This past Thursday, the same day I posted about a recent FINRA Investor Alert regarding cryptocurrency, there was a new press release from the North American Securities Administrators Association (NASAA) with further guidance on the same topic. NASAA’s analysis and warning amounts to this:  Initial Coin Offerings (“ICOs”), and all other investment products related to cryptocurrency or the blockchain, pose a threat to investors.

“A NASAA survey of state and provincial securities regulators shows 94 percent believe there is a ‘high risk of fraud’ involving cryptocurrencies. Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.”

The same day, the SEC made a public statement from Chairman Jay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar, in wholehearted agreement with NASAA:  “The NASAA release also reminds investors that when they are offered and sold securities they are entitled to the benefits of state and federal securities laws, and that sellers and other market participants must follow these laws. Unfortunately, it is clear that many promoters of ICOs and others participating in the cryptocurrency – related investment markets are not following these laws. The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.”

“High risk of fraud”?  That’s a polite understatement. The conditions in this cryptocurrency market are the perfect conditions for bad actors to harm investors and cause investment losses. How? Fraud through market manipulation. Fraud through technical manipulation. Fraud through plain theft. Adverse terms and conditions on a clickthrough agreement. Technical failure, incompetence, malfeasance on the part of the provider. Cyberthreats from third parties online, vandals or burglars. Misrepresentations of the real possibility that cryptocurrency is an object of temporary interest, the bubble will pop, and prices will drop.

And, of course, bad actor conduct includes flawed recommendations by financial advisors to jump in and buy these new, complicated products related to cryptocurrency.  If your portfolio contains investments that, on closer examination, are not plausible or not understandable, that’s one of the ten red flags of financial fraud.

As a securities attorney, I represent investors nationwide who have lost money due to the conduct of a financial professional or a defective investment product.

The Investor Defenders at Pasieczny Law LLC help investors get their money back from brokerage fraud, fraudulent investments, elder financial abuse, and other situations.  Our specialized investment litigation practice combines familiarity with complex financial modeling, experience with specialized FINRA arbitration rules and securities laws, and empathy for our clients whose financial losses have become personal.

If you have concerns about how your money is being handled by your financial professional, or if your broker has stopped returning your calls, contact me for a free, confidential consultation at (503) 358-8292.

FINRA recently released an Investor Alert on cryptocurrency scams. Investors should be wary of jumping into this “hot,” volatile sector, and do their research before handing over their money to a potential fraudster, or for a risky investment that they don’t understand.

In the last quarter, cryptocurrencies such as Bitcoin and Ripple have received a fresh burst of press attention. This includes reporting on massive price swings up and down, and stories of overnight millionaires. According to the media, a Welsh man who spilled lemonade on his laptop in 2013 and absentmindedly threw the hard drive away now wants to mine the local dump for the hard drive. Why? It contained the key to access his lost Bitcoin fortune said to be worth $100 million — but only if he finds it and if the drive is still operational.  It’s a good metaphor for Wild West, gold rush atmosphere of the whole cryptocurrency hype.

With this Investor Alert, and other recent warnings, FINRA points out that:

• Investment offerings based on distributed ledger or “blockchain” technologies may or may not qualify as securities. Many fundamental investor protections written into federal and state law depend on this distinction.
• The cryptocurrency markets inherently transcend national borders. This also limits investor protections. There may be restrictions on how much information the SEC can obtain about the investment, the quality of the information, and limit law enforcement ability to recover money.
• An “initial coin offering” (ICO) for a cryptocurrency is nothing like an “initial public offering” (IPO) for a stock.
• Lack of regulation, lack of clarity about the underlying value of the investment, and the excitement in the market create the perfect conditions for market manipulation and “pump-and-dump” schemes. Fraudsters may use the hype and make false, misleading or greatly exaggerated statements to drive up a higher share value, and then cash out their large holdings at the peak, driving values down and leaving innocent investors at a loss.
• Even if there’s no trace of fraud in an ICO, blockchain operators may themselves be vulnerable to hacking and other cyber threats

According to a December 11, 2017, public statement from SEC Chairman Jay Clayton, the number of such investments registered with the SEC is ZERO. “Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.”

