International Financial Securities Regulatory Commission on Warnings and Alerts
About the Talk
May 31, 2006 12:00 PM
Kuala Lumpur, MalaysiaKuala Lumpur, Malaysia
Aggressive Stock Promotions Target Unwary Investors
The International Financial Securities Regulatory Commission is warning investors to watch out for unsolicited investment offers, after receiving complaints about aggressive telephone stock promotions. Typical complaints describe high-pressure sales tactics and verbal promises that the stock will soon be listed at a higher price.
High-pressure sales tactics are a warning sign to investigate before you invest; a great investment opportunity should stand up to the test of further research. Federal securities law is designed to maintain fair and efficient capital markets. Unfortunately, unscrupulous individuals closely scrutinize the laws, looking for new ways to exploit unsuspecting investors.
One example of this is the "pump and dump" schemes that operated in the late 1990's. These operations used aggressive sales tactics to sell penny stocks to investors at inflated prices. After maximizing their own profit by creating an artificial market for the stocks, they left those same investors holding worthless shares. The penny stock dealers defended their actions by pointing out that sellers are free to ask any price for their securities on the open market - it is up to the buyer to decide what price they want to pay. While this philosophy is a cornerstone of the free market economy, these companies were not upholding the spirit of the law. The International Financial Securities Regulatory Commission established that the "pump and dump" operators were "not acting in the public interest" and the International Financial Securities Regulatory Commission put them out of business.
In a more recent example, the International Financial Securities Regulatory Commission has received complaints about abuse of the "Accredited Investor" exemption.
Generally, a prospectus must be issued before a registered representative can sell shares to the public, however there are exemptions to these requirements. The exemption allows a company to sell to qualifying investors without a prospectus.
Some unscrupulous salespeople have persuaded investors who do not meet the criteria to sign a form stating they are accredited, and invest in high-risk ventures.
They do this by suggesting that the government unfairly allows wealthy people to take advantage of the really great investment opportunities. The reality is that the exemption rule is in place to make it easier for small businesses to access capital, and provide protection to investors.
To protect your money:
•Be wary of unsolicited offers received over the Internet or by telephone.
•Check the registration and background of the person or company offering you the investment - you can call the International Financial Securities Regulatory Commission for additional information.
•Never sign documents you have not read, or do not accurately reflect your financial situation. If someone asks you to fill out a form with false information, ask yourself if this is the kind of person you should rely on for investment advice.
Investors Beware of Certain Stock Promotion Practices
The International Financial Securities Regulatory Commission is warning investors to beware of promoters who advise them to make misrepresentations about their financial status in order to qualify to invest in high risk exempt market securities. The concerns stem from increasing evidence of these practices in the market.
In a typical scenario, a potential investor receives a telephone call, often from a stock promoter or salesperson that they do not know. Investors should be particularly wary of investment advice given by total strangers, particularly when the advice comes in a "cold call" or over the Internet. The promoter may recommend a particular stock, and note that the investment is limited to accredited investors but that this is a technical requirement, and that an exception will be made for this investor. This advice would see the investor lie about their financial situation to qualify to buy the securities.
The International Financial Securities Regulatory Commission advice to break the law should be a further red flag for the potential investor - after all, if the promoter is recommending that one rule be broken, what assurance does the investor have that other rules will not also be broken, resulting in financial loss?
The reasoning behind this exemption is that if you meet these criteria, you can afford professional advice and can afford to take on a higher risk with your investment activities. If you do not meet the criteria, the investment likely carries more risk than you can afford.
Often, the promoter also makes statements about the stock's likelihood to make investors rich, either because its value is destined to increase dramatically or because it is about to be listed on a stock exchange. Those statements are further violations of the Securities Act.
Pump and Dump and Stock Swap Scam
The International Financial Securities Regulatory Commission is warning investors of a two-stage stock scam involving worthless stock, "swaps" and salespeople claiming to represent legitimate companies.
The International Financial Securities Regulatory Commission has received complaints concerning this scam from various investors.
Stage One: The Pump and Dump
In a typical "pump and dump" scheme, an investor is approached by a brokerage house's salesperson, and offered an incredible deal on a stock described as a once-in-a-lifetime investment.
