Securities Fraud Claims: Common Scams Investors Need to Know

Is securities fraud the same thing as investment fraud? Investment Fraud Lawyer Jake Zamansky breaks down this complicated area of law with specific case examples. Learn more https://www.zamansky.com/securities-fraud-lawyer/securities-arbitration/

Transcript

00:10

Hello everyone. Welcome to the next episode of The Investment Fraud Lawyer Speaks a podcast produced by the Zamansky Law Firm. I'm Nancy Rapp from PaperStreet and I'm speaking with the Founder of the law firm Jake Zamansky. Jake is one of the preeminent lawyers in the country for security fraud matters and FINRA arbitration. The law firm represents individuals and institutional clients and cases against Wall Street firms for investment fraud losses. Today, we'll take a take a step back from some of our other shows and go into further detail regarding securities fraud and securities arbitrations. These concepts are not necessarily well known by many investors, and Jake will use this opportunity to explain the proceedings and some of the results of his recent cases. 

Hello, again, Jake, thanks for joining us. Let's get started with some quick clarifications for our listeners. Is securities fraud the same thing as investment fraud? Is there a reason that the names have there's different names for these proceedings?

01:07

There's similar concept securities fraud generally refers to a stock of fraud where someone misrepresents the nature of a security or makes a full statement such as, let's say an earnings release. You put in a phony earnings release and a stock moves, investment in fraud. In involves misrepresenting stocks or other investments to individuals. And from that they can bring claims to recover their losses.

01:45

And in securities fraud, they can recover their losses as well.

01:48

Yes, generally securities fraud cases are brought in court. And often in terms of class actions. investment fraud, generally lends itself to FINRA arbitration, the Financial Industry Regulatory Authority, where individuals or institutions can bring their claims against broker dealers, and financial advisors that sold them of faulty products or made false statements.

02:20

Now with that in mind, let's describe these proceedings a bit. Could you explain what it would be like for an investor to go through both the securities litigation process and the FINRA arbitration, what they would expect and how they're a little different? 

02:33

Sure, if you go into a FINRA arbitration, a FINRA is administered, administered by the a self regulatory body, they have arbitration proceedings, where you go in front of three arbitrators. They're usually lawyers or business people, and those three arbitrators decide your case, in securities fraud, you generally go in front of a court, you have a judge and a jury that makes decisions. So let's talk about how one can bring a FINRA arbitration. First, you have to find a good lawyer that knows this business present him or her with the documents they need to review the case. They then prepare what's called a Statement of Claim, which lays out the claims that you're asserting the two most common ones are unsuitable investment recommendations. Broker told me it was a low risk investment. And in fact, it was a high risk investment that would make it a misrepresentation and also an unsuitable recommendation if you're a conservative investor, and someone pitched you a high risk investment. There also may be misrepresentations about features of certain products like option strategies where you're either told something misleading, where they left out important information.

04:05

Now, are there damages available in these cases? Is it typical like the way same way a person would renew like a personal injury lawsuit? Can that person still hope to recover some damages?

04:15

Yeah, let me just add that in these cases, the Federal Arbitration you present witnesses and documents. The typical witness in a case would be a broker, the customer has super the supervisor, the broker, and then you can call expert witnesses, and they are the ones that often testify about damages. So if you've put in let's say, a million dollars and you lost a half a million dollars, a half a million dollars would be your compensatory or net out of pocket damages, what you put in what you have left, you can also get damages in the form of a of interest and attorneys fees you can recover in some states. And in an egregious situation such as where you know, someone broke or is committing elder abuse, or there's a Ponzi scheme or something like that you could have punitive damages, which could be large to punish the broker or the firm for their gross misconduct.

05:24

Now, aside from obviously experience, is there anything in particular that so much look for when they're seeking an attorney in either securities litigation or FINRA arbitration? Is there any specific qualities or accreditations that matter most? 

05:38

Yeah, you want to look at the attorneys website, but ours, for example, is is umansky.com. And you can see the type of cases we've had the results, the wins, we've had the settlements, we've had the reviews by other clients of the firm, and it gives you a good background of, you know, what are practices, if someone does not have that kind of specific practice, you really shouldn't go to them. This is a very specialized field, you need to have somebody with the expertise.

06:11

Now, Jake, one of the current investigations or one of your ongoing claims that you're looking at as a case of securities for fraud involving high yield investment fraud cases, could you break some of these claims down for us? 

