I hope you had a wonderful weekend, it is a very busy time of year. Please read the Thought of the Day at the end. The first paragraph is from Vanguard giving the weekly overview. The topic is about Chinese companies who are publicly traded on U.S. Stock Exchanges using a process called a reverse takeover or reverse merger. Please forward this to people who are traders of stocks.
Vanguard
On the heels of a dismal unemployment report last week, economic indicators showed slight improvement amid recent signs that the uneven recovery is beginning to slow. The U.S. trade deficit unexpectedly narrowed, consumer credit rose more than anticipated, and the Federal Reserve's Beige Book release reported overall economic growth. For the week ended June 10, the S&P 500 Index fell 2.2% to 1,270.98 (for a year-to-date total return—including price change plus dividends—of about 1.9%). The yield of the 10-year U.S. Treasury note was unchanged for the week at 2.99% (for a year-to-date decrease of 31 basis points).
Fraud Warning - Chinese Companies and Reverse Takeovers
The Securities and Exchange Commission, SEC, has issued a statement concerning Chinese Companies that are publicly traded. The primary method being used is called a reverse takeover or reverse merger. First I will explain a reverse takeover followed by more specific information.
In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks. If the shell is an SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company. However, a comprehensive disclosure document containing audited financial statements and significant legal disclosures is required by the Securities Exchange Commission for reporting issuers. The disclosure is filed on Form 8-K and is filed immediately upon completion of the reverse merger transaction.
The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company.
The Wall Street Journal has been providing information on this issue. From January 1, 2007 through May 31, 2011 a total of 1036 stocks were listed on the U.S. Stock Exchanges. Of this group, 603 were through the reverse takeover method and 433 were through the IPO method. Of this group, 159 Chinese companies were listed through a reverse takeover and 56 were listed through the IPO method. This means that Chinese companies are using the easy method 3 times more often.
So why is the fraud occurring in the U.S.? For starters if the fraud was done in China the culprits would probably be executed. Also, a lack of due dilegence occurs during the reverse takeover method. The companies do not have to sound Chinese such as Longtop Financial Technologies, Focus Media, or Air Media.
The bottom line is that an approved method for a company to get listed is the reverse takeover or reverse merger method. You need to research a stock before you buy it and if it was listed using this method, you should be concerned. If it is a Chinese company that used this method, you should avoid it. My opinion is to avoid purchasing the stock of any Chinese company in any U.S. stock exchange. Avoid the hype/media buzz about China and avoid investing in something where the intrinsic value of a company is in question.
Thought for the Day
Today is the oldest you have ever been, yet the youngest you will ever be – so, enjoy this day while it lasts.
Showing posts with label Investor Fraud. Show all posts
Showing posts with label Investor Fraud. Show all posts
Sunday, June 12, 2011
Sunday, January 23, 2011
Investor Fraud - Improper Transactions
This is the last segment on investor fraud that covers improper transactions. In particular, it covers the situation where an investor looks at a statement and wonders when and why did my advisor make these trades.
First, let me tell you a true story about a farmer in North Dakota about 1990. This person invested money with a well knows investment firm with an advisor that he trusted. The money was designated to be invested at a conservative risk level. The advisor made some trades that lost money in a declining market. As the market declined and the account went down this advisor made more trades and got more aggressive. The farmer looked at his monthly statement and saw transactions and that he was losing money. This account went into a downward spiral because of the advisor taking higher and higher levels of risk in a declining market.
I will tell you the end of the story in a little bit. You can control investor fraud due to improper transactions by taking control in level of authority and level of risk. Some trading is done by advisors to generate revenue associated with making the trade. You can reduce the chance of fraud by hiring a fee based investment advisor that does not get paid by doing a trade.
Level of authority is the amount of control that you give an advisor. This authority has 3 levels: full custody, discretionary control, and no control. Full custody means that you give an advisor full control including the movement of money into and out of an account. Discretionary control means that you give an advisor full control of trades without getting your prior approval but can not handle money. No control means that the advisor must get your approval before making a transaction.
Fidelity Investments ask for permission for either full trading authority or limited trading authority. Full trading authority is most similar to full custody. Limited trading authority is most similar to discretionary control.