As a securities attorney, I represent investors nationwide who have lost money due to the conduct of a financial professional or a defective investment product.

The Investor Defenders at Pasieczny Law LLC help investors get their money back from brokerage fraud, fraudulent investments, elder financial abuse, and other situations.  Our specialized investment litigation practice combines familiarity with complex financial modeling, experience with specialized FINRA arbitration rules and securities laws, and empathy for our clients whose financial losses have become personal.

If you have concerns about how your money is being handled by your financial professional, or if your broker has stopped returning your calls, contact me. Consultations are free and confidential. Call (503) 358-8292 now.

Ninety-one-year-old Joe Forrest of Sarasota lost $246K to former broker Paul Arnold of Raymond James & Associates. Only the accidental intervention of a caring acquaintance led to an investigation and, ultimately, a FINRA judgment that stripped Arnold of his credentials, awarded Forrest $739K in restitution and damages, and led to an ongoing criminal case. The estimated size of the “industry” that financially exploits seniors is $2.9B in 2010, up about 10% from the previous year, and an estimated 86% of these victims do not report the crimes out of shame, confusion, or isolation.

(Barbara Peters Smith, Sarasota Florida Herald-Tribune, at www.heraldtribune.com)

Autonomy, acquired by HP in October 2011, is a maker of high-margin data-mining software designed to find and organize the useful data buried in corporate networks. HP has accused the former Autonomy board of mis-attributing the revenues of more prosaic lines of business to the software, to bolster its apparent profitability. Sources indicate that the San Francisco office of the FBI is involved in the probe, and that shareholder suits are also developing.

(Bloomberg at www.bloomberg.com)

Between 2006 and 2010 the five banks (Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch and Morgan Stanley) underwrote municipal and state bond offerings in California, made payments to the lobbying group California Public Service Association (Cal PSA) for their legislative influence in Sacramento, and characterized those payments as “underwriting expenses” for which taxpayers were ultimately responsible. Although an industry-wide practice at the time, this violates the fair-dealing and supervisory rules of the Municipal Securities Rulemaking Board, the muni bond market’s self-regulatory body. Roughly a quarter of these specific fines go back to the bond issuers.

(Bloomberg at www.bloomberg.com)

California consumers had sued the bank under the state’s Unfair Competition Laws, claiming that the bank’s practice of posting a day’s debit-card transactions in order from highest to lowest tended to maximize overdrafts, and thus maximize overdraft fees. In 2010 Judge Alsup of the U.S. District Court for Northern California agreed with the plaintiffs in a 90-page decision that took Wells Fargo to task both for the unfair posting order and for fraudulent misrepresentations to customers that claimed transactions were posted as they were received. Today the Ninth Circuit held that posting order is the bank’s decision, as part of its ability under the federal National Banking Act to set fees. However, the finding of fraud stands, and the case has been remanded back to the same Judge Alsup to determine an appropriate amount for restitution, and that amount may well come to $203M.

(Wall Street Journal at www.wsj.com)

During his presentation at the annual Sohn Conference, Ackman cited a 2002 FTC decision (“the organization is deemed a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers”), claimed the company meets that definition, and called for FTC involvement. The entire presentation, all 343 slides, is available here.

In May 2012 Herbalife and other network marketing shares fell sharply after similar questions about the company’s opaque revenue classifications were aired on an investor conference call. The head of Herbalife, Michael O. Johnson, is among the country’s highest-paid executives, at $89M in compensation last year. Ackman, who is the founder and CEO of Pershing Square Capital, holds short positions on Herbalife totaling about $1B.

(Bloomberg Businessweek at www.businessweek.com)

The EBSA will re-introduce the proposal, this time bolstered with economic analyses, in 2013. The specific change will update and expand the 40-year-old definition of “fiduciary” within ERISA, and is likely to apply fiduciary standards to nearly everybody who provides investment advice to plan sponsors or plan participants, and will also cover IRA rollover accounts. The industry clearly expects additional expense, constraint, and complication. Of the 2500 independent financial advisors polled by the Financial Services Institute in November, 91% were opposed to the new rules.

