Securities Fraud Lawyer Blog

Stockbroker Fraud and Investment Fraud: How Is It Discovered?

It should go without saying that it is rare that a stockbroker ever confesses to making unsuitable recommendations, illegally recommending private investments away from the firm, churning an account or switching annuities to generate commissions, pushing variable annuities, or telling the client that they didn’t have the authority to trade without first getting permission. Rare, indeed, it simply doesn’t happen, and with Wall Street refusing to adopt a fiduciary duty standard for its brokers, such confessions won’t happen anytime soon. So if it must be discovered by the client, how is it discovered?

In my experience stockbroker fraud and misconduct is usually noticed by someone other than the client: a CPA, a probate or estate planning attorney, a cynical friend not taken in by the broker’s charm and excuses, or even a new broker that recognizes the misconduct of the prior broker. Of course, the client probably has had suspicions, but acting on those suspicions calls into question why the client trusted the broker in the first place--- not an easy self-analysis, and even harder to admit that your choice in brokers was wrong and you have been taken advantage of. Not to mention the fact that the broker is likely explaining that “everyone lost money”, “just hold on…it will come back”, making it even harder to face the problem. Hope springs eternal for many investors and if the markets rebound, thereby hiding the sins, everyone is OK, right? So many claims simply lay dormant while clients ignorantly go along their merry way. Isn’t that what Wall Street and the individual brokers secretly want? It certainly is to their advantage that valid claims go quietly unnoticed.

If more attorneys, CPAs and scrupulous brokers were aware of the way in which investors are often victimized, and how FINRA has established an arbitration system that can and sometimes will result in investor recovery of all losses and even attorneys’ fees, then the investing public becomes more savvy, and less likely to be a victim of Wall Street greed and hubris. CPAs will certainly see the amount of trading and any losses on the annual Form 1099s that each client receives, and in preparing the client’s Schedule D for their tax return. Estate planning attorneys often see investments that are non-performing, and even investments like oil & gas programs that are not held at a traditional brokerage firm. Bankruptcy attorneys and trustees may see assets in the estate that have significantly declined in value, and question why the debtor held such a risky investment in the first place. Finally, family members that begin to handle the finances of elderly or incapacitated loved ones may discover that their investments has lost significant value, and they should question why they were exposed to so much risk in the first place. Fortunately, there are honest brokers, CPAs, estate planning attorneys and other professionals that are willing to bring these potential problems to their client’s attention, and there are qualified attorneys that emphasize representing investors against their brokers and advisers.

The short story is to be vigilant about your money and investments. Ask questions and demand answers. There are best practices to follow as an investor which will help you avoid losses from unsuitable investments and being victimized by the unscrupulous broker. And when the problems are discovered, it is important to know that as an investor you have rights, and if your broker has violated rules in handling your money and investments, you can pursue recovery of those losses through FINRA arbitration.

Might Just Be A Stockbroker’s Selling Away
And That Could Mean You Get Your Money Back.

We have seen a rise in PONZI schemes since the market dropped, but will they keep going with a strong market? A PONZI scheme is essentially when a con man robs Peter to pay Paul in order to keep the con going, all the while living off of the capital. However, many PONZI schemes involve the help from a Wall Street Stockbroker. Sometimes they are part of the con, and sometimes they are simply reponsible for introducing or referring the investor to the scheme, not even knowing it is a con. Either way, you have valid claims.

Most of the time, victim investors in a PONZI scheme get very little back, although occasionally a Receiver will recover assets that can be distributed to all. However, if any investor was simply introduced to the scheme by a registered stockbroker, such investor may be able to recover his investment.

All stockbrokers are required to be registered by FINRA, the regulatory and licensing body for all stockbrokers and brokerage firms. Fundamentally, brokerage firms are required to protect the public investor by detecting and preventing securities fraud and broker misconduct. When a firm fails to detect and prevent misconduct, it is called a failure to supervise. And in the context of a PONZI scheme that is aided by an unwitting stockbroker, brokerage firms can be liable to those clients. Most importantly, FINRA Rules require every stockbroker that participates in any manner in the sale of a security outside of his/her firm to notify the firm and get permission to participate in the deal. If permitted, the firm is responsible for supervising that broker’s participation. However, brokers often do these deals “away” from the firm, hence the term “selling away”, and when brokers get you involved in these schemes without the protection of their firm, both the broker and the firm can be liable. Why? Because the firm is supposed to detect and prevent the broker’s unapproved participation in the scheme.

Many investors think they have no recourse, but if the broker simply refers you or introduces you to the Ponzi con man, the firm can be held liable even if the broker wasn’t making a specific recommendation for you to invest in the scheme. Your claim is even stronger if the broker is getting paid for his referral. If you have been referred by a stockbroker to some investment that has gone south, contact a good lawyer that knows how to recover your money.

Continue reading "PONZI Schemes: What Keeps Them Going?" »

Deep Behind the Pine Curtain In Uncertain, Texas, a once favored son from Tyler, Texas, Richie McFarland’s luck has run out. Last week, Richie pleaded guilty to mail fraud before U.S. District Judge T. John Ward, and was sentenced to 8 years and 1 month in the federal system, plus he must pay $8.8 million in restitution to certain investors. That's what happens when you raise $30 million from almost 350 investors around the country. From the inside looking out, it didn’t have to be that way for Richie who had every opportunity to profit from honest enterprise, but as with most con-men, something went wrong. What was it---greed, eternal optimism, or simple criminal desires? Who knows, but the victims all share the same trait---trusting their money to a con man and left with no place to turn.