If you want to eliminate improper transactions in your account you do not want to give an advisor either full custody or discretionary control. You want the advisor to have your approval before any transaction.
My business practice is to have limited trading authority as designated by Fidelity Investments with a clause in the client contract that states any transcation must have prior approved by the client. This is done to improve communication, eliminate any concerns up-front, and because this is how I would want to be treated as an investor.
Level of risk is the amount of risk that you authorize in the profile section of an application. If you state that you are a conservative investor then money must be invested in a conservative manner as appropriate using the Prudent Man Rule. It is improper for the risk level to change without written approval by the client.
So what did the farmer's advisor do wrong? First, the level of risk was not approved by the client and the advisor acted on his own without approval. Second, the amount of trades was not prudent for a conservative investor.
How did the story end? The farmer contacted the investment firm with the issue and talked with the Compliance Officer. An investigation was conducted and it was found that the advisor did not act properly. The advisor drowned in a boating incident the weekend before action was going to be taken against the advisor. The farmer's account was reimbursed and put back to a conservative portfolio where it should have been by the investment firm. The investment firm did this because they did not want a very nasty fine by the SEC and having this incident made public.
First, let me tell you a true story about a farmer in North Dakota about 1990. This person invested money with a well knows investment firm with an advisor that he trusted. The money was designated to be invested at a conservative risk level. The advisor made some trades that lost money in a declining market. As the market declined and the account went down this advisor made more trades and got more aggressive. The farmer looked at his monthly statement and saw transactions and that he was losing money. This account went into a downward spiral because of the advisor taking higher and higher levels of risk in a declining market.
I will tell you the end of the story in a little bit. You can control investor fraud due to improper transactions by taking control in level of authority and level of risk. Some trading is done by advisors to generate revenue associated with making the trade. You can reduce the chance of fraud by hiring a fee based investment advisor that does not get paid by doing a trade.
Level of authority is the amount of control that you give an advisor. This authority has 3 levels: full custody, discretionary control, and no control. Full custody means that you give an advisor full control including the movement of money into and out of an account. Discretionary control means that you give an advisor full control of trades without getting your prior approval but can not handle money. No control means that the advisor must get your approval before making a transaction.
Fidelity Investments ask for permission for either full trading authority or limited trading authority. Full trading authority is most similar to full custody. Limited trading authority is most similar to discretionary control.
If you want to eliminate improper transactions in your account you do not want to give an advisor either full custody or discretionary control. You want the advisor to have your approval before any transaction.
My business practice is to have limited trading authority as designated by Fidelity Investments with a clause in the client contract that states any transcation must have prior approved by the client. This is done to improve communication, eliminate any concerns up-front, and because this is how I would want to be treated as an investor.
Level of risk is the amount of risk that you authorize in the profile section of an application. If you state that you are a conservative investor then money must be invested in a conservative manner as appropriate using the Prudent Man Rule. It is improper for the risk level to change without written approval by the client.
So what did the farmer's advisor do wrong? First, the level of risk was not approved by the client and the advisor acted on his own without approval. Second, the amount of trades was not prudent for a conservative investor.
How did the story end? The farmer contacted the investment firm with the issue and talked with the Compliance Officer. An investigation was conducted and it was found that the advisor did not act properly. The advisor drowned in a boating incident the weekend before action was going to be taken against the advisor. The farmer's account was reimbursed and put back to a conservative portfolio where it should have been by the investment firm. The investment firm did this because they did not want a very nasty fine by the SEC and having this incident made public.
Saturday, January 15, 2011
Investor Fraud - Prudent Man Rule
This is a continuation of last week's topic, investor fraud. The first paragraph will be the Vanguard weekly recap. Secondly will be the section on investor fraud that discusses the foundation for determining fraud which is the Prudent Man Rule. Lastly are some quotes for your enjoyment.
Vanguard
A variety of reports, from retail sales to industrial production, pointed to strengthening economic growth this week as consumer and producer prices continued an upward move. For the week ended January 14, the S&P 500 Index rose 1.7% to 1,293.24. The yield of the 10-year U.S. Treasury note increased 1 basis point to 3.35%.