(AdvisorOne at www.advisorone.com)

Former affiliates Trudy Gilmond and Kellie King have engaged Ira Sorkin, a notable former federal prosecutor in Manhattan and former SEC regional administrator, in their defense. Sorkin is perhaps best known for representing Bernard Madoff.

Their motion to intervene, filed Friday December 14 by Sorkin’s team, challenges the SEC’s jurisdiction along with all subsequent actions of the receiver because there were no securities involved to begin with. “What the SEC purports are investment contracts are nothing more than contractual rights entitling independent contractors to a share of a company’s profits in return for their efforts in promoting the company” according to the motion. “Because there is no security to justify the SEC’s jurisdiction in bringing this action, the individual appointed at the SEC’s request must be relieved of his duties, and the clawback suits must not go forward.”

Zeek Rewards collapsed earlier this year, a massive online Ponzi scheme involving about $660M and a million participants in 100 countries. Gilmond and King are two of the approximately 1200 “winners” being targeted by the receiver’s Ponzi clawback action. Gilmond and King’s profits taken together come to about $1,573,000, according to court filings.

(Davidson County, North Carolina Dispatch at www.the-dispatch.com)

At one point high-flying Aletheia had $10B in assets under management and counted the state pensions of Louisiana and Oklahoma among its clients, but declared bankruptcy in November amid chronic legal and financial trouble. The new charges of “cherry-picking” allege that Eichler habitually executed speculative options trades before allocating them to any account. The losing trades, profitable 32% of the time, then went to two hedge funds under his management. The winning trades went to his own account and to favored clients. Win rate? 98%.

(New York Times at http://dealbook.nytimes.com)

“Funding portals” as authorized under the JOBS Act signed in April remain illegal until regulation is complete. The most optimistic projection for having rules in place is summer of 2013. In the meantime, a lot of noise. Various blossoming entities like CFIRA (CrowdFund Intermediary Regulatory Advocates) complain about the delay and press for an accelerated timeline. A small army of start-ups claim to have found legal crowdfunding business models using debt funding, donations, or state-level regulatory workarounds. And the state regulators in NASAA (North American Securities Administrators Association) are preparing for an explosion of fraudulent offerings and a long line of burned investors next summer.

(St. Louis Business Journal at http://www.bizjournals.com/stlouis/)

W. Mark Miller, 59, faces a possible 20 year sentence. Miller’s indictment is the latest legal reckoning in the 2009 collapse of the Dallas oil and gas investment fraud (and partial Ponzi scheme) which cheated 7,700 investors out of $485M. Provident co-founder Joseph Blimline, who had operated a separate $28M Ponzi scheme in Michigan before coming to Texas in early 2006, was sentenced this May to 20 years in federal prison, and ordered to pay $407,552,918.95 to victims in restitution. Provident also caused heavy casualties among the 52 broker-dealer firms that made private placements of its investment paper. At least 40% of them are no longer in business.

(FBI at www.fbi.gov/dallas/press-releases)

Charges were filed against LPL Financial LLC, the largest organization of independent financial advisors in the U.S., on the sales of nontraded REITs offered by Inland American Real Estate Trust, the largest nontraded REIT in the industry. The regulator’s investigation found that LPL brokers failed to observe 10% concentration limits meant to protect investors, downplayed liquidity issues, and other issues comprising, in their words, “a boat with many holes”. Non-traded REITs were the subject of a FINRA Investor Alert earlier this year which pointed out their complexity, high fees, adverse tax consequences, and illiquidity.

(Investment News at www.investmentnews.com)

The suit accuses the Voyager Financial Group of Little Rock, Arkansas of accepting $600,000 from Goldschmidt in return for an income stream derived from Voyager’s business of buying out and restructuring military pensions. Similar schemes have offered an attractive return of 10% to 12%. Less attractive: such assignment of military pensions is clearly against federal law and against IRS code, the practice appears to be poorly regulated at best, and at least two websites affiliated with Voyager are still up and running.

