As reported in the Daily Business Review by John Pacenti
SPECIAL REPORT: SECURITIES FRAUD
Boom or recession, the lures used by investment fraudsters to target their victims stay pretty much the same.
“It’s a lot of new wine in old bottles,” said David Nelson, director of the Miami regional office of the Securities Exchange Commission. “We see a lot of the same hooks. People are worried about their retirement. Do I have enough? Do I have too much? Do I have the right balance in my portfolio?”
The SEC scored a big victory in December against a Boca Raton radio personality who dispensed investment advice over the airwaves when a federal judge ordered payment of $9 million in civil fines and restitution.
Also late last year, the SEC filed charges alleging a basic pump-and-dump
penny stock scheme and a pension fund scam targeting Latin American investors.
“Our goal is to have a mix of investigations we are working on so we can maintain a presence in all of the area,” said Glenn Gordon, the region’s associate director. “That’s the best leverage of our resources. We don’t want anyone to think, ‘The SEC is not looking at this kind of fraud this year, so that’s the kind of fraud I’m going to engage in.’ We are interested in everything.”
South Florida has a reputation for being the scam capital of the United States, but the Miami field office remains only slightly busier than most, he said. The SEC does not release case numbers by region.
Civil attorneys who practice in securities litigation field see a slew of potential new cases for the SEC as a recession looms over the economy.
“We are at the point where we have all these problems with the real estate market and the stock market and at the same time we have an election year,” said attorney Melanie Damian with Damian & Valori in Miami. “The combination of these factors is you are going to get all types of litigation.”
Damian, who has been appointed to several federal securities receiverships, said private civil actions and SEC complaints often move simultaneously.
She represents investors who claim they were defrauded by a disbarred
lawyer and a friend who promised big profits from turnkey automated teller machine operations. A complaint filed Jan. 8 in U.S. District Court in Orlando alleges a $33 million fraud. The SEC also took action to freeze assets last year against several corporations run by the duo.
“It was only with the filing of the SEC compliant that plaintiffs and the class became aware of the defendants’ entities’ fraud and uncovered the fraud defendants’ role in perpetrating an investment fraud,” Damian’s complaint states.
Gordon said there can be an uptick in some types of fraud during a recession. “When times are bad, we see a lot of financial institutions cooking the books.”
But current events also can alter the types of cases brought by federal securities regulators. During the anthrax scare of 2001, a fraud case was brought against a company offering a so-called antidote to one of the world’s deadliest spores.
That’s old-school snake oil, plain and simple.
Nelson and Gordon said Florida remains ripe for fraudsters of all types. After all, to paraphrase bank robber Willie Sutton, this is where the money is.
Con artists – whether they are insider traders, pension fund managers or spam e-mailers – have their pick of the litter: retirees on fixed incomes, the wealthy with too much discretionary income and investors who know just too little. The SEC also sees affinity scams targeting trusting people among immigrants and church groups.
“If it’s too good to be true, don’t believe,” Gordon warns. “Ask yourself, if this is such a good deal, why is this person bringing it to you? Why doesn’t he tap into his family? Why hasn’t he liquidated his savings account?”
That’s where investment manager Ken Brown came in. He dispensed advice with his program on MoneyTalk Radio, WSBR-AM in Boca Raton. The SEC claimed Brown illegally cherry-picked stocks from his client’s portfolios since 2002 while passing on $9 million in losses to investors in a bull market. Brown, his wife, Wendy, and adviser Michael Cimilluca allegedly netted more than $4 million by fraud.
U.S. Magistrate Linnea R. Johnson in West Palm Beach found the three people and Brown’s companies liable after a nine-day civil bench trial for $4.5 million plus $4.5 million in fines.
Mark Tepper, a Fort Lauderdale solo practitioner who represents Brown’s
alleged victims, is encouraging the SEC to force the Browns to pay back investors before paying their fines. He expects to see more investors being taken advantage of if the economy turns sour.
“They are burned when they accept advice they shouldn’t have,” Tepper said.
He said there are still scams out there straight out of “Paper Moon” where widows are tricked out of their life savings. Tepper represents two women who were advised by the same broker to invest their late husbands’ life insurance policies.
“You could write on a pin what he knew about investing,” Tepper said of the broker. “Florida has a lot of retirees who are living on their investments, and these are the kind of investors that these people are targeting.”
When Brown went down, investor blogs were jammed.
“Who can you trust if not the host of two financial radio shows who hobnobbed with the late Louis Rukeyser and the secretary of the treasury?” Investors Watchdog asked. “The securities industry is broken with too few regulators to stop serious damage to baby boomers and senior citizens before it happens.”
Nelson insists he has plenty of staff to handle the heavy lifting and move swiftly to freeze assets. But he said there is so much his investigators and lawyers can do.
“Most of what we do is reactive,” he said. “We rarely learn about fraud ahead of time and generally when and if we do we would nip them in the bud.”
A challenging part of his job is to freeze assets through subpoenas before money is moved offshore and disappears.
Sometimes it’s a lost cause, Gordon said. In many pyramid schemes, the cash is flowing at such a fast pace that criminals fritter it away at fancy restaurants and on boats, jewelry, travel and other luxuries.
Still, the SEC has gotten a better track record in cash recovery.
In November, the agency announced it returned $2.7 million in full to 833 investors victimized by the fraudulent promotion and sale of illegally issued shares in Bio-Heal Laboratories. The company, which claimed to develop tropical natural healing products in Nicaragua, was the target of an emergency asset freeze issued by U.S. District Judge Patricia Seitz in Miami.
