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With more people in charge of their investment portfolios than ever before, state securities officials are warning investors of the increasing sophistication of investment advisers who steal money from unsuspecting clients.
Victims include everyone from the retired couple next door, to the hot-shot young executive hoping to make a fast buck, to the doctor and his country-club friends. Recognizing that registered investment advisers are thinly regulated at the federal level, state securities agencies are moving aggressively to catch these swindlers and warn everyone that constant vigilance is the basic ingredient of being an investor in today's securities market.
Although most investment advisers are honest, those that are not see the burgeoning field of financial advice as a great way to line their own pockets. The danger is compounded by the average investor's desire for maximum return, the concern of retirees worried about outliving their savings, the increase in investment opportunities, and the growing number of individuals holding themselves out as qualified investment advisers nationwide.
The Texas State Securities Board, for example, reports that in the first five months of 1996, it received an average of 170 applications to register investment adviser company salespersons each month -- a rate more than twice that of previous years. By the end of Illinois's fiscal year ending June 30, 1996, 1,466 investment advisers had been registered by the Securities Department -- an increase of 5.7% over the preceding year.
The following cases are a sample of the new type of financial scams by self-proclaimed and registered small investment advisers that state securities enforcement officials are encountering:
Maryland-based investment adviser Joshua Fry, known widely due to his Saturday-morning radio show, induced his clients to turn over more than $4 million by touting phony performance figures for a bogus mutual fund called the GTC Fund, which stood for "Good >Til Canceled," that promised "maximum capital growth consistent with the preservation of capital." Fry used the money to run a typical Ponzi scheme in which early investors were paid with later victims' money. The money also supported a lavish lifestyle that included his own horse racing business and gambling junkets. Arrested in Cincinnati, he was ultimately sentenced to eight years in jail.
In Illinois, Howard and John Bozovich were not properly registered as investment advisers. Nevertheless, this father-and- son accounting firm told its clients that it would pool investor funds and purchase various securities. Twelve investors ultimately provided $1.7 million. Investigators from the Illinois Securities Department uncovered massive diversion of investor funds for the personal benefit of the Bozovichs. Victims included an entire church congregation where one of the Bozovichs served as treasurer. Both men were found guilty in state and federal courts. Howard was sentenced to 15 years. John received 11.
In Virginia, registered investment adviser Robert K. Williams, owner of College Planning Services of Virginia Beach, advertised his expertise in repositioning assets for families seeking financial aid for their college-bound children. Offering fraudulent securities and trust agreements, he obtained $293,000 from 14 Virginia investors and used the money to pay for personal and business expenses including a luxury Mercedes with the license plate IPLAN4U. One of his victims was a 19-year-old man who lost $15,000 he had received after his father had died from cancer. Williams was convicted on one count of mail fraud, sentenced to 24 months in prison plus three years of probation, and ordered to make restitution.
The Colorado Division of Securities reports that Murleen K. Kunzman swindled $1.8 million from 80 individuals she recruited from her income tax preparation service. In league with her husband and son, the Greeley, Colorado woman convinced her carefully selected clients that they would receive returns higher than certificates of deposit from nine separate limited partnerships in residential mortgage loans that she offered. After pleading guilty, she was convicted of securities fraud and money laundering and sentenced to 57 months in federal prison. Her former clients lost everything they invested.
A former pro football player with a history of being disciplined for securities violations by the New York Stock Exchange, the National Association of Securities Dealers, as well as New Hampshire and Vermont, this self-proclaimed investment adviser was arrested in September 1995 after a joint investigation by the Vermont Securities Division and the FBI. The accused allegedly ran a Ponzi scheme in which early investors were paid with money provided by later ones, then encouraged to invest ever larger sums. Residents of Vermont, New Hampshire, Massachusetts, and Florida may have been bilked out of as much as $30 million. The accused owned several luxury homes and an airplane, was an avid golfer, and recruited many of his victims from a local country club.