(Jeff Mapes of The Oregonian at www.oregonlive.com)

Republican Wes Cooley, now 80 years old, served one term beginning in 1994. He withdrew from the 1996 race amid allegations he’d lied about his military service in Korea and concealed his marriage. In 2009 Cooley was accused of selling the unregistered stock of Bidbay.com and lying about its pending acquisition by Ebay, bilking investors of about $10M. He was also accused of concealing more than $1M of income from the IRS on his 2002 tax return.

(Bloomberg at www.bloomberg.com)

Speaking at a conference on securities litigation organized by the New York Bar, Kaplan pointed to causes ranging from legal precedent (the restrictive “fraud-on-the-market” reasoning of the 1988 Supreme Court decision in Basic Inc v. Levinson) to political influence (the relationship between plaintiffs’ lawyers and the pension funds commonly named as lead plaintiffs in class actions). But the overall result, according to the judge, citing a study by research firm NERA Economic Consulting, is that the average ratio of settlements to investor losses has declined from 7 percent in 1996 to an all-time low of 1 percent in 2011.

Robert Banks of our office states “I am not surprised by these statistics. Although each case has to be reviewed on its merits, we have consistently advised clients that they are far better off bringing their own claims in securities cases than in participating in class actions. Class actions rarely result in a decent recovery to the investors. Most of those cases are settled for pennies on the dollar, and oftentimes the only people who win are the lawyers. Unlike the typical class action, in our cases the clients come first. They are directly involved in the case, including any settlement discussions, and we have historically obtained recoveries greatly exceeding the class action results reported in this article.”

(Reuters at newsandinsight.thomsonreuters.com)

Although considered successful by the court-appointed receiver and the bankruptcy trustee, it’s half of one percent of the $190M shortfall still owed to 25,000 investors of Wasendorf’s Peregrine Financial Group, which sought bankruptcy protection in July. The “Madoff of the Midwest” is currently awaiting sentencing on charges of mail fraud, embezzlement of about $200M over 20 years, and lying to the regulatory Commodity Futures Trading Commission. Because Wasendorf stole customer funds from legitimate commodity investments, any clawback action by the trustee targeting former investors is less likely. He could receive 50 years.

(Des Moines Register at http://blogs.desmoinesregister.com)

One suit against NASDAQ contends that investors lost money due to the exchange’s computer malfunctions on offering day, preventing them from liquidating their positions on the stock’s immediate and dramatic correction. The other suit, a probable class-action suit brought by 31 large institutional investors, accuses Facebook of misrepresenting its true financial condition. With an IPO price set by underwriter Morgan Stanley at $38, the stock notoriously lost half its value within three months, and now trades south of $30 per share.

(Reuters at www.reuters.com)

In 2009 the National Institute of Justice found that almost 12 percent of Americans 60 and older had been financially exploited; for 2010 MetLife estimated the total size of elder financial fraud losses at $2.9 billion in the U.S.

A UCLA study published online in the Proceedings of National Academy of Sciences suggests that older people, when shown photographs of untrustworthy people, show less fMRI activity in the anterior insula area of their brains than younger people. A similar University of Iowa study, published in the August issue of Frontiers in Neuroscience, finds that deterioration of the ventromedial prefrontal cortex, whether due to age or localized brain damage, may explain the same kind of decreased judgment and vulnerability to fraud.

(The Atlantic at www.theatlantic.com)

It was closed by the SEC in August. In only eighteen months online entrepreneur (and former singing magician) Paul Burks received $600M from over a million people involved in his penny auction pyramid. In the next few weeks receiver Kenneth Bell will be pursuing Ponzi clawback claims against the roughly 1000 former affiliates who benefitted the most, hoping to extract their gains. Now a few of those former affiliates have filed a motion in U.S. District Court in Western North Carolina asking for an appointed examiner to defend their rights. They contend that receiver Bell is destroying what they still regard as a legitimate business.

(Winston-Salem Journal at www.journalnow.com)