06:24

In the last few years we've seen brokers and financial advisors pitching risky, high yield bonds, and telling investors that they're low risk. We've seen this a lot when people when the interest rates were low, that a year and a half ago, people were searching for yield. And a lot of you know, brokers and advisors pitched, these high yield bonds, in some cases, their junk bonds, very risky, you know, low credit quality. One of the ones we've looked at and brought cases against is a company called GWG l bonds, which were bought and sold, and they were supposed to be backed by life insurance policies. If someone passes away, then they get a big reward when the policy pays, but they issued bonds so they could buy these policies. What we found out was, they had sold billions of these l bonds, the CWG company through a whole distribution network, the 1000s of customers. Our investigation shows that rather than just buying life insurance policies, a lot of the money was put into alternative investments of company insiders, which was inappropriate and was not disclosed. Shortly thereafter, this company went bankrupt CI WG but there's still many cases going on against the brokerage firms that sold these investments. They're responsible for failing to do due diligence, failing to make proper disclosures and in some cases out outright misrepresentation fraud.

08:10

What was the company trying to gain by having them not do what they said they were going to do? Was it just trying to yield more money for their clients? Or were they doing some you know, devious practice or deceptive practices intentionally?

08:24

It looks like they were, you know, trying to enrich themselves with company money. It's always a bad sign when insiders are using company money to invest in other strategies maybe, you know, those strategies are too risky. They benefit the insiders in some cases, there may be real fraud. Couple other situations we're looking at is something called contingent convertible bonds, where they use the name Coco's CEO. Recently, Credit Suisse had issued $17 billion worth of these Coco's contingent convertible bonds. And they paid a high rate of interest 9% or more a lot of investors, particularly in Asia went into these cocoa bonds. Well, when Credit Suisse was in financial trouble, and the Swiss government had UBS takeover the company, those bonds became worthless, absolutely worthless, $17 billion up in smoke, you're now seeing investors bringing claims Morgan Stanley, and other major firms like UBS and Credit Suisse sold these bonds to investors. And it doesn't appear that there was sufficient disclosure of the risk and that these bondholders were treated properly after the collapse.

09:53

There doesn't seem to be very much press regarding this case as much as you would think then that then that situation there it seems more than to pull the news media's we're focusing more on just the collapse of the bank, then this potential lawsuit, right?

10:05

That's exactly right. This was this was an investment that was set up. In case there was trouble with the bank. You know, if a bank went out of business, this one didn't go out of business, it was acquired, you know, for some billions of dollars by UBS. So UBS will probably be sued for these bonds. But yes, there has hasn't been as much coverage as there should be that 17 billion is an awful lot of money. And like I say, a lot of people all over the world, including in Asia, suffered massive losses. Another thing we're seeing is structured products. This is another area where a broker's when there was a low yield environment, we're pitching structured products. It's a combination or a hybrid between equity and a bond. And when we had the recent downturn in the stock market, a lot of these structured products lost tremendous value. They're basically they have a reference index. So for example, if I put a million dollars into it, a UBS structured product, and there's an index, which determines the rate of return, it could be what the S&P does, it could be a stock like Apple or Tesla. And if those stocks go below a certain level, there'll be you can lose principal. These are risky investments. They're illiquid, you can't really sell them, you have to hold them to maturity, which could be one or three years. So if people have structured products, they may not realize that they have substantial losses. This is a good time when you're getting together with your accountants doing your tax returns to look and see what kind of losses you have on your returns. And if you see something that looks really fishy, you should contact a securities lawyer and think about a FINRA case.

12:07

What would your accountant be looking for just a very large loss? Or is there some other telltale signs that an accountant or someone with financial know how may catch?

12:16

Yeah, well, certainly large losses is one of the main things you want to look at. If if you're seeing high commissions are fees that you didn't anticipate, that's something you might want to look at, and see people have sold annuities, you know, which are supposed to pay over a period of time, but there's often, you know, high fees associated with that. So I guess the telltale sign is, is losses. And, you know, if people are on margin that amplifies the loss you if something goes down, it could go down twice as fast if you're on margin. So those are the things you should look for.

12:56

Yes, for our audience who don't may not know, what does it mean, if someone's on margin.

13:01

Margin means borrowing money to pay to buy stock. So if I bought, let's say, $200,000 worth of the stock, and I only put up $100,000 in cash, I'm borrowing 100 grand from the firm. So I'm buying twice as much stock as a normal situation, and I'm borrowing that money. If the stock goes down rapidly, I could get a margin call and have to pay it back. So margin really increases the return if it goes up and increases the risk if it goes down.

