Department of Financial Institutions
January 14, 2004
Deborah Bortner, Director Of SecuritiesPh: 360-902-8797, Skinney@Dfi.Wa.Gov
For immediate Release:
Investors In WASHINGTON Must
be aware of fraudulent activitiesOLYMPIA, WA – Investors are losing billions of dollars annually to investment fraud. During 2003, the Washington State Department of Financial Institutions (DFI) took action in investment fraud cases totaling over $200 million. The Department is forecasting that consumers will again be challenged with increasingly complex, confusing, and fraudulent investments in 2004. In a survey released today, the North American Securities Administrators Association and DFI identified the top 10 investment scams for which investors should be on the look out.
“In the past year our investigation team came face to face with many of the age-old investment schemes that cheat consumers out of their money time and time again. But, con artists are discovering new ways to take advantage of the public,” said Deb Bortner, Director of Securities.
The North American Securities Administrators
Association surveyed state securities regulators to create a list of the
most common scams across the country. The following frauds are ranked in
the order of prevalence and seriousness as identified by state regulators.
(Additional information outlining each scam is attached.)
- Ponzi Schemes
- Senior Investment Fraud
- Promissory Notes
- Unscrupulous Brokers
- Affinity Fraud
- Insurance Agent Securities Fraud
- Prime Bank/High-Yield Investment Schemes
- Internet Fraud
- Mutual Fund Business Practices
- Variable Annuities
“The numbers of complaints brought to our attention are on the rise. I give credit to the investors who are taking a closer look at their investment options and asking the right questions about unexplained fees or other irregularities,” said Bortner.
Enforcement actions taken by the Washington State DFI in the past year reflect the trends shown in the NASAA Regulator Survey. The Department released a list of some of the investigations that were successful at ending consumer abuse. “These cases make it clear that, ‘it can happen here,’” says Bortner.
Larry Starchman – Monroe, Wa
- Ponzi scheme
- affinity fraud
Starchman recruited investors from among his church congregation promising to make high returns in his day trading venture. To sell his plan, Starchman provided false statements showing that other investors had made money in his investment program. In reality, Starchman’s investment plan lost, rather than earned and a significant portion of the money was not invested in the program. Eventually his Ponzi scheme collapsed.
Kevin L. Lawrence – Bainbridge Island, WA
- unlicensed securities sellers
- senior fraud
- promissory notes
- affinity fraud
In the largest Ponzi scheme in Washington history, Lawrence pleaded guilty to three felony criminal offenses and was sentenced in the Seattle U.S. District Court to 20 years in prison and ordered to pay over $91 million in restitution. Over 5,000 investors from 36 states and several foreign countries were victims of a scheme that touted the imminent public stock offering of Lawrence’s health and fitness company, Znetix. Some of the victims included senior citizens and others were solicited by fellow church members or members of social and business organizations.
Lonzo Archer – New Brunswick, NJ
DFI alleges that Lonzo Archer recommended unsuitable securities to an elderly couple and excessively traded their accounts to generate commissions. The couple allegedly paid at least $35,000 in commissions while sustaining losses of approximately $118,300.
Dave Augustus Green - Florida
Dave Augustus Green cold-called at least two Washington residents from his Florida office and then began unauthorized trading after establishing an account for them. Green settled with the Department for engaging in excessive trading and unauthorized trading in their accounts. Green agreed to give up his securities salesperson registration and not to apply for a license as a securities salesperson or investment adviser representative for three years. He repaid the commissions he received from one Washington investor, paid a $3,000 fine and reimbursed DFI for its investigative costs.Herbert Sweeting – Edmonds, WA
- senior fraud
- insurance agents & other unlicensed securities
Sweeting, an insurance agent, sold unregistered securities to his acquaintances, including one elderly person to whom he sold more than $450,000 in high-risk investments. Sweeting was the insurance agent for another family member and was able to develop a relationship of trust with the victim. He used the money to invest in pay telephone and equipment leasing businesses, a closely held business and a stock-trading venture, as well as a treasure recovery project in the Philippines. Sweeting also used the victim’s money to trade in his own stock brokerage account and in a foreign currency trading account. Most of the money was lost.
“Consumers can protect themselves by learning to recognize the signs of fraud,” says Bortner. “Many of the abuses we investigate could easily have been avoided if the investors were more watchful. Consumers should be vigilant in reading their account statements to make sure they have authorized all transactions, Bortner advises. For more information about securities and investments, visit the DFI web site. (www.dfi.wa.gov). Consumers with questions or complaints are encouraged to contact the Department at 1-877-RING DFI (1-877-746-4334).
Department of Financial Institutions
PONZI SCHEMES Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors.
SENIOR FRAUD Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combined to create a perfect storm for investment fraud against senior investors. Older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns.
PROMISSORY NOTES Promissory notes are often sold by independent insurance agents and issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person.
UNSCRUPULOUS BROKERS Despite the stock market’s rebound in 2003, state securities regulators say they are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets.
AFFINITY FRAUD Con artists know that its only human nature to trust people who are like yourself and use their victim’s religious or ethnic identity to gain their trust and then steal their life savings.
INSURANCE AGENTS AND OTHER UNLICENSED SECURITIES SELLERS While most independent insurance agents are honest professionals, too many are lured by high commissions into selling fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts and viatical settlements. The person running the scam instructs the independent sales force to promise high returns with little or no risk.
PRIME BANK SCHEMES Con artists promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to prime banks. It is common to avoid the term altogether and underplay the role of banks by referring to these schemes as “risk free guaranteed high yield instruments” or something equally deceptive.
INTERNET FRAUD Con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. The most recent figures show cyberfraudsters took in $122 million in 2002, according to the Federal Trade Commission.
MUTUAL FUND BUSINESS PRACTICES To date, more than a dozen mutual funds are under investigation and several mutual funds and mutual fund employees have either pleaded guilty, been charged or settled with state regulators. Ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders.
VARIABLE ANNUITIES High commissions often are the driving force for sales of variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. Investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities.