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From Bryan Forman, Forman Law Firm, P. C.–In an effort to provide our readers with unique perspective of other professionals in the world of investments and securities regulation, arbitration, and litigation, I will occasionally invite friends, colleagues, and other experts to publish a blog piece from their unique perspective.  If you like what they have to say, please say so and forward!  Thanks for reading.

In this Guest Blog Piece, we hear from Edmond (Ed) Martin of Sage Investigations, LLC in Austin, Texas.  Ed brings some unique experience and perspective to “Ponzi Schemes” a topic that has been around for a while and one on which we have often posted (see, “Ponzi Schemes Recommended By Stockbroker—How Can Firms Miss Them”), but one that is likely to experience a resurgence at the end of the recent bull market and the recession possibly brought on as with the Coronavirus Correction as more and more schemes are revealed as the proverbial house-of-cards comes tumbling down.    Ed is a Certified Fraud Investigator, and gained substantial experience working as a Special Agent for the U. S. Treasury and Internal Revenue Service, Department of Justice, Texas State Securities Board, and other government agency types that you never really want to hear from unannounced–you would always rather call them as a victim of a scam.  Ed has investigated all sorts of financial fraud, with a particular emphasis on Ponzi Schemes, and has told his stories on a number of television programs.    See his CV here.  We invite him here to share his perspective on two of the more notorious Ponzi schemes—Madoff and Russell Erxleben, and to highlight a few of the early warning signs for investors.

Beware of Financial Fraud During Troubled Times.

The Texas Securities Act , when applicable, is an extremely powerful tool for any investor seeking to recover an investment and other damages when they have been a victim of fraud or when the Texas Securities Act (TSA) has been technically violated, and this is particularly true when an investor invests in a private oil and gas deal that may not be compliant with the TSA or when the deal is misrepresented, or perhaps an outright scam.  Oil and gas scams are, in fact, a staple of the enforcement actions brought by the Texas State Securities Board, and even though the Texas State Securities Board often shuts down the scams and the scammers, investors don’t always get compensated for their losses.

With the stock market reaching recent all time highs in late 2017 and going into 2018, private investment will predictably increase, and in Texas, a lot of investment dollars find their way into oil and gas drilling programs and other investments tied to our so-called “black gold.”   One recent Houston Chronicle article made a good case of why we will see more and more money flowing into the oil and gas and drilling sectors in Texas.   In short, with the price per barrel up from lows of last year, and with the Texas economy booming, it is reasonable to predict that there will be much more drilling activity, and investment into drilling activity.  This usually translates to more private investment opportunities for individual investors in the Texas oil and gas sector, and this predictably will attract promoters and other scam artists hoping to exploit gullible and unsophisticated investors hoping to take part in the energized energy sector.  And, surprisingly, it is still common for promoters of oil and gas deals to abscond with investors’ dollars.

Investments in oil and gas can come in many shapes and sizes.  Investors can, of course, invest in a variety of publicly traded securities, including mutual funds, ETFs, Master Limited Partnerships, and specific companies (e.g. Exxon Mobile, Royal Dutch, and many others who are headquartered in Texas) whose share value is tied to the oil and gas industry.  Investing in a public traded vehicle generally eliminates the opportunity for most registration fraud, IF you are investing through a registered broker that makes a suitable recommendation in light of your investment objectives, risk tolerances, sophistication, and financial condition, but when you are investing in a private investment, the potential of securities fraud may be increased.

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.
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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.
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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.

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