13:41

Now that's a good segue, Jake, because it seems like a lot of the securities arbitration cases are going to be those involving stockbroker fraud. Let's start talking about these cases. In particular, let's talk about something that tends to catch media attention. And it's more of what I think what people think of when they think about stockbroker fraud and that's broker embezzlement. 

14:01

Yeah, we've seen a lot of this lately. And it's a big problem brokers stealing from customers or having phony accounts or even Ponzi schemes. One such case that's pending now is against Oppenheimer, the company. There was a broker named John Woods, who was running a Ponzi scheme outside of the firm. So if you put million dollars into your Oppenheimer account, Woods would take the money out, wire it to his own company called Horizon. It was like a private equity company, but it was really a Ponzi scheme. Woods is out of the business, and customers are suing but you see a lot of this. Another name for this is called selling away. If somebody's at a Merrill Lynch or UBS or Morgan Stanley, any investment you have should be on that stage. Pinkman that the firm issues if a broker has us doing something at another firm or outside the company, that's a red flag. And often we see brokers stealing, they set up a nice sounding name, like in the case of woods, you know, Horizon private equity, you know, or sunshine capital or something. When you see something like that, you gotta be careful, the broker could be stealing your money and putting it into something outside of a regular firm, usually a bad sign.

15:31

For someone like me, who's a novice, that sounds like it would be an automatic red flag, if they were redirecting your money. Is there any cases where the redirect would actually be legitimate?

15:41

No, not really, everything has to go through, if you're with the firm has to go through that firm, and should be reported on you know, your UBS or Morgan Stanley statement. Every investment has to be vetted by the firm, they have to know what it is it has to be on what they call their platform. If it's not on their platform, the broker is not allowed to sell it. So it's a problem for the broker, and it's a problem for the customer.

16:08

So basically, in this situation, if it seems fishy, it probably is.

16:13

Absolutely where there's smoke, there's fire. And this is an area you got to really be careful with. Because that money can disappear fast, and it's hard to recover it. A lot of times the firm say says it's not our responsibility, you know, you did that outside the firm, and then the broker goes bankrupt or goes AWOL.

16:32

But what about cases of stockbroker fraud that may not be so overtly, you know, theft or, you know, just seeming like criminal activity? What about one unauthorized use of funds or failure to supervise?

16:52

Well, you raise a good point, failure to supervise involves a brokerage firm having a duty or responsibility to monitor the broker and know what the broker financial advisor is doing. They're supposed to, they actually have computer models, where they it's called an exception report, which is run every month. It has red flags, when there's high commissions when there's high losses, high turnover, turning the stocks over, you know, too frequently. So, someone is at the controls, supposedly, in at the supervisory level, they're supposed to flag problems. They're supposed to talk to the brokers frequently, and they're supposed to monitor customer accounts. So if money is going out of an account, or if there are large losses, it's a firm's responsibility to check with the broker. And, you know, even check with customers directly, managers should call customers to make sure that they understand that their losses, they understand what they're invested in. That's a key responsibility of a brokerage firm is to supervise, if they fail to supervised, the firm itself can be held responsible.

18:09

In essence it is essentially negligence by a law firm. I mean, a stockbroker.

18:13

Yeah, it's negligence. Sometimes it's recklessness. But you know, they have a responsibility. When you go to a major firm like a UBS or Morgan Stanley or Wells Fargo, you expect that there are supervisors watching the store watching the brokers, there are a lot of bad apples there. So you want to make sure that someone is on top of it. And you know, if there's a problem that they deal with it at an early stage, you know, before the money's all gone.

18:42

Jake, I know we talked about this in another show, but I think we're it's worth mentioning again, in case listeners hadn't missed that one. But unauthorized trading. You and I had discussed that sometimes we there might be a no harm no foul situation with this where sometimes some actions were taken where there wasn't a loss. But what if there was a loss and or what should an investor do if they just simply don't like that these actions were taken?

19:06

Well, they should contact the securities attorney. And, you know, see if there's a case, they can contact the management at these firms. When a customer makes a complaint, you know, by email or even on the phone, it gets logged in as a customer complaint, and it has to be investigated. internally. There are also regulators, the Securities Exchange Commission and FINRA, they receive a lot of customer complaints. So those are ways that a customer can make a complaint heard.

19:38

And that's probably good to do just so that there isn't these continued steps taken even if they were with good intentions or something like that. 

