Classic Frauds Revisited
Jeffrey D. Spill
Deputy Director for Enforcement
New Hampshire Department of State
&
John Curry
Special Agent In Charge
North Carolina Secretary of State
12/7/2009
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Purpose
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Identify the building blocks of classic
fraud
Examine six categories of schemes that
have been used on investors with great
success over the years
Equip you to recognize and
appropriately handle each type in the
field
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Building Blocks
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There has to be a security
Check for an investment contract
Does it satisfy the Howey test?
Not all notes are securities, Reves v.
Ernst & Young
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The Oldies but Goodies:
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Ponzi, Multi-level marketing and
Pyramids
FOREX/Foreign Currency Exchange
Real Estate Investments
Pump & Dump
Promissory/Prime Bank Notes
Oil & Gas Wells, Pay Phones and ATM’s
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Ponzi, Multi-level Marketing, and
Pyramids
Ponzi – Usually involves horizontal
investing and a pooling of money to the
promoter
Multi-level marketing of a product of
some type
Pyramids – Usually involves multi-level
distribution and vertical investing
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Ponzi, Multi-level Marketing and
Pyramids- How it Works
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Investment Contract – SEC v. Koscot,
SEC v. GlennTurner, Trivectra
Common Enterprise
Horizontal Commonality, Salcer v. ML
Strict Vertical Commonality, Brodt
Liberal Vertical Commonality,
Villeneuve v. Business Concepts,
Koscot
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Ponzi, Multi-level Marketing and
Pyramids- How it Works
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Solely Through the Effort of Others
Promoter activities
Investor activities
Koscot and Trivectra
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Multi-level Marketing, Ponzi and
Pyramids
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Violation of Anti-fraud Restrictions of
Section 101 of the Uniform Act
Mathematical impossibility
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Forex / Foreign Currency
Exchange Fraud
Latin for “Give Me Your Money”
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Forex
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"With a $10,000 deposit, you can make
$1,000 a month!“
Risk options:
“I can take the risk away.”
"You take only as much risk as you see fit."
"Whether the stock market moves up or
down, in the currency market you will always
make a profit."
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Forex Fraud
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Forex fraud is any fraud that entices
investors by a promise of high returns
using Foreign Exchange investments
Forex con artists may or may not
actually invest in Foreign Exchange
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Forex
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Sounds sophisticated
Highly specialized
Mystique attracts unsophisticated
investors
Not widely understood
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Forex Fraud
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Foreign currency contracts may be
legitimately traded either on a
recognized futures exchange or in the
"interbank market," which generally
involves trading between large
institutions such as banks and
corporations
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Forex Fraud
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Fraudulent currency trading firms often
tell customers that their trading is done
in the "interbank market" on their behalf
Many currency traders ask customers to
give them "margin," often sums in the
range of $1,000 to $5,000, leveraging
the investment
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Forex Fraud
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Margin trading can make investors
responsible for dollar losses that greatly
exceed the margin amount they deposited
The victims of these frauds are actually being
sold a position in a currency forwards market
which is both completely unregulated and
provides no guarantee that the promoter has
secured the forward position in the traded
currency
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Forex Fraud
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Up to 50% commission on each deal
Deceptive, misleading and highpressured sales solicitations
Failure to supervise employees and
agents in the conduct of their
commodity futures activities
Churning accounts
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Forex Fraud
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Representatives unregistered
Misrepresent the likelihood of loss
Misrepresent the risk
Huge losses by investors
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Real Estate Investments
(Swamp) Land in Florida !
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Real Estate InvestmentsHow it Works
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Investments sold in real estate portfolios or
funds for property development
Often properties are overseas or otherwise
difficult for investors to verify
Real estate holdings are non-existent or
grossly overstated
High returns promised. Initially may be
realized Ponzi-style as large numbers of
investors are recruited
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Real Estate InvestmentsInvestigation I
Examine claims made in sales material:
What assets are actually held?
What investments were actually made?
