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Latest Headlines in Investment Fraud – August 2022

August 31, 2022 Blog

As retail investors wait to see how the markets will ultimately respond to the turmoil of 2022, it is important to keep in mind that market downturns are not the only risks these investors face. Investment fraud is a very real concern as well, and investors face risks ranging from broker fraud and mismanagement to the misleading promotion of high-risk structured investment products.

In this article, we have rounded up some of the latest headlines in investment fraud. If you believe you may be a victim of one of these schemes—or any other investment fraud scheme—we encourage you to contact us promptly for a free and confidential consultation:

FinCEN Warns of “Rising Trend of Elder Financial Exploitation”

In June 2022, the Financial Crimes Enforcement Network (FinCEN) issued an Advisory on Elder Financial Exploitation. As FinCEN wrote in a news release announcing the release of the Advisory, “In 2021, financial institutions filed 72,000 Suspicious Activity Reports (SARs) related to [elder financial exploitation]. [T]his represents an increase of 10,000 SARs over the previous year’s filings. The Consumer Financial Protection Bureau (CFPB)’s estimate of the dollar value of suspicious transactions linked to [elder financial exploitation] has similarly increased—from $2.6 billion in 2019 to $3.4 billion in 2020. This is the largest year-to-year increase since 2013.”

While elder financial exploitation is not new, this increase in prevalence is significant—and it underscores the importance of monitoring senior investors’ accounts for signs of fraud. Senior investors and their loved ones must also be cautious to avoid investment scams. Every year, we see numerous scams specifically designed to bilk seniors out of their hard-earned retirement savings.

SEC Announces Charges Related to Alleged Promissory Note Scheme Targeting Seniors

Just a few weeks ago, the U.S. Securities and Exchange Commission (SEC) announced charges against a firm and individual accused of conducting a promissory note scheme targeting seniors. According to the SEC, the defendants “induced investors, ranging in age from 64 to 82, to purchase the notes by promising exorbitant interest rates ranging from 50% to 175%.”

However, rather than investing these seniors’ funds in promissory notes, the defendants used their money to pay for personal expenses and luxury items. According to the SEC, the defendants spent $486,000 of investors’ funds “on purchases at Disney resorts, Tiffany & Co., and Gucci.”

Federal Prosecutors: Men Used Religious Affiliation to Perpetrate Investment Fraud Scheme

In July 2022, a federal jury convicted two individuals of perpetrating an investment fraud scheme through their affiliation with a religious organization. A third defendant pleaded guilty before trial and received a 30-month prison sentence.  According to a recent news report, the defendants used their religious affiliation to “’ promote[] themselves as Christian businessmen of unquestionable integrity as they were recruiting investors for overseas projects in Africa and the Philippines.”

Here, too, the report indicates that many of the victims were elderly individuals. Altogether, the defendants raised approximately $1.2 million through their fraudulent investment scheme, which they too used to cover their own personal expenses.

Regulator Announces “Sweep of Single Stock ETF Offerings”

In August 2022, Massachusetts’ Secretary of the Commonwealth announced a “sweep of single stock ETF offerings,” emphasizing the risk these exchange-traded funds present for retail investors. According to Investment News, Secretary William Gavin stated that “For nearly all Main Street investors, there is no difference between investing your money in single-stock ETFs and gambling with that money at a casino.”

Single-stock ETFs are a new phenomenon. The SEC authorized the first ones in mid-July, warning at the time that they presented “potential harm to investors who might not understand the nuances of ETFs designed for active traders.” These investments are unique in that they are designed to target a specific exposure and to be held for no more than a day. For investors who do not understand how single stock ETFs work or the risks they present, entrusting their savings to brokers and advisors who push these investments could lead to substantial losses.

David Lerner’s Energy 11 L.P. Reports $45 Million in “Unpaid Distributions” to Investors

In another article published in August, Investment News writes that a settlement between the Financial Industry Regulatory Authority (FINRA) and a barred former broker of David Lerner “highlights the millions of dollars of unpaid distributions . . . owed to investors who bought a proprietary energy fund, Energy 11 L.P., before energy prices collapsed in 2020 amid the Covid-19 pandemic.” According to the publication, while the proprietary fund had close to $360 million in total assets at the end of June, it has failed to pay approximately $45 million to investors.

The barred broker, Jeffrey Basford is currently facing multiple investor claims in FINRA arbitration, and David Lerner is seeking to distance itself from Basford’s misconduct—issuing a statement that Basford had an “unblemished record until Energy 11 suspended distributions.” However, a spokesperson for David Lerner also acknowledged that the outstanding distributions “must be accumulated and paid,” and Investment News reports that the firm has faced multiple prior claims related to its sale of proprietary investment products.

SEC: Atlanta-Based Firm Perpetrated $90 Million “Fix-and-Flip” Securitization Investment Scam

Also in August, the SEC issued a press release announcing charges against an Atlanta-based investment firm and its portfolio manager related to the firm’s “fix-and-flip” securitization scheme. According to the SEC, after raising $90 million from investors, the firm and its portfolio manager “artificially reduced delinquency rates by improperly diverting funds ostensibly held to reimburse borrowers for renovations made to the mortgaged properties, to instead pay down outstanding loan balances.”

Calling the scheme a “first-of-its-kind securitization of loans made . . . for the purpose of purchasing, renovating, and selling residential properties,” the SEC alleged that the firm’s and portfolio manager’s misrepresentations violated both the Securities Act of 1933 and the Investment Advisers Act of 1940. The defendants have agreed to settle the SEC’s charges for penalties totaling more than $1.8 million.

Are You a Victim of Investment Fraud?

If you are concerned that you may be a victim of investment fraud, you should speak with an attorney promptly. For a free and confidential consultation with an experienced attorney at Zamansky LLC, call 212-742-1414 or tell us how we can contact you online today.

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