Investor Fraud Foundation - Prudent Man Rule
The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court decision, Harvard College v. Armory 9 Pick (26 Mass) 446, 461 (1830). The prudent man rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."
Reasonable or Prudent man is a hypothetical person used as a legal standard especially to determine whether someone acted with negligence. This hypothetical person exercises average care, skill, and judgment in conduct that society requires of its members for the protection of their own and of others' interests. The conduct of the reasonable man serves as a comparative standard for determining liability.
The Prudent Man Rule requires that each investment be judged on its own merits. Isolated investments in a portfolio may have been imprudent at the time of acquisition. However, as a part of a portfolio designed under a strategy the investment could be prudent. Thus, a fiduciary may not be held liable for a loss in one investment.
This is the foundation for determining investor fraud. An investment advisor must act prudently and in the best interest of the respective client. All of the questions that are asked when opening an account, which are kind of a pain, and exist to protect the interest of the investor. As an investor you should be glad that these questions are asked as they help protect you.
The reason that questions like income level, income tax rate, net worth, and risk level exist are to determine what is prudent for the investor. Income level and net worth are use specifically to determine what kind of investor you are. If your income level or net worth is above a certain level you are viewed as smart enough to know about investing such that you can not sue your investment advisor.
When determining if fraud has been committed in an investigation, this information is used. The law aggressively protects people who are below a certain income level and net worth. An investment advisor must invest prudently based upon this information to meet the principles of the Prudent Man Rule.
The next newsletter will illustrate how this information is used to protect an investor and give examples of fraud.
Anonymous Quotes
• The voices in my head may not be real, but they have some good ideas!
• Always borrow money from a pessimist. They won't expect it back.
• Hospitality - making your guests feel like they're at home, even when you wish they were.
• Money can't buy happiness, but it sure makes misery easier to live with.
• I used to be indecisive. Now I'm not sure.
Vanguard
A variety of reports, from retail sales to industrial production, pointed to strengthening economic growth this week as consumer and producer prices continued an upward move. For the week ended January 14, the S&P 500 Index rose 1.7% to 1,293.24. The yield of the 10-year U.S. Treasury note increased 1 basis point to 3.35%.
Investor Fraud Foundation - Prudent Man Rule
The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court decision, Harvard College v. Armory 9 Pick (26 Mass) 446, 461 (1830). The prudent man rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."
Reasonable or Prudent man is a hypothetical person used as a legal standard especially to determine whether someone acted with negligence. This hypothetical person exercises average care, skill, and judgment in conduct that society requires of its members for the protection of their own and of others' interests. The conduct of the reasonable man serves as a comparative standard for determining liability.
The Prudent Man Rule requires that each investment be judged on its own merits. Isolated investments in a portfolio may have been imprudent at the time of acquisition. However, as a part of a portfolio designed under a strategy the investment could be prudent. Thus, a fiduciary may not be held liable for a loss in one investment.
This is the foundation for determining investor fraud. An investment advisor must act prudently and in the best interest of the respective client. All of the questions that are asked when opening an account, which are kind of a pain, and exist to protect the interest of the investor. As an investor you should be glad that these questions are asked as they help protect you.
The reason that questions like income level, income tax rate, net worth, and risk level exist are to determine what is prudent for the investor. Income level and net worth are use specifically to determine what kind of investor you are. If your income level or net worth is above a certain level you are viewed as smart enough to know about investing such that you can not sue your investment advisor.
When determining if fraud has been committed in an investigation, this information is used. The law aggressively protects people who are below a certain income level and net worth. An investment advisor must invest prudently based upon this information to meet the principles of the Prudent Man Rule.
The next newsletter will illustrate how this information is used to protect an investor and give examples of fraud.
Anonymous Quotes
• The voices in my head may not be real, but they have some good ideas!
• Always borrow money from a pessimist. They won't expect it back.
• Hospitality - making your guests feel like they're at home, even when you wish they were.
• Money can't buy happiness, but it sure makes misery easier to live with.
• I used to be indecisive. Now I'm not sure.
Sunday, January 9, 2011
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.
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.
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