Apparently over the last decade or so, Richie has run a number of investment scams under various names such as Delta Interests, Inc., Caddo Resources, LTD, Synterra Investments, Boomtown, LLC and perhaps other entities chiefly offering investors interests in non-existent oil wells, oil and gas leases and other supposed drilling programs. Investors’ efforts to secure repayment of lost investments appear to have been fruitless over the years, thwarted by the legal system, bankruptcies, and ineffective regulatory oversight, but recent efforts by the U.S. and State governments and regulatory bodies will land Richie in jail. Are there more cons in the woods of East Texas, and throughout small town America?

PONZI schemes can be simple or complex, but they all seem to have at their source a perversely gifted con man that can talk plain folk, street savvy and highly educated investors alike out of millions. What leads a gifted person from a caring family like McFarland to defraud friends, family and otherwise unknown investors with friends and family out of millions of dollars of hard earned money? Greed, stupidity, or a death spiral so strong that even the stalwart can’t survive. Obviously McFarland’s con was on a much smaller scale than Bernie Madoff or Sir Allen Stanford, but no less damage was inflicted on the victims. Do they know that one day the gig will be up, or do they believe that they will escape the same post mortem of every other PONZI scheme con man---namely time in a federal correctional facility with a restitution order that will never be paid. Said another way, are there countless cons like McFarland, Madoff, Stanford or George Hudgins that do, in fact, escape all scrutiny and simply move from one con to another living off of their ill-gotten gains? If so, something is wrong in the regulatory world whose officers and agents are charged with protecting the innocent investors of every walk of life from these con men.

What are investors to do? As the old adage goes, if it sounds too good to be true---IT IS! While an ounce of prevention in the form of good sense before investing is definitely worth a pound of cure when one deals with a PONZI, often the only possible recourse is to find someone other than the snake-oil salesman who is responsible. In many instances, these scams lead through registered brokerage firms, commodities firms, banks and other regulated institutions that have laws and regulations that require their vigilance and supervisory oversight. In those instances, investors may, indeed, have a valid recourse to recovering their lost investments by the entity that should have detected and prevented the scam from starting or continuing. Frequently investors are successful in recovering their losses when someone with deeper pockets had a legal responsibility to detect the con, and protect the investors. If you have invested in something that now sounds “too good to be true”, check with a securities fraud attorney competent in recovering these funds.

Continue reading "A PONZI Scheme in the Oil and Gas Patch Gets Plugged and Operator Richie McFarland Gets Sentenced to 8 Years. " »

Do brokerage firms knowingly turn a blind eye and a deaf ear to the Ponzi schemes recommended by their brokers, or are there instances where brokers really are successful in hiding these schemes from even the most vigilant financial firms? Not surprisingly, the answer is “yes” to both questions. However, it should come as a surprise because firms really don’t have any upside when their brokers participate in outside business activities or private securities transactions. Pursuant to Financial Industry Regulatory Authority (FINRA) Rules 3030 and 3040, brokers are required to notify their firms of any outside business or investment opportunity they get involved in, and with regard to the investment opportunities, the brokerage firm is required to supervise the scheme just as if it was branded and endorsed by the firm. When firms don't properly supervise these outside securities transactions, they can be held financially responsible for the victims' losses.

According to the United States Securities & Exchange Commission (SEC) it filed 60 enforcement cases that involved Ponzi schemes, with some of the most notable being Bernie Madoff and Sir Robert Allen Stanford who made off with an alleged $50 Billion and $7 Billion, respectively. But one thing is certain, given the heyday of the last bull market and no doubt the lifestyles built by these con men and even well intending stockbrokers, there will be more PONZI schemes in the news.

For those that find themselves victims of PONZI schemes, more troubling may be the fact that the regulators such as the United States Securities & Exchange Commission (SEC), Financial Industry Regulatory Authority and various states securities regulators may have received advanced warning in these schemes, but slow to act. Many of these regulatory bodies and their employees have found themselves the target of accusations that they simply turned a blind eye and a deaf ear to obvious warning signs, and in some instances actual knowledge of the wrongdoing. While the regulators are becoming more and more zealous in their enforcement efforts, they rarely recover an individual victim's losses.

So what’s an investor to do? Better to be vigilant before investing, than a vigilante after the money is gone. The SEC offers investors some obvious best practices and warning signs to try and avoid investing in a PONZI scheme. However, even some of the most savvy investors remain blindly trusting of a polished con man. Recoveries are usually fractions of the amount invested and are often confined to the efforts of a Receiver appointed by the Federal Courts. However, when a FINRA registered stockbroker or SEC registered investment adviser is involved, victims stand a much better chance of recovering their lost funds through an arbitration or a lawsuit against the broker or adviser’s brokerage firm for violations of FINRA Rules 3030 or 3040, and also under claims that the firm failed to adequately supervise the broker who promoted the scheme. If you find yourself in that situation, be sure to interview and hire attorneys that are competent in the area of arbitrating claims against Wall Street brokerage firms.

Bryan Forman’s Comment: More and more Ponzi schemes are showing up, and brokerage firms that turned the proverbial blind eye and deaf ear to their brokers’ involvement in these schemes will pay the price for inadequate supervisory oversight.

To learn more about PONZI schemes and how to recover when you have lost money, visit a competent securities fraud and arbitration attorney.