Brokers Gone Wild (Part 9)

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On January 5, 2009, in Investor Protection, Investors at Risk, Ponzi schemes, SEC, Scams, Securities Industry (general), by Investor's Watchblog

We were on Part 8 of a series called Brokers Gone Wild - in which we were following the course of a typical financial scam - when Bernard Madoff interrupted us. We will continue to post on the Madoff scam, but return to the BGW series now to conclude that series. In Part 8, the checks had stopped coming. You [...]

We were on Part 8 of a series called Brokers Gone Wild - in which we were following the course of a typical financial scam - when Bernard Madoff interrupted us. We will continue to post on the Madoff scam, but return to the BGW series now to conclude that series. In Part 8, the checks had stopped coming. You had begun to think that the worst may have happened, but didn’t know for sure yet. We pick the story up there.

If you have not yet called the Securities and Exchange Commission (SEC) or your state’s securities commissioner, one of your fellow investors surely has. The investment promoter may send an email letting you know that the SEC is investigating. He may ’welcome’ the development as a chance to ‘educate’ the SEC on the investment and prove to them that there is nothing to worry about. That is all bluster. He is ‘glad’ only that the regulators’ investigation gives him an excuse not to pay you. He knows that the end is not far away.

Soon, the SEC will likely ask a federal judge for an order shutting the investment down and freezing the assets of both the investment and the investment promoters. The SEC’s complaint will detail the ways in which the SEC believes the investment violates the federal securities laws. Oftentimes, the SEC will ask the Court to appoint a Receiver who will step into the place vacated by the investment promoters and will seek to preserve and recover assets while limiting expenses. (We’ll take a closer look at what a Receiver does in the next post in this series).

Because you may not have known that the SEC was investigating, its action in shutting down the investment may strike you as rash or ill-informed. You might blame the agency for your losses, believing that if it had just left things alone, you would have recovered your investment. But, the SEC investigated for weeks before it shut down the investment. The SEC staff had to convince both the Commissioners of the SEC in Washington, and, then, a federal judge that there were likely ongoing violations of the federal securities laws. The SEC does not bring such actions lightly, and never brings them without evidence in hand to prove the allegations.

You need never find yourself in this situation. Have a former SEC Enforcement Branch Chief investigate your broker and the investment he is offering, before you invest. Many baby boomers and senior citizens have done so and thereby saved their nest eggs from certain scrambling.