Former SEC attorney Mitch Herr, now a partner with Holland & Knight, said the agency has improved immensely in the wake of the Enron and other big corporate scandals. He said the government is giving the agency more money and paying its lawyers and accountants more.
“It’s become frankly a more serious regulatory agency,” Herr said.
Herr said the SEC’s bread and butter remains rooting out bad apples in the securities industry, and he noted SEC Chairman Christopher Cox has said mom-and-pop investors deserve the same protection as institutional investors.
Teaming with the FBI
In December, the SEC and the U.S. attorney’s office brought charges in Miami against six men in a pump-and-dump stock ruse. The men – many no strangers to securities fraud – were nabbed by an FBI agent posing as a corrupt hedge fund investment manager willing to take kick-backs.
The case showed how the SEC office can leverage its resources by teaming up with the FBI and federal prosecutors, Nelson said.
In another SEC case, U.S. District Judge K. Michael Moore ordered $7.1 million in restitution and fines in an affinity scheme targeting Haitian-Americans in Miami last February. About 600 victims were told they could expect a guaranteed 15 percent return on investments. Instead, it was an old-fashioned Ponzi scheme where old clients were paid off with money from new ones.
A lot can be accomplished by just keeping track of the con men – even the dead ones.
A complaint filed last August noted Frederick J. Kunen of Coconut Creek pitched a sham index options trading program, telling inexperienced investors he had an eight-year track record. He guaranteed a 10 percent to 20 percent risk-free monthly return.
The SEC claims Kunen ripped off 19 investors for $1 million and didn’t mention he had served a year in prison for leading a Ponzi scheme in 2001.
Kunen bought $150,000 in jewelry and a new BMW and was traveling in St. Maarten when he died July 11, thus proving the adage “You can’t take it with you.”
The SEC learned soon after that Kunen’s estate attorney, Charles O. Morgan Jr., was moving in on the remaining investors’ funds. U.S. District Judge Alan Gold granted the government’s request to indefinitely freeze the assets in a civil SEC action against Morgan.
“Targeting mainly individuals with little or no investment experience, Kunen enticed them to invest in the option trading program,” the complaint said. “He never disclosed that, in reality, his index options trading strategy was risky, or that he was a convicted felon for securities and bank fraud.”
Tepper said a little knowledge can cause big trouble for fraud victims.
“It’s usually not blue-collar or uneducated types who get duped by securities fraud. They tend to be suspicious,” he said. “Educated people who think they know what they are doing are ripe for the taking.”
Neil M. Nameroff, a Miami solo practitioner, said hard times make people do things they wouldn’t normally do, and good people – even stockbrokers – make bad mistakes.
“They get overextended and tragedies develop,” he said. “It’s a domino effect. The housing market goes, then it affects the mortgage industry, which hurts the financial markets, and now we see the stock market spiraling down horribly. People who have invested in real estate are losing their shirts.”
Gordon said bad times will reveal criminal acts that started during the boom time. “Sometimes they may have been cooking the books before, and they just can’t continue to maintain it when the economy goes bad,” he said.
If last year’s securities buzz phrase was stock options backdating for corporate executives, this year’s early candidate is mortgage-backed securities.
The SEC found fraud in the real estate downturn because some high-rise developers sold stakes that would pay off when condos units sold, Damian said. But many contract holders are balking when closing day approaches.
“That would be the next thing that either the SEC or private litigants will be looking at as far as securities fraud,” she said.
In fact, it’s already happened. U.S. District Judge John Antoon .lll in Orlando
ordered receivership in the case of developer Patrick Kirkland’s triplex developments. Antoon rejected Kirkland’s motion for summary judgment in September with an order beginning, “If it sounds too good to be true, you may be listening to Patrick Kirland.” Antoon froze Kirkland’s assets and is treating his sale of stakes in his developments as investments.
The subprime mortgage meltdown also is making a mess of the securities that backed them.
“We certainly are aware of what’s been going on with the subprime market,” Gordon said. ”We are interested in any illegal conduct in regards to the securities aspect. In regards to individual mortgage fraud, we are probably not interested. But fraud in terms of securities bundled together, sure that’s an interest to us.”
The SEC, especially in South Florida, continues to be on the lookout for fraud involving Latin America. The agency was crucial in the recover of $34 million pocketed by Coral Gables-based Pension Fund of America. The fund told Latin American investors that investments would be held by well-known financial institutions but instead was pilfered by fund managers and for sales commissions, the SEC alleged.
In a different case, the SEC filed a complaint against Coral Gables-based U.S. Pension Trust, claiming 14,000 mostly Latin American investors were taken for $178 million.
“We don’t want to become an area that is haven for fraudsters targeting foreigners,” Gordon said.
Another aspect of foreign fraud is that in many countries – Korea and Canada to name two – white-collar crimes are not prosecuted vigorously. In others, bribes are considered a part of doing business.
U.S. companies operating abroad may get involved with foreign businesses that break U.S. laws. Nelson said it’s up to his office to decipher whether a company was unaware of what its foreign partner was doing or if it was done “with a wink and nod.”
To further the breath of securities enforcement, Gordon said there is a concerted effort to share skills and knowledge with foreign regulators.
But Nelson and Gordon say there’s a fine balancing act when the SEC disciplines or fines a broker. An edict on a particular case can have far-reaching and unintended consequences in the market.
“You don’t want to constrain or restrain the markets. It could indirectly affect the whole industry,” Nelson said.
But big brokerage houses often want to clean house and come to the SEC when they’ve rooted out a problem.
“It’s important to note we reward self-reporting,” Gordon said.