Investor Alert – NASAA and SEC Warn about Cryptocurrency Related Investments

This past Thursday, the same day I posted about a recent FINRA Investor Alert regarding cryptocurrency, there was a new press release from the North American Securities Administrators Association (NASAA) with further guidance on the same topic. NASAA’s analysis and warning amounts to this:  Initial Coin Offerings (“ICOs”), and all other investment products related to cryptocurrency or the blockchain, pose a threat to investors.

“A NASAA survey of state and provincial securities regulators shows 94 percent believe there is a ‘high risk of fraud’ involving cryptocurrencies. Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.”

The same day, the SEC made a public statement from Chairman Jay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar, in wholehearted agreement with NASAA:  “The NASAA release also reminds investors that when they are offered and sold securities they are entitled to the benefits of state and federal securities laws, and that sellers and other market participants must follow these laws. Unfortunately, it is clear that many promoters of ICOs and others participating in the cryptocurrency – related investment markets are not following these laws. The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.”

“High risk of fraud”?  That’s a polite understatement. The conditions in this cryptocurrency market are the perfect conditions for bad actors to harm investors and cause investment losses. How? Fraud through market manipulation. Fraud through technical manipulation. Fraud through plain theft. Adverse terms and conditions on a clickthrough agreement. Technical failure, incompetence, malfeasance on the part of the provider. Cyberthreats from third parties online, vandals or burglars. Misrepresentations of the real possibility that cryptocurrency is an object of temporary interest, the bubble will pop, and prices will drop.

And, of course, bad actor conduct includes flawed recommendations by financial advisors to jump in and buy these new, complicated products related to cryptocurrency.  If your portfolio contains investments that, on closer examination, are not plausible or not understandable, that’s one of the ten red flags of financial fraud.

As a securities attorney, I represent investors nationwide who have lost money due to the conduct of a financial professional or a defective investment product.

The Investor Defenders at Samuels Yoelin Kantor LLP help investors get their money back from brokerage fraud, fraudulent investments, elder financial abuse, and other situations.  Our specialized investment litigation practice combines familiarity with complex financial modeling, experience with specialized FINRA arbitration rules and securities laws, and empathy for our clients whose financial losses have become personal.

If you have concerns about how your money is being handled by your financial professional, or if your broker has stopped returning your calls, contact me for a free, confidential consultation at 1-800-647-8130.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice also includes representing investors nationwide in investment disputes.

Investor Alert – Cryptocurrency Stock Scams

FINRA recently released an Investor Alert on cryptocurrency scams. Investors should be wary of jumping into this “hot,” volatile sector, and do their research before handing over their money to a potential fraudster, or for a risky investment that they don’t understand.

In the last quarter, cryptocurrencies such as Bitcoin and Ripple have received a fresh burst of press attention. This includes reporting on massive price swings up and down, and stories of overnight millionaires. According to the media, a Welsh man who spilled lemonade on his laptop in 2013 and absentmindedly threw the hard drive away now wants to mine the local dump for the hard drive. Why? It contained the key to access his lost Bitcoin fortune said to be worth $100 million — but only if he finds it and if the drive is still operational.  It’s a good metaphor for Wild West, gold rush atmosphere of the whole cryptocurrency hype.

With this Investor Alert, and other recent warnings, FINRA points out that:

According to a December 11, 2017, public statement from SEC Chairman Jay Clayton, the number of such investments registered with the SEC is ZERO. “Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.”

As a securities attorney, I represent investors nationwide who have lost money due to the conduct of a financial professional or a defective investment product.

The Investor Defenders at Samuels Yoelin Kantor LLP help investors get their money back from brokerage fraud, fraudulent investments, elder financial abuse, and other situations.  Our specialized investment litigation practice combines familiarity with complex financial modeling, experience with specialized FINRA arbitration rules and securities laws, and empathy for our clients whose financial losses have become personal.

If you have concerns about how your money is being handled by your financial professional, or if your broker has stopped returning your calls, contact me. Consultations are free and confidential. Call 1-800-647-8130 now.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice also includes representing investors nationwide in investment disputes.

Elder Financial Abuse Growing

(December 29) The case of a Florida retiree cheated out of his life savings highlights the tragic depth of financial abuse of the elderly.

Ninety-one-year-old Joe Forrest of Sarasota lost $246K to former broker Paul Arnold of Raymond James & Associates. Only the accidental intervention of a caring acquaintance led to an investigation and, ultimately, a FINRA judgment that stripped Arnold of his credentials, awarded Forrest $739K in restitution and damages, and led to an ongoing criminal case. The estimated size of the “industry” that financially exploits seniors is $2.9B in 2010, up about 10% from the previous year, and an estimated 86% of these victims do not report the crimes out of shame, confusion, or isolation.

(Barbara Peters Smith, Sarasota Florida Herald-Tribune, at www.heraldtribune.com)

DOJ Probing HP / Autonomy

(December 28) Yesterday in its annual 10-K regulatory filing, Hewlett-Packard stated that the Justice Department has opened an investigation into the accounting practices that have led the company to an $8.8B write down associated with its acquisition of Autonomy Corp. and a significant drop in HP’s share price in the last few weeks.

Autonomy, acquired by HP in October 2011, is a maker of high-margin data-mining software designed to find and organize the useful data buried in corporate networks. HP has accused the former Autonomy board of mis-attributing the revenues of more prosaic lines of business to the software, to bolster its apparent profitability. Sources indicate that the San Francisco office of the FBI is involved in the probe, and that shareholder suits are also developing.