Court house record checks:
Who owns the property now?
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Real Estate InvestmentsInvestigation II
What real efforts were made to develop
the property as advertised?
Permits applied for, inspections done?
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Pump & Dump
“What goes up, must…”
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Pump & Dump
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How it Works I
Usually Involves Microcap Stocks
Requires Market Manipulation:
Dissemination of false information
Use of the Internet
Use of e-mail and telephone
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Pump & DumpHow it Works II
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Motivators for investment:
“Medical Breakthroughs”
Phony Consumer Demand
On-line Businesses
Phony RE Projects
Phony Mergers and Acquisitions
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Pump & DumpHow it Works III
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Involves Multiple Players:
Dealmakers
Boiler Rooms Sales
Promoters
Traders
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Find The Source
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Promissory Note Fraud
Promising & Delivering High
Interest, Commissions and
Losses !
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How It Works I
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Often a fictitious business promotion
The con artist hires a marketing firm to
develop a flashy sales program
The con artist hold seminars to entice
insurance agents to join a network of
sellers
Interest rates are very attractive
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How It Works II
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Investments are marketed as safe with
guaranteed yields
Initial investors begin receiving high
monthly interest payments
More investors are recruited based on
early results
Everyone is happy, briefly
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How It Works III
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At the end of the initial investment
period, investors happily rollover
Agents are happily receiving big
commissions
Eventually new investors dry up
Money runs out and the company
offering the notes disappears
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Investigation I
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Is the seller registered to sell securities?
Follow the money trail – get bank
records
Where do the proceeds of the notes go?
Who is paying the “interest”?
Is there really a legitimate business?
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Investigation II
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Where are they located?
Are they licensed?
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Oil & Gas, Pay Phones
and ATM’s
No, not like at your convenience
store…
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Oil & Gas Wells- How it works
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Company sells shares of specific wells to be
drilled
If successful, the investor will get a share of
the sale of oil and natural gas from that well
for the life of well
Affinity fraud- increasing U.S. oil production
and decreasing foreign dependence is
appealing to many investors
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Oil & Gas- Investigation I
When it fails- Is it Fraud or just bad luck?
 Contact state regulatory agency:
No permit sought= willful intent
If company is drilling or has other wells
already operating, was investors money
misused in completing/operating these?
State agency employees often know facts and
hear rumors (leads) from the field
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Oil & Gas- Investigation II
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Check advertising for outrageous claims
and promises, Internet and blogs also.
Examine bank records for inappropriate
expenditures and outright theft.
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Pay Phones & ATM’sHow it Works I
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“Investment Contracts” are sold, often for
more hardware than is ever purchased
Lease payments & “buy backs” offered
Guarantees make third party management
the only option
Not a viable business
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Poorly/superficially managed
Not profitable
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Pay Phones & ATM’sHow it Works II
False Promises made:
 “Agreements in place to put ATM’s in
all Las Vegas casinos”
 18% return each month
 “Can’t lose”
In Ponzi fashion, early investors paid with
funds from subsequent investors
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Pay Phones
and ATM’s- Investigation
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Obtain records of hardware sales from
manufacturers
Obtain installation, activation and
phone company billing records
Obtain bank and business records
Interview employees
Locate & inventory assets
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General Investigative Issues-I
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Gather all paper and read it carefully
Check registrations
Interview victims thoroughly
Talk to the seller/promoter
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General Investigative Issues-II
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Internet searches may disclose action
taken in other jurisdictions
Use NWCCC data searches surgically
“Cast your nets broadly” when seeking
information sources, witnesses and
physical and financial evidence
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General Investigative Issues III
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Follow the money – where did it come
from and where did it really go?
Good relationships help detail oriented
Investigators!
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Take Action
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Cease and Desist Order/TRO
Other Administrative or Civil Actions
Seizure of Assets/ Appointment of
Receiver
Criminal Prosecution
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Classic Frauds Revisited
Thank you for attendingClassic Frauds Revisited !
12/7/2009
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