Business Compliance Partners Reviews NASAA’s List of Emerging and Persistent Investor Threats

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The North American Securities Administrators Association (“NASAA”) published its annual list of financial products and practices that pose threats to investors.

The list and additional information can be found here.

“NASAA members are particularly concerned about two provisions of the recently passed [Jumpstart our Business Startups] (“JOBS”) Act that could unwittingly open a floodgate of fraud. These include provisions to expand crowdfunding to allow businesses to raise money from investors and to allow the general solicitation and advertising of private placement offers,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities.

NASAA’s Enforcement Section compiled the following information:

New Threats

  •     Crowdfunding and Internet Offers
  •     Inappropriate Advice or Practices Involving Investment Advisers
  •     Scam Artists Using Self-Directed IRAs to Mask Fraud
  •     EB-5 Investment-for-Visa Schemes

Persistent Threats

  •     Gold and Precious Metals
  •     Risky Oil and Gas Drilling Programs
  •     Promissory Notes
  •     Real Estate Investment Schemes
  •     Reg. D/Rule 506 Private Offerings
  •     Unlicensed Salesmen Giving Liquidation Recommendations

Specifics include the following:

Crowdfunding and Internet Offers – States and Canadian provinces have been reporting a recent increase in enforcement actions involving internet fraud. Securities registration rules will be relaxed to allow crowdfunding which will likely increase the number of market participants presenting fraudsters with more opportunities to commit their crimes.

Inappropriate Advice or Practices Involving Investment Advisers – The Dodd-Frank Act shifted primary regulatory responsibility for thousands of mid-sized investment advisers from the SEC to the state level.

According to NASAA, in 2011 the first full year of implementation, the state enforcement actions against investment advisory firms nearly doubled from the previous year; advice to clients and general business practices were prominent findings. As more of the new state regulated investment advisers are examined NASAA expects the trend to continue.

Scam Artists Using Self-Directed IRAs to Mask Fraud – Self-directed IRA custodians rarely evaluate the quality or legitimacy of investments. State securities regulators have investigated numerous cases and found that scam artist have been exploiting this fact to hide their schemes behind legitimate fronts.

Self-directed IRAs allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals, and private placement securities, according to NASAA.

NASAA believes that tax deferral characteristics and early withdrawal penalties lead investors to be more passive enabling fraud to continue longer than with other investment vehicles.

EB-5 Investment-for-Visa Schemes – The Immigrant Investor Program, also known as EB-5 is a 20-year-old program that grants a U.S. visa to foreign nationals who invest a minimum of $500,000 into a new commercial enterprise.

Fraudsters have been using a two pronged attack that typically involves soliciting and getting funding from investors in China or other foreign countries and then using their participation and investment to attract U.S. investors. For example, a developer of a failed artificial sweetener factory planned for a small Missouri town sought Chinese investors through the EB-5 program, and made that a key component in pitching and then selling the underlying government bonds issued for the project. The developer defaulted on the first bond payment, causing the city and investors to lose millions of dollars.

Gold and Precious Metals – Typical scams involve promoters that offer to sell investors gold coins, bullion, bars or other forms that the promoter will hold for safekeeping when in fact, the gold does not really exist. During recessions and turbulent economic times the prevalence of this type of scam usually increases, according to NASAA.

Risky Oil and Gas Drilling Programs – Investments in oil and gas drilling programs are pitched as alternatives to the stock market that offer big returns. Oil and gas fraud ranked as the fourth most common product or practice leading to investigations and enforcement actions. There are active investigations into suspect oil and gas investment programs in over two dozen states and in every region of the U.S. and Canada.

Promissory Notes – Promissory notes are private loan agreements. Sales of promissory notes are often a favored investment vehicle for Ponzi schemes. According to NASAA, 20 states recently identified promissory notes as one of the top five most common products or features in fraudulent schemes.

Real Estate Investment Schemes – Distressed real estate investment offerings have increased, including those that are related to buying, renovating, flipping or pooling distressed properties. According to NASAA, in a recent survey of the states, real estate fraud was ranked as the third most common product or practice leading to investigations and enforcement actions.

Regulation D Rule 506 Private Offerings – In the most recent survey of state securities regulators, fraudulent private placement offerings were ranked as the most common product or scheme leading to investigations and enforcement actions, according to NASAA.

Unlicensed Salesmen Giving Liquidation Recommendations – Liquidation of securities by insurance-licensed firms or agents who are not registered to sell securities is a significant source of complaints and inquiries for the states.

In addition, senior investors are often enticed to shift their investments from traditional securities to annuities sold with the promise of guaranteed income and a mechanism for easy transfer of the value of the annuity to beneficiaries upon death.

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