Investor Fraud - Overview

This will give an overview of investor fraud from my perspective, while specific types of fraud and unethical practices will be covered in future newsletters. Almost all people involved with securities and investors are honest. Unfortunately, a small fraction of dishonest people also exist and they are typically very good at it.

The first question is this a serious issue? Let’s look at the more notable cases of fraud during the time period of November 2008 to today.
• Nov 11, 2008: J. V. Huffman, Jr. of Claremont, North Carolina, and Biltmore Financial, $25 Million
• December 1, 2008: Tom Petters, Minneapolis, MN, $3.65 billion.
December 10, 2008: Bernard Madoff, of New York, New York, $65 billion,
• January 9, 2009: Joseph S. Forte of Bromall, PA, $50 million .
• January 26, 2009: Nick Cosmo, Hicksville, NY, the founder of Agape World, $380 million.
• February 17, 2009: Allen Stanford of the Stanford International Bank, $8 billion.
• February 25, 2009: James Nicholson, millions of dollars"
• March 13, 2009: Joanne Schneider, $60 million.
• March 13, 2009: Brian Jared Smart of Lehi, Utah, $2 million.
• June 17, 2009: Donald Anthony Walker Young, of Acorn II L.P.,
• June 2, 2009: Jason Trevor Brooks of Boulder, about $10 million.
• June 22, 2009: New York hedge-fund manager Edward T. Stein, $30 million.
• December 1, 2009: Scott W. Rothstein CEO of Rothstein Rosenfeldt Adler law firm, $1.4 billion.
• March 21, 2010: Kenneth Starr head of New York-based Starr and Co. and Starr Investment Advisors LLC, scammed clients include Wesley Snipes, Martin Scorsese, Caroline Kennedy, Annie Leibovitz and Sylvester Stallone, $30 Million.
• January 7, 2011: Stanley Kowalewski of Greensboro, NC, CEO of SJK Investment Management LLC, $16.5 Million. This is in the January 9, 2011 Charlotte Observer newspaper, page 2 Sports Section.

Based upon this information, I think the answer is yes. Especially, since it has become mainstream news such that it is reported in a newspaper sports section.

Registration and Audit
Every person and every company that deals with investments has to be registered with FINRA. Agencies that handle investor fraud exist at both the state and federal level. Both Christian Stewardship Retirement LLC and I have the appropriate registrations.
• Federal Level: Securities and Exchange Commission, SEC, handles the largest investment companies, the Department of Labor handles savings plans like 401(k) or 403(b).
• State Level: Secretary of State Securities Division handles smaller investment companies. An investment advisor who is registered on the state level must be registered in each state where they have at least 5 clients.

Misconceptions about Fraud:
1. All I need to do is to trust my advisor. All investors who have been a victim of fraud initially trusted the person who committed the fraud.
2. It will never happen to me. Nobody thinks that they will ever become a victim of fraud.
3. The victim should have been smart enough to have avoided it. It would be good if this was true, just ask a person who has been a victim.
4. I will not be a victim of fraud if I use a large company. Fraud occurs because of an individual within a company regardless of the size of the company, even if it is the head of the company like Bernie Madoff.

Possible Signs of Fraud:
1. Guarantee of a higher than normal return
2. High pressure to use a particular advisor within an organization
3. Missing money or shares of securities from an account
4. Account does not respond as anticipated to market fluctuations
5. A continual turn-over in your account
6. A change in the type of portfolio such as from conservative to aggressive

How to avoid being a victim of fraud:
• Know your investments and how they should respond.
• Always be able to validate the value of the individual security in the newspaper or internet.
• Have access to your account via the internet 24 hours a day.
• If possible have the account statement issued by an independent company. I use Fidelity for this reason.
• Check your account on a regular basis, at least once a week
• Verify that the security behaves as expected.
• Keep track of the securities and the number of shares
• Check the registration of the company and the advisor, contact FINRA – trust and verify

Who do you contact if you believe that you or someone you know is a victim of fraud or if you have a question concerning fraud? The first place to start is to discuss the issue with the Compliance Officer at the investment company or savings plan. The next stop would be the Secretary of State Securities Division, SEC, or the Department of Labor and ask for an investigation.