The Madoff Ponzi scheme happened two years ago this past week.  Ponzi schemes are in the news again. The Justice Department announced this week that it had brought criminal and civil cases against more than 500 people for fraud schemes that involved more than $10 billion in losses.  The reality is that small-time Ponzi schemes have been coming to light with regularity since the financial crisis began and investors started asking for their money back. That’s a big problem when an investment scheme is built on paying out old investors with money brought in from new ones. According to data compiled by Investment News, a trade publication, schemes involving $9.244 billion in losses have been revealed so far this year.

Last week, a former Denver-area hedge fund manager, Sean Mueller, was convicted of running a scheme that bilked some 65 investors out of $71 million. One of those investors, John Elway, the former Denver Broncos quarterback,  lost $15 million.

Small investors who handed over their life savings to Mr. Mueller or other swindlers, will, in all likelihood, not fare well; they will probably never see that money again.

Here is a look at what all investors should consider to keep their money safe.

The people who are most likely to involve you in a swindle are friends and relatives. It has become so common that it now has its own name: affinity fraud.

We have a tendency to trust people we think are like ourselves.

One of the most egregious recent examples of this involved Imperia Invest IBC, whose assets were frozen by the Securities and Exchange Commission in October. According to the S.E.C., Imperia defrauded some 14,000 investors out of $7 million. About $4 million was collected primarily from the deaf.

Another big risk is to associate Ponzi schemes with hedge funds. The reality is that Mr. Madoff and the others who have been caught were not running hedge funds; they were running swindles.

The two most common themes were, “I have a complex strategy that I cannot divulge,”  and, ”I have a strategy that supplies double-digit returns year after year.”

Make sure to do your research before investing. The truth is, few people take the time to really do it.

One of the first things to do is a Google search of the accused schemer. Many people do not even do something as simple as a Google search, because someone they know recommended them or uses them as their broker.  It’s amazing to see the looks on clients faces when a simple Google search reveals previous complaints.

An investor should first ask the manager of the fund what institutions have invested with him. If the manager has been in the business for decades yet has not secured any institutional investments, that should be a warning sign.

Next, people should consider the manager’s background and ask where he learned how to manage money.  Then ask who the manager’s bosses were at those places.

Also, another approach is to make sure that all your investment eggs are not in one basket.  One of the easiest things investors could do was insist that a hedge fund use different firms for the three main services it needs: a clearinghouse to buy and sell securities, a custodian to hold the money and an administrator to ensure that the value of the assets is correct. Having one firm do all three can be a recipe for disaster.

If you have been caught up in a ponzi scheme, you may be able to recover your losses. Call a Securities arbitration lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Florida –On August 4, 2010 the Florida Office of Financial Regulation (OFR)released the 2010 list of most commonly used cons or traps investors should avoid.  Regulators found as the impact of the financial crisis continues along Main Street, investors seeking to jump-start their investment portfolios are most vulnerable and need to be wary of these popular scams.

• Exchange-Traded Funds (ETFs). While ETFs resemble mutual funds in many respects, some, such as leveraged and inverse ETFs, may contain hidden traps and complexities, and may consist of highly leveraged bundles of exotic financial instruments, including options and other derivatives. Given their potential for volatility, leveraged ETFs may not be suitable for most retail investors. These types of ETFs are primarily designed for short-term trading (such as day-trading), and not for buy-and-hold strategies. Also be aware that some ETFs are thinly traded and may not always be liquid.

• Foreign Exchange Trading Schemes. Currency trading and foreign exchange (forex) trading schemes can be particularly harmful to unsuspecting investors. Trading in foreign currencies requires resources far beyond the capacity of most individual investors. Promoters profit by charging high commissions or selling investment strategies assuming that trades are actually made.  In some instances, salesmen and promoters who claim to have complex algorithms or propriety software programs which allow them to beat the market are actually just running Ponzi schemes. Too often, state regulators have encountered situations where there are no trades; the money is simply stolen.

• Gold and Precious Metals. High gold prices have trapped some investors in gold bullion scams in which a seller offers to retain “purchased” gold in a “secure vault” and promises to sell the gold for the investor when it gains in value. In many instances the gold does not exist. Investors have also been harmed by promoters pitching investment pools in precious metal commodities and gold mines.

• Green Schemes. Investment opportunities tied to the development of new energy-efficient “green” technologies are increasingly popular with investors and scammers alike. Scammers also exploit headlines to cash in on unsuspecting investors, whether from investments related to the clean-up of the Gulf of Mexico oil spill or the rising national interest in environmental innovations tied to “clean” energy, such as wind energy, wave energy, carbon credits and other alternative energy financing.

