In 2003 the Business World Philippines published an article of mine entitled “An investor’s guide based on the California experience (Investment scams)”, which is likewise archived in the Asia Africa Intelligence Wire (http://www.accessmylibrary.com).
I am posting the material again in this blog, for legal research purposes, considering that lately the issue of Ponzi schemes have cropped up again in the Philippine media.
Pyramiding, ponzi schemes and other forms of investment scams are not a unique problem of the Philippines. It is a worldwide phenomenon. Human greed induces the anomaly and the Internet facilitates its aggravation. I would like to share the California experience on the matter. (See: http://www.corp.ca.gov/pub/cyber.htm)
The common violation of securities laws in most countries are: * Offer and sale of unqualified securities * Unlicensed broker-dealer and investment adviser activity * Fraudulent offers and sales of securities * Market manipulation * Insider trading.
The Internet is the con artist's most attractive marketing tool almost everywhere in the world, for the following reasons: * It is a global borderless trading environment. * It offers instant access to 60 million people. * Con artists can be anonymous through the use of fictitious names, multiple aliases, remailers, coffeeshops and libraries with Internet access. * State and local governments have limited resources and defined jurisdictional boundaries, while con artists can operate from anywhere with the most modern technologies.
There are more than 300 million internet websites throughout the world.
Let me share what California has been doing to counteract this irregularity.
In February, 1999, the California Department of Corporations's Internet Surveillance Unit surveyed 480 websites, of which 45, or 9%, involved investment offerings; and of those, 31, or 69%, were in California. The subject matters of the offerings included 15 entertainment deals, 6 franchise offerings, 5 foreign currency offerings, venture capital, gaming, commodities and immigration offerings.
The California Department of Corporations has sent its staff to state- of-the-art computer crimes training such as the National White Collar Crime Center Cybercop 101 training program and other offerings sponsored by the National Cybercrime Training Partnership (Cybercop 201, Electronic Crime Scene, Networks, and the Internet are in the curriculum development stage).
It is seeking to promote transparency and audit trails in electronic commerce to enhance regulatory oversight and protect the public from illegal activity. It has opened a dialogue with Internet Service Providers to obtain their assistance in obtaining investigative information from victims, disseminating public service announcements and involving bulletin board operators and service providers in addressing issues of privacy, confidentiality and due diligence. The goal is to promote responsible self- regulation and legal uses of the Internet while discouraging illegal activity.
The demographics of Internet users will change as more people gain access to the Internet via their television sets and cable hookups. These new users will be less sophisticated and more vulnerable to fraudulent schemes.
Internet commerce will be the cutting edge issue for regulators and law enforcement in the next decade. It creates many new and unique problems of jurisdiction, evidence gathering, and the ability to bring enforcement actions that are effective and meaningful.
To be effective will require focus and discipline and a clear understanding of who the department is trying to protect and from what. The Department of Corporations believes that it has the tools and the skills in place to play a leading role in dealing with both legal and illegal investment activities on the Internet.
Financial safety tips for investors. See: http://www.corp.ca.gov/pub/tipsafety.htm): * Beware of unsolicited telephone calls from strangers offering get-rich- quick schemes. They promise fast profits and usually do not deliver. If an investment sounds too good to be true, it probably is. Ask yourself why such a great deal is being offered to complete strangers. * Shy away from high pressure tactics designed to part you from your money before you have a chance to think about or investigate the investment. * Avoid investments where the seller has little or no written information about the company or written information about past performance. Before investing ask for a company prospectus, but remember, even a prospectus is not evidence of legitimacy. Read all materials carefully, ask questions and check with experts. * Be wary of investments sold on the basis of rumors or tips. Investments based on "inside information" are illegal and are designed to trick you into thinking you have the inside track. * Have a professional (licensed stock broker, licensed investment adviser, accountant, lawyer or financial adviser) review the investment for you. Remember this is not a guarantee of success but their experience and expertise may help you navigate the complex financial marketplace. * A critical step in wise investing for any individual investor is taking the time to check the backgrounds of potential brokers and advisers prior to entering into financial relationships with them. * Do not purchase any investment that is offered over the Internet, through newspaper advertisements, on the radio or on television unless you check with the appropriate regulatory agency or with a licensed broker-dealer to determine if the company is licensed. * When in doubt about a potential investment, wait. Remember, even with legitimate investments there is always the risk of losing money. If you do not understand the investment, stay away from it. Trust your instincts. A lack of understanding on your part may be caused by the fact that the investment really doesn't make any sense.
