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!

8 to 10% Is A Reasonable Expected Rate of Return

Reminder:  These Financial Myths Headings are Myths.

No.  8-10% is not a reasonable rate of return, even though national investment "superstars" still claim that it is.
Here in Oregon, that point has been driven home . . . again, unfortunately, by Aequitas Management.  The article that follows is long but instructive.  (Thank you Advanced Regulatory Compliance, Inc.!)
But here are the warning signs:

1. They put almost all of their eggs in one basket: notes on Corinthian College loans.  Investors need to understand where their money is going!
2. They issued their own statements.  Never rely on statements issued by your broker/agent/adviser.  Always insist on third party generated statements.
3. They were high-flying.  Take note of what your adviser himself invests in.  Fancy offices & furnishings?  Expensive cars? Jets?  Expensive client events?  You should wonder how those "investments" improve your financial situation.

So, enjoy the article.  I hope you learn something from it!

The Securities and Exchange Commission yesterday charged an Oregon-based investment group and three top executives with hiding the rapidly deteriorating financial condition of its enterprise while raising more than $350 million from investors.  Aequitas Management LLC and four affiliates allegedly defrauded more than 1,500 investors nationwide into believing they were making health care, education, and transportation-related investments when their money was really being used in a last-ditch effort to save the firm.  Some money from new investors was allegedly used to pay earlier investors

The SEC’s complaint, filed yesterday in federal district court in Oregon, alleges that CEO Robert J. Jesenik and executive vice president Brian A. Oliver were well aware of Aequitas’s calamitous financial condition yet continued to solicit millions of dollars from investors to pay the firm’s ever-increasing expenses and attempt to stave off the impending collapse.  Former CFO and chief operating officer N. Scott Gillis allegedly concealed the firm’s insolvency from investors and was aware that Jesenik and Oliver continued soliciting investors so that Aequitas could pay operating expenses and repay earlier investors with money from new investors.

“We allege that Aequitas had severe and persistent cash flow shortages and top executives knew they weren’t using money raised from investors like they said they would.  But they refused to disclose the true financial condition, continued to draw lucrative salaries, and roped even more unknowing investors into a losing venture,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. 

According to the SEC’s complaint:

• From January 2014 to January 2016, Aequitas raised money from investors by issuing promissory notes with high rates of return typically ranging from 8.5 to 10 percent.
• While Aequitas did use some investor money to acquire trade receivables in health care, education, transportation, and other consumer credit sectors, the vast majority was concentrated in student loan receivables of for-profit education provider Corinthian Colleges.  Corinthian defaulted on its recourse obligations to Aequitas in mid-2014, which significantly exacerbated the firm’s already severe cash flow problems.
• The executives continued to draw their lucrative salaries, use a private jet, and attend posh dinner and golf outings, all at the expense of investors.  They used the outings to raise more money from investors.  Jesenik, Oliver, and Gillis took home at least $2.5 million in combined salaries during this period.
• By November 2015, Aequitas could no longer meet scheduled redemptions.  Last month, the firm dismissed two-thirds of its employees and hired a chief restructuring officer.   

The SEC’s complaint charges violations of the federal securities laws by Aequitas Management, Aequitas Holdings LLC, Aequitas Commercial Finance LLC, Aequitas Capital Management Inc., and Aequitas Investment Management LLC as well as Jesenik, Oliver, and Gillis.  The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and monetary penalties from all defendants as well as bars prohibiting Jesenik, Oliver, and Gillis from serving as officers or directors of any public company.

Aequitas and the affiliated entities have agreed to be preliminarily enjoined from raising any additional funds by offering and selling securities, and agreed to the appointment of a receiver to marshal and preserve remaining Aequitas assets for distribution to defrauded investors.  The stipulated orders are subject to court approval.

The SEC’s continuing investigation is being conducted in the San Francisco office by Brent Smyth, Crystal Boodoo, and Tracy Combs and supervised by Steven Buchholz.  An examination of Aequitas’s registered investment advisory affiliate, and examinations of other registered investment advisers that recommended Aequitas investments to their clients, contributed to the investigation and were conducted by Thomas Dutton, Bradley Cline, Edward Haddad, Matthew O’Toole, Caroline Smith, Bernice You, Marc Valle, and Alice Schulman.  The SEC’s litigation will be led by Sheila O’Callaghan and Wade Rhyne.

Advanced Regulatory Compliance, Inc. (“ARC”) is a national full-service investment advisory compliance consulting firm backed by its association with The Law Offices of Patrick J. Burns, Jr., P.C., a securities law practice. ARC provides practical solutions to complex compliance issues. Our key services include investment adviser registrations, mock audits, annual reviews, due diligence, development of best practices and ongoing compliance support.  If you have any questions or concerns about this newsletter, please contact our firm at (310) 275-7300.

Your Constructive Comments are Welcome!

THE DEVIL IS IN THE DETAILS

This blog heading is colloquially true, especially when it comes to Investment Adviser contracts.  A recent review of compliance violations found- first of all- that 22% of advisers didn't have contracts with their clients.  A contract isn't required unless a fee of some kind is collected from or owed by a client.  So if you are paying a fee of any kind- flat, hourly, percent of assets, performance based -a contract is required.

