A Primer on Securities Fraud Donald W. Searles Senior Trial Counsel Los Angeles Regional Office...

A Primer on Securities Fraud

Donald W. Searles Senior Trial Counsel

Los Angeles Regional Office

American Association of Individual Investors November 20, 2010

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SEC Disclaimer

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation do not necessarily reflect the views of the SEC, its Commissioners, or other members of the SEC’s staff.

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Did you know?

48% of America’s workforceis not covered in a pension plan

Source: GAO Report – October 28, 2009GAO-10-153T 401K Plans

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Did you know?

58% of Americans have not calculated their retirement

needs

Source: FINRA Investor Education FoundationNational Financial Capability StudyDecember 7, 2009

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Did you know?

70% of Investors have not checked if their investment professional is registered

Source: FINRA 2007 survey (http://www.saveandinvest.org/web/groups/sai/@sai/documents/sai_original_content/P036702.pdf)

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Did you know?

4 out of 10 cash out their retirement plans when changing jobs (leakage)

Source: GAO Report – October 28, 2009GAO-10-153T 401K Plans

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Did you know?

Information is the investor’s best tool

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Did you know?

You are responsible for accumulating and managing

your own wealth

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The SEC Stair Steps to Securities

Set a GoalUnderstand the Products – Asset ClassesAsk QuestionsResearch, Research, ResearchAvoid Fraud

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Set a goal

Your Financial Goal

Short Term, Medium Term, Long TermUnderstand Your Risk Tolerance

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Understand the Products – Asset Classes

Certificates of Deposit Money Market Funds Treasuries (Bills, Notes, Bonds, TIPS) Bonds Mutual Funds Exchange Traded Funds (ETFs) StocksDiversification

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Understanding Fee Structure

Per Transaction Beware inactivity fees

Assets Under Management As your wealth increases, their revenue

increases

Mutual Fund Fees

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Ask Questions

10 Questions to Ask…Is this product registered with the SEC or

my state regulator?Why is this investment suitable for me?How will this investment make money?

(Dividends? Interest? Capital gains?)What are the total fees?How liquid is this investment?

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Ask Questions

10 Questions to Ask…

What are the risks with this investment?How much can I lose?Is the company making money?Am I diversified?Where can I get more information about this

investment?

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Research, Research, Research

Check out brokers and investment advisersUnderstand the fee structureKnow the companies you buy – use EDGARReview Mutual Fund Prospectuses (485

filings)Use trusted websites

www.SEC.govwww.investor.govwww.mymoney.gov

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Research, Research, ResearchCheck out Brokers and Investment Advisers

Call State Regulators, visit www.nasaa.org

Call FINRA at 1-(800) 289-9999 or visit FINRA’s Broker Check at www.finra.org

Guidance from the SEC www.sec.gov/investor/brokers.htm

SEC Investment Adviser Public Disclosure page: www.adviserinfo.sec.gov

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EDGAR – SEC’s free database

Company filings you’ll find in EDGARReports:

Form S-1: Registration StatementForm 10-K: Annual ReportForm 10-Q: Quarterly ReportForm 8-K: Current ReportForms 3, 4 & 5: Insider Holdings & SalesSchedule 14A: Proxy Statement

www.SEC.gov - “Filings and Forms”

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Avoid Fraud

Fraud TypesNewslettersOn-line Fraud“Free” LunchPump & DumpPyramid/Ponzi SchemesAffinity FraudRed Flag Sales Techniques

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Newsletters

Tips for checking out newslettersDon’t believe everything you readIs newsletter paid to “tout” or recommend

the stockIndependently investigate Be wary of small, thinly-traded companies Check with the SEC or your state securities

regulator has the newsletter ever been in trouble

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On-line Fraud

Websites/phishingEasy to createOften steal the look and feel (including name

and logo) of a legitimate company or Government agency

Watch out for “SEC Approval”Purports to offer a good or service that

appeals to investors (e.g., “secret" systems)

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On-line Fraud

The InternetAlways think twice before investing money in any

opportunity you learn about through the InternetBeef Up Your SecurityBe Careful What You DownloadUse Your Own Computer & Log-Out CompletelyDon’t Respond to Requests for Personal InformationBe Smart About Your PasswordUse Extra Caution with Wireless ConnectionsRead Your StatementsMonitor Your Credit Report

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“Free” Lunch

There is no “Free Lunch”Always evaluate the investment thoroughlyBe skeptical of titles or designations, such as

“Senior Financial Counselor”Get everything in writing, take it home and

read it carefully before agreeing to invest

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Schemes

Pump and Dump

– Promoter urges you to “buy now or lose out”

– Price rises sharply– Fraudsters sell at peak– Price drops when the hype

stops– Investors lose money

Pyramid/Ponzi

– Try to make $$ by recruiting new investors

– Promise of sky-high, risk-free returns

– Incoming $$ from new investors pays off earlier investors

– Scheme gets too big – Promoter can’t find new

investors– Pyramid collapses– Investors lose money

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Pyramid schemes requirements

Levels Number of Participants1 62 363 2164 1,2965 7,7766 46,6567 279,9368 1,679,6169 10,077,69610 60,466,176 11 362,797,056 - more than the U.S. Population12 2,176,782,336 13 13,060,694,016 - more than double the World Population

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Affinity Fraud

Target members of a groupRace, Religion, Social Clubs, Age, Union, Profession

Con-artist infiltrates through trusted member

Often underreported

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Red Flag Sales Techniques

Top 10 Dubious Sales Techniques

10. Try to be your friend 9. Guarantee high profits or no risk

8. Try to force an immediate decision 7. Little or no written material 6. Promises quick profits 5. Claims to have “insider” information 4. Claims to have Government endorsement

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Red Flag Sales Techniques

Top 10 Dubious Sales Techniques

3. Uses words like: “Guarantee” “High Return” “Limited Offer” “As Safe as a CD”

2. Unclear how investment makes money 1. Doesn’t take no for an answer

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When dealing with salespeople

Don’t be afraid to:Hang up the phone Decline to meet with the salespersonRefuse to make an immediate decision

Do:Monitor your investments READ EVERY

STATEMENTRequest information in writingReport fraud and abusive sales tactics

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When dealing with salespeople

Do:Ask questions – be informedRecognize psychological and manipulative tacticsBe skeptical of any unsolicited offerDiscuss the investment with a third party whom

you trust before you make a decision Contact the SEC immediately if you

believe a fraud is being committed

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What’s new at the SEC

New at the SEC:www.Investor.govProxy voting

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Investor.gov

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SEC contact information

Website: WWW.SEC.GOV

Toll free number: 1-(800) 732-0330

Mail: U.S. Securities and Exchange Commission100 F Street NEWashington, DC 20549

Los Angeles Regional Office: (323) 965- 39985670 Wilshire Blvd., 11th FloorLos Angeles, CA 90036Ask for the “DUTY OFFICER”

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You can search EDGAR in Many different ways from the

EDGAR page

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EDGAR Name Search

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Searching EDGAR by latest filing

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Historical searches

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Research mutual funds and compare fees

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Obtain a prospectus for a mutual fund

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