Caveat Venditor

We're all too familiar with the doctrine of "caveat emptor", or buyer beware, which places all responsibility for a bad deal on the shoulders of the consumer.  Caveat venditor reverses that responsibility, placing all responsibility upon the seller.  With financial products and services, both are true, as the case below shows.  A quick check with http://brokercheck.finra.org/ would have saved these investors a lot of hassle and heartache.  They would have discovered that these thieves were not registered to advise about nor sell investments.  And the perpetrators, or sellers, should have been mindful of not only enforcement actions but also their clients' best interests.

SEC Obtains Asset Freeze in Case of Investor Funds Stolen for Shopping Sprees

FOR IMMEDIATE RELEASE

2016-153

Washington D.C., July 28, 2016 —

The Securities and Exchange Commission today announced an asset freeze it has obtained against three men who aren’t registered to sell investments and allegedly went on lavish shopping sprees with more than $5 million raised from investors to purportedly develop a resort.

In an emergency action filed in federal court in Atlanta, the SEC alleges that Matthew E. White, Rodney A. Zehner, and Daniel J. Merandi fraudulently issued $1 billion in unsecured corporate bonds out of a shell company they own and claimed the money would be used to fund the resort project.  But they never came close to raising the funds necessary to start the project, and meantime they pocketed the $5.6 million they did raise and used it for personal purchases at Saks Fifth Avenue, Gucci, Louis Vuitton, Prada, and Versace.

“We allege that these men stole millions of dollars from investors for personal use and orchestrated sham transactions to prop up the price of the worthless, expired bonds at the center of the fraud,” said William P. Hicks, Associate Director of the SEC’s Atlanta Regional Office.

The SEC encourages investors to check the backgrounds of people selling them investments.  A quick search on the SEC’s investor.gov website would have shown that White, Zehner, and Merandi are not registered to sell investments.

The SEC's complaint filed yesterday alleges that White, Zehner, Merandi, and their companies violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5. The SEC seeks permanent injunctions, disgorgement, and penalties against all of the defendants.  The court order obtained late yesterday freezes defendants’ cash held in a brokerage account and freezes the bonds held in a separate brokerage account.   

Your Constructive Comments are Welcome!

Annuity Salespeople Are All Honest & Competent Because of Special Licensing

I don't think I have to remind you that this post heading is a MYTH.  What's astonishing with the case below is not so much the jaw-dropping audacity of the crook but the carelessness of his victims.  Here's the story, according to an article by Marlene Y. Satter in ThinkAdvisor.  (See my Dos & Don'ts afterward.)

  Nebaraska Regulator Suspends Omaha Advisor in Annuity Scam

The Nebraska Department of Banking and Finance issued an emergency order against Jerome Bonnett Jr., aka Joe Bonnett, and two of his companies, Bonnett Financial Services Inc., and BWM Advisors LLC of Omaha, revoking Bonnett’s registration as an investment advisor representative and suspending the registration of BWM Advisors LLC for multiple violations of the Securities Act of Nebraska.

In addition, the Nebraska Attorney General’s office, on behalf of NDBF, filed a civil action in Douglas County District Court against Bonnett and his companies alleging violations of the act and misappropriation of client funds. The lawsuit seeks injunctive relief, freezing of assets and the appointment of a receiver.

According to the emergency order, Bonnett had arranged for an annuity for one client, but when the client had attempted to receive payment for the annuity, it developed that there was no such policy and instead Bonnett made a payment to the client from funds he had received from another client [classic Ponzi scheme]

In addition, Bonnett borrowed money from other clients to satisfy his own tax obligations and received numerous checks from other clients for purported sales of various investment products, but had been depositing client checks only to have checks drawn in his own name for withdrawal of funds that were then deposited in his personal accounts and apparently diverted for personal use.

“Based upon the evidence reviewed to date, it appears that Bonnett has borrowed $550,000 from his clients since October 2015, and $500,000 of that debt remains outstanding,” the department said in a statement. “While Bonnett has made $187,602.74 in payments to clients, there remains over $1,350,000 that is unaccounted for.”

How could his victims have avoided  Bonnet's scam?  Here are my suggestions:

• DO a background check at both brokercheck.finra.org and your state's financial regulatory website (here is Oregon's).  Ask your adviser for details of any reported events that show up.
• DON'T ever make investment checks or transfer forms payable to your adviser.  Sure, fees for service are fine.  But not large sums which you are expecting to be reinvested.
• DON'T accept statements produced by your adviser nor mailed from your adviser's address.  Legitimate statements will be issued by verifiable 3rd parties, like Fidelity, Vanguard, American Equity for example.
• DO insist on a contract issued by the company to which you are sending your money.
• DON'T accept statements hand delivered to you by your adviser or his staff.  This could mean they are attempting to circumvent mail fraud statutes.
• DO be suspicious of "annuity" payments directly from your adviser.  These, too, should come from a verifiable 3rd party, i.e. the annuity company from which you received your contract.
• DO take advantage of all the tools available on the Internet.  If you have no computer, smart phone or Internet connection, go to the local library & they'll be happy to help you.
• And finally, to be fair, DO be wary of negative company reviews.  Are they statistically significant?  For example, a couple dozen lousy reviews about a company may be concerning.  Unless they have 500,000 contract holders.

Your Constructive Comments are Welcome!