Investigate Before You Invest: Ten Do's and Don'ts for Investors. The following tips are offered as "guidelines" for prospective investors, based on the California experience. The bottom line with any investment is research, research, research! You can never have too much information.
1. Be cautious when strangers make contacts by "cold" phone calls, unannounced visits to your home or contacts from mailing lists. Phone calls from strangers offering get-rich-quick schemes can be a sign that a "boiler room" scam is on the line. Operators rent offices with impressive addresses and hire unlicensed salespeople to work banks of phones calling individuals from lists they buy. They promise fast profits and usually do not deliver.
2. Question outrageously fantastic promises of extraordinary returns of 25%, 50% or even 100% on your money in short time periods. Too-good-to- be-true offers usually are just that.
3. Shy away from high pressure sales techniques requiring hurried money commitments because "tomorrow will be too late." Some fraudulent schemes have used messengers to pick up investors' checks almost as soon as they were off the phone - this is usually the last contact the victims had with the companies.
4. Avoid investments where the seller has little or no written information about the company or written information about past performance. But remember, even printed materials, no matter how slickly presented, can be bogus - read all materials carefully, ask questions and check with experts.
5. Be wary of investments sold on the basis of rumors, tips or supposedly "inside information."
6. Ask the seller to give you written information about the investment, including the prospectus or offering circular and financial statement. Read them or get help reading them before you sign a purchase order to pay for investment. Such information is required for many types of investments, including stock offerings, limited partnerships, franchise offerings and mutual funds.
7. Get competent help. Consult with your registered stock broker, banker, lawyer, accountant or real estate agent. Check out the company with the Securities and Exchange Commission or the Department of Trade and Industry or a knowledgeable friend or family member.
8. Contact government agencies to find out if a company or individual is properly licensed to do business or has any history of violating the law. Failure to properly register or a history of trouble with authorities should be a red flag to any prospective investor.
9. Deal with established businesses whose reputations are known in the community.
10. When in doubt, wait. If something seems fishy, if your questions are not satisfactorily answered, don't commit your money. Remember, even with legitimate investments there is always the risk of losing money; there is no point in stacking the odds against you by putting your hard-earned savings in an investment that may not be on the up and up.
Top Ten Investment Scams. The top 10 investment scams for investors to avoid, based on the California experience, are the following:
1. Promissory notes - The states are working together and coordinating with the Securities Exchange Commission (SEC) on a nationwide project relating to the illegal and fraudulent sale of promissory notes and unlicensed broker-dealer activity by the sales agents marketing them. Many of the notes are being marketed as 9-month promissory notes in an attempt to rely on narrow exemptions from federal and state securities laws, but these exemptions do not apply. Investors should beware of cross-marketing of investment and financial products by insurance, banking and securities firms; and by insurance agents and financial planners who are often selling products they don't understand.
2. Internet fraud - California was one of the first states to introduce an Internet Surveillance Program. Now, at least, half the states have programs to identify illegal and fraudulent investment offerings, market manipulation, insider trading and unlicensed broker-dealer, as well as agent and investment adviser activity on the Internet.
3. Telemarketing fraud - New boiler rooms, or high pressure telephone sales operations, are opening all the time selling illegal and fraudulent investment products and many of them are making as much as $1 million a month. Sales representatives will say anything to convince the investor to part with his or her money because they don't have any intention of delivering on their promises. California received one of five grants from the US Department of Justice to attack telemarketing fraud, establishing a major telemarketing project in Southern California. The program is a partnership between local, state and federal law enforcement and regulatory agencies working together to prevent and prosecute telemarketing fraud and to create innovative enforcement techniques that will serve as a model for the nation.