• Oil & Gas Schemes. Regardless of the price at the pump, fraudulent energy promoters continue to capitalize both on interest in the commodity and on oil and gas as investment alternatives to the stock market. Oil and gas investments tend to be highly risky and unsuitable for traditional, smaller investors who cannot afford the risk. Securities investments offering profit participation in oil and gas ventures can be legitimate, but even when the underlying project is genuine, any revenues realized can be absorbed by high sales commissions paid to the promoter and dubious “expenses” skimmed off by the managing partner. Some promoters, many of whom have had past run-ins with regulators, have attempted to structure their “joint ventures” or “general partnerships” to avoid securities regulation and deprive investors of important protections.
 

• Affinity Fraud. Scam artists have found it lucrative to abuse membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Typical affinity groups include religious, ethnic, professional, educational, language, age and any other group with shared characteristics that allow investors to trust members of the group. Rather than trusting a person or company due to a common affiliation, investors should seek further information about the investment from an unbiased, independent source and review both the promises and risks.
• Undisclosed Conflicts of Interest. When obtaining investment advice about securities, investors need to know that not all advice is given with their best interest at heart. Some salespeople can receive lucrative commissions when they sell a product that is risky or inappropriate for an investor, but don’t have to disclose that financial incentive. Investors should demand that anyone giving advice or recommendations disclose how they are compensated.

• Private or Special Deals. Some investors encounter investment opportunities or deals couched as “private” or only for “special” clients. While securities laws do offer businesses the opportunity to raise capital by selling securities to a relatively small number of investors in a non-public offering, these securities are not subject to the same review as others. Many state securities regulators have seen continued or increased abuse of fraudulent private offerings made under federal exemptions or not regulated at all. Although properly used by many legitimate issuers, private offerings have become an attractive option for con artists looking to steal money from investors by promoting the special or private nature of these schemes and by making false and misleading representations.

• “Off the Books” Deals. “Off the books” sales are an increasingly common threat to investors. Be cautious if your broker offers an investment on the side instead of one sold through his or her employer. These “off books” investments may not only be illegal, but they can also be especially risky without the oversight and supervision of the broker’s employer.

• Unsolicited Online Pitches. Promoters of fraudulent investment schemes are moving beyond e-mail and turning to social media and online communities, such as Facebook, Twitter, Craigslist and YouTube to solicit unsuspecting investors. Some may use these sites to spread misinformation to artificially inflate the value of stock before selling in a “pump and dump” scheme. Others may promise high-yield, tax-free returns from investments in offshore markets. Once the money is sent to another country and is in someone else’s control, investors may not be able to get it back. In many cases, these offers turn out to be Ponzi schemes. Investors should approach any unsolicited investment opportunity with suspicion.

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The Salt Lake City Tribune reported today that Gov. Gary Herbert on Thursday pledged a crackdown on investment fraud in Utah where officials say they are currently investigating cases in which 4,400 people have lost as much as $1.4 billion.

He said the group is serious about prosecuting investment crimes and is launching an educational effort to keep people from being defrauded. Herbert called the problem “enormous” as he stood with local, state and federal officials who are members of the Utah Securities Fraud Task Force. “These kinds of fraud are things that we will not tolerate,” said Herbert at an afternoon news conference. “We are going to be aggressive. We are going to be proactive.”

“We believe the problem is bigger than these numbers indicate,” said McTighe.

James S. McTighe, FBI special agent in charge of the region that includes Utah, Idaho and Montana, said the federal investigative agency treats investment fraud “as a major issue here in Utah.” He said 370 potential scammers are under investigation in 115 cases.

The gathering of local, state and federal officials emphasized the prevalence of Ponzi schemes and affinity fraud. Ponzi schemes involve using monies from new investors to pay off earlier investors and make it appear an enterprise is prosperous. The officials described affinity fraud as a way of marketing bogus investments that involve members of a group who share an interest or relationship that makes them vulnerable to someone within the group attempting to scam them.

Affinity fraud is a serious problem in Utah because about 60 percent of residents share membership in one church, The Church of Jesus Christ of Latter-day Saints.

An Orem resident who asks that her last name not be used, Kaylene, said she invested $35,000 with a man who, like herself, was a member of the LDS Church. She said the man, identified in court documents as Terry Wayne Brown, caught her at an emotional time after her husband had died and used his church affiliation to convince her to invest without a contract or a receipt.

She described him as “a man from a really nice family, big home, new truck, nice clothes” who came to her with an investment that he said had changed his life.

“Then he told me he had been guided by the spirit to people who are struggling financially,” she said. “Then he said, ‘And I know I have been guided to you. I am here for your financial rescue.’ ”

Brown pleaded guilty last year to two counts of securities fraud and was sentenced to 90 days in jail and ordered to make restitution.

McTighe said a rough estimate is that half of the fraud being investigated in Utah involves affinity fraud among LDS members.

If you are a victim any of the alleged fraudulent tradings schemes in Utah and/or those involving Terry Wayne Brown, call a FINRA Securities arbitration lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA and the NFA.

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