19:47

Yeah, it could be also symptomatic of a larger problem. And, you know, by bringing it to the firm or lawyer or regulators attention, you're helping other people so that they don't get you know, scammed or fleeced

20:01

All right, and then get another major set of securities fraud claims that seemed to be slightly more in the media than others would be pump and dump schemes. Now, these schemes we've seen in popular culture such as the movie The Wolf of Wall Street, but perhaps people didn't realize what exactly was transpiring in these claims, could you discuss these both in their overall usage and have some real-world examples?

20:24

Okay, I have to admit, I actually represented the Wolf of Wall Street Belfort a long time ago, and I learned all about these situations firsthand, his company was called Stratton Oakmont. And what they did was, they would pump up the price of new stocks to a high level. So if a stock came out and IPO at $5 a share, they would have older brokers calling older customers hyping the stock, trying to get people to buy in creating a huge demand. A lot of these are what we call thinly traded stocks. It's not like they're, you know, widely held on the New York Stock Exchange. They're NASDAQ stocks, and so it starts at say, five hours with an IPO, tremendous selling pressure, the stock goes up to 10 or 15. At a lot of times, insiders at these companies will sell out at those high prices, and then the stock collapses, once the demand is gone. And, and, you know, the media and, and investors realize this is not such a good company, the stock price collapses, you know, there you have the pump, and then the dump, the insiders have dumped their shares, the the ordinary investors are left holding the bag, and they've got losses, this is also called Market manipulation. And we see this a lot with some of these Bitcoin companies, you know, that that go up tremendously in value, and, and then collapse. So, there's also you know, if someone's hyping a hot pharmaceutical stock, you know, saying that a certain, you know, clinical trial is being approved, and it's not, they pump it up, they get they take their winnings and, and sell their stock, and then leave the other investors, you know, with with huge losses. So it's a terrible situation, we see that a lot, these pump and dumps it's usually with smaller companies, you know, with lower tier brokers. So you really have to do your due diligence, who's your broker? Has he or she been sued before? Have they hopped around to a lot of different firms, you can go on FINRA broker check and see anything about your broker, if there's a lot of disclosures or customer complaints, you should run away from that person.

22:55

With Palmer, Dempsey, these tend to be in particular industries, like I know, we've talked about how like Silicon Valley stocks can have some corruption too. But is there any particular industry where you see pump and dump the most are now?

23:08

Well, we see it in a lot of internet related stocks, startup companies, you know, things that have a hot name, like I said, Bitcoin, now we're talking about artificial intelligence, you know, there's some very good firms doing artificial intelligent work. But I'm sure we're going to see a lot of fraudulent companies claiming that they have, you know, great artificial intelligence products, and they really don't. So that's, you know, it's new companies generally with a hot story. And they're usually smaller offerings. And from, you know, dubious investment banks that are selling them.

23:49

With these schemes, it seems like an investor wouldn't know that something was going wrong until it was very much too late. Is that the case? It doesn't seem like there would be some obvious warning signs for them to pull out faster, or is there something that they could look for?

24:04

You really have to do your due diligence, you have to look at the company, what kind of reports they put out to the public. You have to look at the reputation and the background of the companies that are offering these stocks, you know, who's the underwriter? Who's the selling group? If you see a selling group with a lot of customer complaints, or, you know, someone who's not really registered at a certain firm or the office isn't a legitimate office, you really have to do some digging, because once these things collapse, you know, it's hard to recover. A lot of these firms go out of business. So the more due diligence you can do on the company, the principles of the company, the products, the better chance you have of not getting scammed.

25:00

See the potential investors should research the business that they're investing into as much as their investment broker as well for situations like this?

25:09

If it's if it's cryptocurrency or artificial intelligence, you know, do some work looking at what is the service or product being provided? How mature is the market? And these guys have a background and they have customers? Do they have a track record? These are the types of things you have to look for. 

25:33

In other words, sometimes it might be the more trendy the product or stock, the more risks that will be associated.

25:39

Absolutely right. These brokers who pump these stocks look have to have a story. You know, it could be a healthcare story, a crypto story, but when there's a hot story, you know, people are interested in getting involved. That's an easy sales pitch. But a lot of times there's nothing behind the story.

26:00

All right, Jake. Well, I think we've educated our listeners a lot today on some interesting new scams that people may not have been aware of, and then some other things to take caution for. So we thank you once again for joining us today and we tell our listeners catch us next time for more information about securities and investment fraud. Thanks, everyone.

26:17

Thank you so much.