4. Investment seminars and financial planner activity - The states now have greater responsibilities for the regulation of investment adviser activity and are concerned about the proliferation of investment seminars and financial planners offering investment advice that may require a license. State regulators are also concerned there may be a lack of disclosure of conflicts of interest and hidden fees and commissions. The proliferation of "tout sheets" and other financial advice on the Internet has created new legal questions about what constitutes investment advice that requires a license, what is opinion and what is a bona fide publication. Many Internet advice forums claim not to receive fees or commissions for their recommendations but may be engaging in trading patterns that constitute market manipulation.
5. Affinity group fraud - The states continue to bring enforcement actions involving breach of trust and fraud on religious, ethnic and professional groups by members of these groups or persons claiming to provide assistance to these groups. Advertising in the media that serves specific ethnic groups is used to identify potential victims, often with offers of employment, training or financial advice.
6. Abusive sales practices by licensed broker-dealers and agents - In the regulated industry, sales of securities to unsuitable investors, failure to disclose critical information, fraudulent offerings of securities and market manipulation are of great concern to the state regulators. Online trading has become a major issue in terms of trade execution, capacity, disclosure, margin and suitability. State regulators have brought actions against a number of day trading firms for unlicensed investment adviser activity, unlicensed broker-dealer activity, and fraud in connection with guaranteed results and promises of success.
7. Viatical investment scams - Viatical investments are still one of the hottest investment products in the marketplace, and also one of the riskiest. Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients, including AIDS and cancer patients. The insured receives a discounted percentage of the death benefits in cash to allegedly improve the quality of their lives in the final days. Investors get their share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker. Because of the uncertainties involved in predicting when a person is going to die, even a person with a disease considered terminal, these investments must be considered extremely speculative and are only appropriate for persons willing to risk losing all their investment. On the investment side, these investments are being heavily marketed as humanitarian and profitable investment opportunities to elderly investors and investors with IRA accounts for whom they are entirely unsuitable.
8. High tech products and services - The states have participated in a number of multi-state and state-federal task force actions against illegal offerings of high tech investments. Such illegal offerings target unsophisticated investors with promises of high profits with no risk by getting in on the ground floor by investing in the latest high tech products and services such as 900 number investments, Internet service providers and high tech virtual reality shopping malls.
9. Entertainment - Many scams offer opportunities for investments in movie deals and other entertainment products with promises of guaranteed profits and pitches that emphasize the potential profitability of many popular entertainment vehicles without disclosing the risk.
10. Ponzi/pyramid schemes/bunco - Ponzi and pyramid schemes continue to be popular. Ponzi schemes are swindles in which tremendous rates of return are paid to initial investors out of funds from later investors, who end up losing all of their money when the house of cards falls down. A pyramid scheme involves the collection of money from individuals at the bottom (new investors) to pay the initial investors at the top, with all the emphasis on bringing in new members/investors and not on selling the product or service. There have been many schemes offering investments in alleged "prime bank interests" of world banking entities.
Top Ten Tips for Online Investors. When one invests online he must be sure to take the following precautionary steps (see: http://www.corp.ca.gov/pub/tips10online.htm):
1. Receive full disclosure, prior to opening your account, about the alternatives for buying and selling securities and how to obtain account information if you cannot access the firm's website.
2. Understand that most likely you are not linked directly to the market, and that the click of your computer mouse does not instantly execute the trade.
3. Receive information from the firm to substantiate any advertised claims concerning the ease and speed of online trading.
4. Receive information from the firm about significant website outages, delays and other interruptions to securities trading and account access.
5. Obtain information before trading about entering and canceling orders (market, limit and stop loss), and the details and risks of margin accounts (borrowing to buy stocks).
6. Determine whether you are receiving delayed or real-time stock quotes and when your account information was last updated.
7. Review the firm's privacy and website security policies and whether your name may be used for mailing lists or other promotional activities by the firm or any other party.
8. Receive clear information about sales commissions and fees and conditions that apply to any advertised discount on commissions. Know how to contact a customer service representative with your concerns and request prompt attention and fair consideration.
By:
Atty. Manuel J. Laserna Jr.
lcmlaw@gmail.com
