Accumulation Phase (Pay-In) • Annuity Date • Annuity Phase (Pay-Out)

49. Accumulation Phase (Pay-In) Investors pay premiums which are invested in portfolios of securities • Single large premium or a series of smaller payments

50. Annuity Phase (Pay-Out) • At retirement, the investor is entitled to a fixed stream of payments • The investor may also choose a single large payment, sometimes subject to surrender charges