So what devilish details should you watch for in an advisory contractual relationship?  Here's a short list:

• First and foremost:  The absence of a contract altogether!  Do you really want to work with and pay someone without formalizing rights and expectations on paper?
• Any provision that compensates the adviser based on "a share of capital gains upon, or capital appreciation of, the funds- or any portion of the funds -of the client. (Sec. 205(a)(1) of the Investment Advisers Act).  I see these so-called performance fees in contracts all the time.
• Mandatory arbitration clauses.  These have become so common that the average person doesn't blink an eye signing them.  By doing so, you're giving up- in most cases -the right to sue individually or to be party to a class action against the adviser.  My contract only has a voluntary mediation clause; we agree to sit down and talk about a dispute before consigning our souls to the lawyers.  Never had to use it.
• Be aware of with whom it is you're actually contracting.  Is it the adviser himself or some obscure LLC or other obfuscatory entity that your adviser can hide behind?  My clients contract with me, and only me, directly.

Your Constructive Comments are Welcome!

Seven Steps for Making Identity Protection Routine

Ok, this is NOT a myth.  These steps come verbatum from the ever-helpful IRS.

RS Security Awareness Tax Tip Number 3, December 7, 2015                                Español

The theft of your identity, especially personal information such as your name, Social Security number, address and children’s names, can be traumatic and frustrating. In this online era, it’s important to always be on guard.

The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.

Here are seven steps you can make part of your routine to protect your tax and financial information:

1. Read your credit card and banking statements carefully and often – watch for even the smallest charge that appears suspicious. (Neither your credit card nor bank – or the IRS – will send you emails asking for sensitive personal and financial information such as asking you to update your account.)  I would add that it pays to turn on notifications on your credit cards, especially for "credit card absent" charges.
2. Review and respond to all notices and correspondence from the Internal Revenue Service. Warning signs of tax-related identity theft can include IRS notices about tax returns you did not file, income you did not receive or employers you’ve never heard of or where you’ve never worked.
3. Review each of your three credit reports at least once a year. Visit annualcreditreport.com to get your free reports.
4. Review your annual Social Security income statement for excessive income reported. You can sign up for an electronic account at www.SSA.gov.  It's also important to check for zero earnings years when you did in fact receive wages.  That means your employer failed to report, and pay, payroll taxes.
5. Read your health insurance statements; look for claims you never filed or care you never received.  And you might also contest charges that you feel are excessive.
6. Shred any documents with personal and financial information. Never toss documents with your personally identifiable information, especially your social security number, in the trash.  Check my Event Schedule at www.garyduell.com for our annual Document Shredding and Identity Protection event.  The next one is this coming May.
7. If you receive any routine federal deposit such as Social Security Administrator or Department of Veterans Affairs benefits, you probably receive those deposits electronically. You can use the same direct deposit process for your federal and state tax refund. IRS direct deposit is safe and secure and places your tax refund directly into the financial account of your choice.  Even though a physical check may feel more secure, it isn't!

To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. You also can read Publication 4524, Security Awareness for Taxpayers.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

• IRS Commissioner Koskinen's Statement on the Security Summit Group Public Awareness Campaign 
• Taxpayer Guide to Identity Theft
• Publication 5027, Identity Theft Information for Taxpayers
• www.irs.gov/identitytheft -- Identity Protection: Prevention, Detection and Victim Assistance
• IR-2015-129, IRS, States and Tax Industry Announce New Steps to Help Public to Protect Personal Tax Data  
• Fact Sheet 2015-23, IRS, States and Industry Partners Provide Update on Collaborative Fight Against Tax-Related Identity Theft    
• IRS and Partner Statements on the October 2015 Security Summit Meeting

IRS YouTube Videos:

• Taxes. Security. Together. – English
• IRS Efforts On Identity Theft – English| Spanish| ASL
• IRS Identity Theft FAQ: First Steps for Victims – English | Spanish | ASL
• IRS Identity Theft FAQ: Going After The Bad Guys – English | Spanish | ASL

IRS Podcasts:

• IRS Efforts on Identity Theft – English | Spanish
• IRS Identity Theft FAQ: First Steps for Victims – English | Spanish\
• IRS Identity Theft FAQ: Going After The Bad Guys – English | Spanish

Subscribe to IRS Tax Tips

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RELAX, IRS has eliminated Fraud

Wish this was true, but it's yet another Financial Myth.  You can read the whole article here, or, my abridged version below.
http://www.irs.gov/uac/Newsroom/IRS-Warns-Taxpayers-to-Guard-Against-New-Tricks-by-Scam-Artists

It's good to know the 5 things IRS will not do:

• Angrily demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
• Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
• Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• Require you to use a specific payment method for your taxes, such as a prepaid debit card.
• Ask for credit or debit card numbers over the phone.

If someone attempts to fool you in this manner, immediately turn them in at http://apps.irs.gov/app/scripts/exit.jsp?dest=https://www.treasury.gov/tigta/contact_report_scam.shtml

Best Always,

Gary
Your Constructive Comments are Welcome!