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Donald W. Searles Senior Trial Counsel Los Angeles Regional Office American Association of Individual Investors November 20, 2010. A Primer on Securities Fraud. SEC Disclaimer.
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Donald W. Searles Senior Trial Counsel Los Angeles Regional Office American Association of Individual Investors November 20, 2010 A Primer on Securities Fraud
SEC Disclaimer • The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation do not necessarily reflect the views of the SEC, its Commissioners, or other members of the SEC’s staff.
Did you know? • 48% of America’s workforce • is not covered in a pension plan • Source: GAO Report – October 28, 2009 • GAO-10-153T 401K Plans
Did you know? • 58% of Americans have not calculated their retirement needs • Source: FINRA Investor Education Foundation • National Financial Capability Study • December 7, 2009
Did you know? • 70% of Investors have not checked if their investment professional is registered • Source: FINRA 2007 survey (http://www.saveandinvest.org/web/groups/sai/ • @sai/documents/sai_original_content/P036702.pdf)
Did you know? • 4 out of 10 cash out their retirement plans when changing jobs (leakage) • Source: GAO Report – October 28, 2009 • GAO-10-153T 401K Plans
Did you know? • Information is the investor’s best tool
Did you know? • You are responsible for accumulating and managing your own wealth
The SEC Stair Steps to Securities • Set a Goal • Understand the Products – Asset Classes • Ask Questions • Research, Research, Research • Avoid Fraud
Set a goal • Your Financial Goal • Short Term, Medium Term, Long Term • Understand Your Risk Tolerance
Understand the Products – Asset Classes • Certificates of Deposit • Money Market Funds • Treasuries (Bills, Notes, Bonds, TIPS) • Bonds • Mutual Funds • Exchange Traded Funds (ETFs) • Stocks • Diversification
Understanding Fee Structure • Per Transaction Beware inactivity fees • Assets Under Management As your wealth increases, their revenue increases • Mutual Fund Fees
Ask Questions • 10 Questions to Ask… • Is this product registered with the SEC or my state regulator? • Why is this investment suitable for me? • How will this investment make money? (Dividends? Interest? Capital gains?) • What are the total fees? • How liquid is this investment?
Ask Questions • 10 Questions to Ask… • What are the risks with this investment? • How much can I lose? • Is the company making money? • Am I diversified? • Where can I get more information about this investment?
Research, Research, Research • Check out brokers and investment advisers • Understand the fee structure • Know the companies you buy – use EDGAR • Review Mutual Fund Prospectuses (485 filings) • Use trusted websites • www.SEC.gov • www.investor.gov • www.mymoney.gov
Research, Research, Research • Check out Brokers and Investment Advisers Call State Regulators, visit www.nasaa.org Call FINRA at 1-(800) 289-9999 or visit FINRA’s Broker Check atwww.finra.org Guidance from the SECwww.sec.gov/investor/brokers.htm SEC Investment Adviser Public Disclosure page:www.adviserinfo.sec.gov 16
EDGAR – SEC’s free database • Company filings you’ll find in EDGAR • Reports: • Form S-1: Registration Statement • Form 10-K: Annual Report • Form 10-Q: Quarterly Report • Form 8-K: Current Report • Forms 3, 4 & 5: Insider Holdings & Sales • Schedule 14A: Proxy Statement www.SEC.gov - “Filings and Forms”
Avoid Fraud • Fraud Types • Newsletters • On-line Fraud • “Free” Lunch • Pump & Dump • Pyramid/Ponzi Schemes • Affinity Fraud • Red Flag Sales Techniques
Newsletters • Tips for checking out newsletters • Don’t believe everything you read • Is newsletter paid to “tout” or recommend the stock • Independently investigate • Be wary of small, thinly-traded companies • Check with the SEC or your state securities regulator has the newsletter ever been in trouble
On-line Fraud • Websites/phishing • Easy to create • Often steal the look and feel (including name and logo) of a legitimate company or Government agency • Watch out for “SEC Approval” • Purports to offer a good or service that appeals to investors (e.g., “secret" systems)
On-line Fraud • The Internet • Always think twice before investing money in any opportunity you learn about through the Internet • Beef Up Your Security • Be Careful What You Download • Use Your Own Computer & Log-Out Completely • Don’t Respond to Requests for Personal Information • Be Smart About Your Password • Use Extra Caution with Wireless Connections • Read Your Statements • Monitor Your Credit Report
“Free” Lunch • There is no “Free Lunch” • Always evaluate the investment thoroughly • Be skeptical of titles or designations, such as “Senior Financial Counselor” • Get everything in writing, take it home and read it carefully before agreeing to invest
Pump and Dump Promoter urges you to “buy now or lose out” Price rises sharply Fraudsters sell at peak Price drops when the hype stops Investors lose money Pyramid/Ponzi Try to make $$ by recruiting new investors Promise of sky-high, risk-free returns Incoming $$ from new investors pays off earlier investors Scheme gets too big Promoter can’t find new investors Pyramid collapses Investors lose money Schemes
Pyramid schemes requirements • Levels Number of Participants 1 6 2 36 3 216 4 1,296 5 7,776 6 46,656 7 279,936 8 1,679,616 9 10,077,696 10 60,466,176 11 362,797,056 - more than the U.S. Population 12 2,176,782,336 13 13,060,694,016 - more than double the World Population
Affinity Fraud • Target members of a group • Race, Religion, Social Clubs, • Age, Union, Profession • Con-artist infiltrates through trusted member • Often underreported
Red Flag Sales Techniques • Top 10 Dubious Sales Techniques 10. Try to be your friend 9. Guarantee high profits or no risk 8. Try to force an immediate decision 7. Little or no written material 6. Promises quick profits 5. Claims to have “insider” information 4. Claims to have Government endorsement
Red Flag Sales Techniques • Top 10 Dubious Sales Techniques 3. Uses words like: • “Guarantee” • “High Return” • “Limited Offer” • “As Safe as a CD” 2. Unclear how investment makes money 1. Doesn’t take no for an answer
When dealing with salespeople • Don’t be afraid to: • Hang up the phone • Decline to meet with the salesperson • Refuse to make an immediate decision • Do: • Monitor your investments READ EVERY STATEMENT • Request information in writing • Report fraud and abusive sales tactics
When dealing with salespeople • Do: • Ask questions – be informed • Recognize psychological and manipulative tactics • Be skeptical of any unsolicited offer • Discuss the investment with a third party whom you trust before you make a decision • Contact the SEC immediately if you believe a fraud is being committed
What’s new at the SEC • New at the SEC: • www.Investor.gov • Proxy voting
SEC contact information • Website: WWW.SEC.GOV • Toll free number: 1-(800) 732-0330 • Mail: U.S. Securities and Exchange Commission • 100 F Street NE • Washington, DC 20549 • Los Angeles Regional Office: (323) 965- 3998 • 5670 Wilshire Blvd., 11th Floor • Los Angeles, CA 90036 • Ask for the “DUTY OFFICER”
You can search EDGAR in Many different ways from the EDGAR page 33