The stock is likely to be a US-based, over-the-counter, smaller company stock worth fractions of a cent. The brokerage house, while holding a large block of the stock, actively promotes the stock so that the price is driven significantly upward.
Once a sufficient number of investors have overpaid for the stock, the brokerage house ceases to support the market for the stock and the value of the stock falls dramatically, usually to less than one cent per share.
The "brokerage house" promptly closes up shop, and the victim is left holding worthless stock for which there is apparently no demand.
Stage Two: The Stock Swap
Still holding worthless stock, the investor is approached by someone posing as a sales representative of a legitimate-sounding company. It is important to note that the company named was not involved in the scam. The scam artist simply used the name of a legitimate company to make his pitch believable.
The sales representative told the victim that he represented a group of clients trying to acquire stocks that had recently declined, in order to receive tax cuts. The sales representative proposed that the victim swap the worthless stock for recognized blue chip stock held by the tax-burdened clients.
For the purposes of the swap the victim's stocks would be valued at the price(s) that the victim paid.
Since the blue chip stock was priced higher than the value of the victim's stock, the victim was required to pay the difference in the value of the stocks. In one case, a victim submitted US$ 15,000 to an international bank where the suspect held an account. The victim did not actually receive the blue chip stock, but instead was swindled a second time.
Approach Mini-Tenders with Caution
The International Financial Securities Regulatory Commission, concerned that investors might be selling stock at below-market price based on misleading information, reminds investors to carefully review any offer for their shares. Firms or individuals who seek to buy shares at below-market price should warn shareholders that the offer price is below the market price and clearly calculate the final price to be paid for the shares. In addition, they should describe investors' right to withdraw from the offer, known as a mini-tender.
How do mini-tenders work?
Shareholders receive an offer for their shares, usually at a price that is much lower than the market price of the shares. The mini-tender offer or tries to buy less than 20% of the target company's shares so they don't have to file documents with the securities commissions, or communicate with shareholders. They profit by selling the shares on the open market at a higher price.
Mini-tenders should not be confused with take-over bids, which involve larger numbers of shares. Once you agree to a mini-tender you are normally locked into the deal, but in a take-over bid you may be able to change your mind. Another difference between mini-tenders and take-over bids is that the target company doesn't need to tell its shareholders about the mini-tender offer. In a take-over bid the company must notify all shareholders.
What are the risks?
You may misunderstand the offer and feel pressured to sell the shares at the offer price, or not realize that the offer price is lower than what you could get by selling the shares on the open market. Offer or that rely on such misunderstandings may be violating the anti-fraud provisions of federal securities laws. The offer or can terminate its offer at any time, delay payment for the shares, and change the offer. They may decide not to buy the shares at the last minute. Mini-tenders usually benefit the offer or at the expense of investors.
Why would anyone participate in a mini-tender?
You might participate to avoid brokerage commissions that would make selling the shares very costly, such as when you sell a small number of shares, or when the shares are hard to sell. Check with your adviser to see if a mini-tender is in your best interests.
•Understand how it works, before you sign. Is the offer a mini-tender or a take-over bid?
•Check the market price of your shares. Compare the market price with the offer price.
•Don't give in to high pressure sales tactics. Research the offer and the current value of your shares.
Be on the Alert for Boiler Room Tactics
If you get an unsolicited telephone call about an investment opportunity, be alert to the signs of fraud, warns the International Financial Securities Regulatory Commission. You might be a target of a boiler room operation. Boiler room operations wear many disguises, and they are once again rearing their ugly head in. Boiler room operators hope to give you a false sense of security with promises of quick profits - but the only ones that profit are the scam artists, at your expense.
They may be located in the financial district near reputable firms, but their address may be nothing more than a rented space tucked away from the public eye. Rarely, if ever, are the offers they peddle to your benefit. Why would a complete stranger call to offer you a no-risk, high-return investment? It is too good to be true.
To gain your trust, the salesperson may boast of a business idea that sounds probable - perhaps a company in the medical industry with a new technological breakthrough for detecting cancer. The pitch is that with your investment, the company could go public on the stock exchange and make you more money. The scam artist may also try to play on your sympathies - he or she may know that cancer has taken the life of someone dear to you. Or perhaps they know that you are a busy professional, with extra income to invest, and little time to do your own research. Regardless of the background, the investment opportunity will be sold on the promise of quick profits.