In the United States, over 22,000 investment adviser firms -- entrusted with $10 trillion in customer funds -- are registered with the Securities and Exchange Commission (SEC). Yet according to Chairman Arthur Levitt, they can expect a visit, on average, only once every 44 years! Levitt has stated publicly that his agency simply does not have the resources to inspect and investigate smaller investment advisers. So, the responsibility is left to the states.
To date, all but four states require investment advisers to be licensed. (Colorado, Ohio, Iowa, and Wyoming are the exceptions.) Most states require investment advisers to pass an examination, undergo background checks, renew their registration annually, and report changes in their businesses or addresses promptly. States also review an applicant's disciplinary history and financial stability prior to allowing the investment adviser to conduct business in a given jurisdiction.
The point-of-contact sale for most people is the investment adviser representative or salesperson. Over 30 states require that investment adviser representatives be licensed -- the SEC does not.
Most states also protect investors by actively pursuing a program of unannounced, on-site examinations of small investment advisers and careful screening of promotional materials.
1. Investigate the investment adviser and salesperson thoroughly. First, call the Indiana Securities Division at its toll-free number, 1-800-223-8791, to find out if he or she is properly licensed to provide investment advice. If the individual also is licensed as a stockbroker, background information will be available through the Indiana Securities Division from the Central Registration Depository (CRD) -- a computerized reference system operated jointly by the North American Securities Administrators Association (NASAA) and the National Association of Securities Dealers (NASD).
2. Is the investment opportunity registered for sale in the state in which you live? Call the Indiana Securities Division to find out. All investment opportunities must be registered or exempt. If one being recommended to you isn't registered or exempt, consider that a red warning flag to investigate further. Ask for written Adisclosure@ information. Review it carefully and make sure that you understand all of the risks involved. If you have questions, ask, and keep asking until you get an answer you understand. If you're pressured by a investment adviser to make a hasty decision, just say "no." After all, it is your money.
3. Always stay in charge of your money. Protect your nest egg. If the world of investments baffles you, carve out time to educate yourself. Read one or more of the many magazines devoted to personal finance on a regular basis. Once you've made an investment, carefully review your account statement. Make sure you know where your money is being held. Generally, you should receive account statements from the custodian of the securities as well as from your investment adviser. Confirm that all transactions are ones you've authorized.
4. Remember that con artists are usually extremely polite. Here's how you will probably be approached: A successful swindler will deliver a professional-sounding sales pitch that makes the flimsiest investment deal sound as safe as putting money in the bank. He or she will be extremely polite, dress in expensive clothes, and may work out of impressive offices with prestigious addresses. Many troll for prospects at houses of worship, country clubs, or senior centers. Others lull investors into complacency by first providing a sound financial service, then moving in for the kill. Before turning over any of your hard-earned money, call the Indiana Securities Division and check out the salesperson.
5. Keep greed in check. If the return on an investment sounds too good to be true, it probably is. A legitimate adviser should find out about your financial needs and goals, as well as the level of risk you are comfortable with, then suggest a "suitable investment." Don't allow the promise of inflated returns to cloud your judgment. Many people secretly believe that a rags-to-riches story can become a reality for them -- if only they get the right break. Con artists play upon the dreamer in all of us. Don't let them sabotage your dreams.
6. Keep notes about phone conversations and meetings. It's important to keep a record of your conversations and meetings between you and your investment adviser. Con artists operate in an atmosphere of trust that persuades people there is no need to keep careful records. But don't be fooled! Be sure to jot down the date, time, and place, as well. By keeping careful notes, you won't have to rely upon your memory if your adviser tells you something down the road that just doesn't seem right. If a lawsuit or dispute does occur, careful notes will set the record straight.
Whether due to a self-directed retirement plan, an inheritance, saving for a child's education, or other reasons, today, more Americans than ever before find themselves in charge of their financial investments. Handling those investments are some of the most important decisions anyone can make. Although the vast majority of financial advisers are trustworthy, be on the look-out for those that are not. Being an investor requires education and attentiveness. Start asking questions before it's too late.
Call the Indiana Securities Division at its toll-free number,1-800-223- 8791.