(Bloomberg at www.bloomberg.com)

FINRA Fines Banks for Bond Misconduct

(December 27) FINRA has fined five major U.S. banks $4.48M for their misconduct in underwriting municipal bonds.

Between 2006 and 2010 the five banks (Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch and Morgan Stanley) underwrote municipal and state bond offerings in California, made payments to the lobbying group California Public Service Association (Cal PSA) for their legislative influence in Sacramento, and characterized those payments as “underwriting expenses” for which taxpayers were ultimately responsible. Although an industry-wide practice at the time, this violates the fair-dealing and supervisory rules of the Municipal Securities Rulemaking Board, the muni bond market’s self-regulatory body. Roughly a quarter of these specific fines go back to the bond issuers.

(Bloomberg at www.bloomberg.com)

Ninth Circuit Addresses Wells Fargo Overdrafts

(December 26) The U.S. Court of Appeals for the Ninth Circuit has vacated a $203M ruling against Wells Fargo Bank related to overdraft fees.

California consumers had sued the bank under the state’s Unfair Competition Laws, claiming that the bank’s practice of posting a day’s debit-card transactions in order from highest to lowest tended to maximize overdrafts, and thus maximize overdraft fees. In 2010 Judge Alsup of the U.S. District Court for Northern California agreed with the plaintiffs in a 90-page decision that took Wells Fargo to task both for the unfair posting order and for fraudulent misrepresentations to customers that claimed transactions were posted as they were received. Today the Ninth Circuit held that posting order is the bank’s decision, as part of its ability under the federal National Banking Act to set fees. However, the finding of fraud stands, and the case has been remanded back to the same Judge Alsup to determine an appropriate amount for restitution, and that amount may well come to $203M.

(Wall Street Journal at www.wsj.com)

Herbalife Attacked as Fraud

(December 20) Hedge fund manager William Ackman today launched a detailed attack on the network marketing nutrition company Herbalife, characterizing it as a fraudulent pyramid scheme.

During his presentation at the annual Sohn Conference, Ackman cited a 2002 FTC decision (“the organization is deemed a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers”), claimed the company meets that definition, and called for FTC involvement. The entire presentation, all 343 slides, is available here.

In May 2012 Herbalife and other network marketing shares fell sharply after similar questions about the company’s opaque revenue classifications were aired on an investor conference call. The head of Herbalife, Michael O. Johnson, is among the country’s highest-paid executives, at $89M in compensation last year. Ackman, who is the founder and CEO of Pershing Square Capital, holds short positions on Herbalife totaling about $1B.

(Bloomberg Businessweek at www.businessweek.com)

Industry Resists New ERISA Rules

(December 19) In 2011 the proposed redefinition of a relatively obscure term in a relatively obscure piece of legislation by the Department of Labor’s Employee Benefits Security Administration (EBSA) caused such a “tremendous and passionate” outcry from the financial services industry that the Department withdrew the proposal in September 2011.

The EBSA will re-introduce the proposal, this time bolstered with economic analyses, in 2013. The specific change will update and expand the 40-year-old definition of “fiduciary” within ERISA, and is likely to apply fiduciary standards to nearly everybody who provides investment advice to plan sponsors or plan participants, and will also cover IRA rollover accounts. The industry clearly expects additional expense, constraint, and complication. Of the 2500 independent financial advisors polled by the Financial Services Institute in November, 91% were opposed to the new rules.

(AdvisorOne at www.advisorone.com)

Plausible Challenge to Zeek Receiver

(December 17) Two former Zeek Rewards affiliates are mounting the first plausible legal challenge to the receiver in the case, hoping to avoid the receiver’s Ponzi clawback action that would force them to pay back their profits.

Former affiliates Trudy Gilmond and Kellie King have engaged Ira Sorkin, a notable former federal prosecutor in Manhattan and former SEC regional administrator, in their defense. Sorkin is perhaps best known for representing Bernard Madoff.

Their motion to intervene, filed Friday December 14 by Sorkin’s team, challenges the SEC’s jurisdiction along with all subsequent actions of the receiver because there were no securities involved to begin with. “What the SEC purports are investment contracts are nothing more than contractual rights entitling independent contractors to a share of a company’s profits in return for their efforts in promoting the company” according to the motion. “Because there is no security to justify the SEC’s jurisdiction in bringing this action, the individual appointed at the SEC’s request must be relieved of his duties, and the clawback suits must not go forward.”

Zeek Rewards collapsed earlier this year, a massive online Ponzi scheme involving about $660M and a million participants in 100 countries. Gilmond and King are two of the approximately 1200 “winners” being targeted by the receiver’s Ponzi clawback action. Gilmond and King’s profits taken together come to about $1,573,000, according to court filings.

(Davidson County, North Carolina Dispatch at www.the-dispatch.com)

“Cherry-Picking” at Aletheia

(December 16) The SEC today filed civil charges against the once-powerful Peter Eichler, Jr., and his embattled money management firm Aletheia Research and Management of Santa Monica.

At one point high-flying Aletheia had $10B in assets under management and counted the state pensions of Louisiana and Oklahoma among its clients, but declared bankruptcy in November amid chronic legal and financial trouble. The new charges of “cherry-picking” allege that Eichler habitually executed speculative options trades before allocating them to any account. The losing trades, profitable 32% of the time, then went to two hedge funds under his management. The winning trades went to his own account and to favored clients. Win rate? 98%.

(New York Times at http://dealbook.nytimes.com)