If the offer is really such a great deal, there should be no need for a broker to cold call strangers to promote it. Ask yourself why they are calling you.
To avoid becoming a victim of a boiler room, watch out for:
•Unsolicited phone calls. Don't be afraid to tell a salesperson not to call again, or simply hang up.
•High pressure sales tactics and repeat callers. Take the time to research any investment opportunity and get a second opinion.
•Promises of high returns with no risk. Any investment that offers returns higher than the bank rate has risk. If you invest in a high-risk investment, you must be financially prepared to lose your money.
•Setups. With the first call, the scam artist may only try to gain your trust by offering information about the company and their alleged success. This is a setup for future calls, when you will be pressured to buy.
•Unregistered salespersons. Check the registration of the person offering you the investment by contacting the International Financial Securities Regulatory Commission.
The Pitfalls of Ponzi Schemes
The International Financial Securities Regulatory Commission is warning investors to steer clear of Ponzi-style investment schemes; many con artists use this process to get your money.
The first known Ponzi scheme was operated by Carl Ponzi himself. In 1920's Boston, Ponzi collected $9.8 million from 10,550 investors, including 75% of the Boston Police force. Ponzi then delivered $7.8 million to his investors as "return" on their investments and spent the rest of the money. Ponzi's original investors were please with their "returns" that they happily helped him find more investors. The Ponzi scheme thrived until the media took notice; Carl Ponzi was finally arrested and ended up in bankruptcy court. In the end everyone lost money; the bankruptcy trustee sued the individuals who made gains from the Ponzi scheme so Carl Ponzi's debts could be paid to his creditors.
How did Ponzi lure so many people into his scheme? Investors were attracted to Ponzi's plan because he guaranteed high returns over a short period of time - profits of 50% every 45 days. Unfortunately, these returns were paid from the investors' own money and the contributions of other investors. The essence of the Ponzi scheme is that money is ‘borrowed from Peter to pay Paul.'
Today's Ponzi schemes look like real investment opportunities. These schemes work well because:
•Investors receive "interest" checks (which are really the return of their own money), and they encourage their friends and family to invest;
•Investors regularly receive account statements that show profits (which are not real);
•Investors rarely research the investment, or check the background of the person offering the investment.
•The Ponzi operator often convinces investors to put their ‘profits' back into the Ponzi; ultimately they lose their original investment plus any profits they may have earned. Ponzi schemes spread by word of mouth. As more people hear of the apparently profitable investment, more investors want to get in on it. Early investors are paid out of money from new investors, at times for many years until the Ponzi collapses. The Ponzi scheme comes to an end when the number of new investors inevitably falls. With fewer new investors, there is no new money to pay the returns. If you lose your money to a Ponzi scheme, chances are you will not get your money back.
Although a Ponzi scheme can be difficult to spot, the following tips will help you protect your money from con artists:
•Watch out for investment promotions that offer guaranteed high returns and low risk. If an investment has a high return, you are taking a large risk with your money.
•Check the registration of the investment, and the person or company offering it. Many Ponzi operators are not registered to sell securities, nor is the investment itself registered.
Is it Independent Research or Paid Promotion?
The International Financial Securities Regulatory Commission is encouraging the public to consider the difference between marketing publications and investment advice. Unsolicited investment newsletters are commonly sent out by fax and e-mail by firms that are paid to promote investments. Before you act on the material, consider that it may not give you a balanced picture. Promotional Language:
•Headings such as "Hot Tip" and "Special Alert" will attract your attention to information that seems authoritative and professional, but may not provide the whole story.
•Statements like "the potential to make our readers wealthier than they ever imagined"- potential is not a guarantee.
•Claims that other smart investors are already following this advice - in the hopes that you will follow the crowd.
What you should watch out for:
•Fine print that contradicts what's promised in the newsletter. Look for statements like "The reader assumes all risk as to the accuracy and the use of this document."
•Free stock research that you didn't ask for. Chances are that someone who doesn't know anything about you or your investment objectives doesn't have your best interests in mind.
•Promotions for companies that are not listed on a stock exchange. These companies may be subject to less regulation and have fewer disclosure requirements - which means higher risk.
•References to current events like commodity shortages and global terrorism to create a sense of urgency. These are high-pressure sales tactics.