Good News for SEC

The news that Congress will leave the U.S. Securities and Exchange Commission intact as a part of its revamp of financial regulation is good news. Combining the Commodity Futures Trading Commission with the SEC would have just created a larger bureaucracy with more opportunity for inefficiencies. Now I hope Congress will dedicate additional resources to the SEC, a small agency with a huge mandate.

I know the SEC has come under serious criticisms lately. And some of it has been deserved. But my experience working with the SEC enforcement staff has been very positive over the last thirty years. My only criticism of the SEC over the years is the lack of resources in every state. The grouping of SEC enforcement and examination personnel in regional offices is more cost efficient, but assigning SEC personnel to staff an office in each state would substantially increase the SEC's coordination with state regulators and other law enforcement agencies. Under the regional office system, the vast majority of the enforcement and examination actions are located in the immediate areas of the regional offices.

I anticipate good things will happen under the leadership of Mary Schapiro. I met Ms. Schapiro at a NASAA function in the early 90's and she impressed me as being down to earth and a savvy government executive. Her recent appointment of former federal prosecutors to senior executive positions will create more of a law enforcement culture at the SEC and shake up the status quo.

Let's hope the political grandstanding by members of Congress, intent on punishing the SEC for past oversights, will not impede its ability to protect investors.

Update on Seaforth Meridian Receivership

My efforts to recover the funds transferred by Raymond Coia to John MacIntyre has been on hold for the past eighteen months due to MacIntyre's death. The lawsuit I filed in Scotland to recover the farm that MacIntyre purchased with these funds had to be put on hold until an executor was appointed for MacInytre's estate.

MacIntyre's only heir, John MacIntyre Jr., has made attempts to be appointed executor. But as I understand it, the Court will not approve the appointment unless MacIntyre Jr. obtains a performance bond in an amount equal to the value of the assets in the estate. Apparently there are only two insurance companies that will write this type of bond and the first company approached declined and the second company has not made a decision.

Just last week I instructed my attorneys in Scotland to apply for the appointment of a judical factor. The judicial factor will be authorized to act as the executor for the estate under the Court's supervision. When our judicial factor application was filed we were notified by Jr.'s lawyers that the second insurance company was close to approving the required bond.

So, either Jr. is going to obtain the bond, or the Court will act on our application for a judicial factor to control the estate. In either event, this should allow our lawsuit to recover the farm, or the funds, to move forward.

Capital Enhancement Club Funds Recovered

Claimants in the Capital Enhancement Club receivership will be happy to learn that after almost four years of litigation I have successfully repatriated $1.2 million from the IPTS Inc. bank account at VEF Banka in Riga, Latvia.

I anticipate a distribution payment in the near future that will amount to 10% of each approved claim. This will bring the total distribution amount to 36% of each claim approved in this receivership.

Ponzi Schemes and the SEC

I've received some comments since my posting on December 16 regarding the SEC's handling of the Madoff case. I stated in that posting we should wait and see what information was given to the SEC before condemning its response.

Since the disclosures and testimony by Harry Markopolus citing his efforts over nine years to get the SEC to investigate Madoff, it is apparent that certain SEC staff members dropped the ball. It is unfortunate that Markopolus met with two senior SEC staff attorneys who either dismissed his allegations due to arrogance or incompetence. But I don't think these facts should reflect negatively on the entire agency.

I have worked with the SEC on and off over the last thirty years, and I have always been impressed with the quality and dedication of the SEC enforcement staff. While Markopolus deserves credit for recognizing the scheme and taking his suspicions to the SEC, I don't agree with the entirety of his testimony:

1. Markopolus insinuates that the SEC is overstaffed with attorneys who are not sophisticated enough about financial products to recognize a securities fraud. This statement indicates Markopolus' lack of understanding about the role of SEC enforcement staff attorneys.

2.Markopolus recommends the agency reduce the number of attorneys and add Chartered Financial Analysts to conduct these investigations. Really? What is it that prepares the CFA to conduct investigations, take statements, and prepare a case for an administrative hearing or civil court procedure? And it doesn't take a CFA to recognize a ponzi scheme. By its very nature, a ponzi scheme can be anything, i.e. options, swaps, equities, bonds, etc. because the investment product is fictitious and limited to the crook's imagination.

The question for Markoplous is what prevented him from going to the FBI, if the SEC did not respond to his allegations? Or, why didn't he take his information to a state securities regulation agency? Why just sit on this information for nine years?

I watched the Financial Services subcommittee hearings where Markopolus and the SEC division directors testified. And no one really brought up the fact that ponzi schemes are criminal offenses, and a vast majority are committed by crooks with previous criminal records, not registered securities professionals. And the SEC is not a criminal enforcement agency. Nor does the SEC have the tools, or procedures, to deal with criminals. The only time this fact was brought out was when Rep. Ackerman from NY was throwing a tantrum and berating the SEC officials. He asked the SEC Director of Enforcement why the SEC didn't send in someone "undercover" to investigate the Markopolos allegations, and she tried to restore some civility to the exchange by calmly explaining that the SEC is a civil enforcement agency and the SEC did not do "undercover" work.

What is abundantly clear is that ponzi schemes are a huge, but under reported problem not only is the US, but in all developed nations. As I've reported before, just google the term HYIP and you can find directories of HYIPs that are all ponzi schemes.

Questions on Raymond Coia Release From Prison

I've had many emails from readers who are asking if Ray Coia has been released from prison. The best information I have gathered is that Coia was "given a weekend leave in preparation for his release."

That is all the information I have and no date was available for his pending release from prison.

THE MADOFF SCHEME AND THE DEMISE OF THE “SOPHISTICATED INVESTOR” EXEMPTION

Well, this one will go down in history as the case that doomed the “sophisticated investor” or “accredited investor” exemption from securities registration. Historically, the federal and state securities laws have provided an exemption to securities issuers for the review and registration of investments offered and sold to institutions and individuals who qualified as “sophisticated investors” by means of net worth and income.

The theory being that “sophisticated investors” have the experience and education, or the means to employ those with the experience and education, to perform proper due diligence and avoid investing in questionable or high risk investments. Not only hedge funds, but other high risk/high reward investments have relied on this exemption for years.

I predict the SEC, and the States, are going to be implementing rule changes that will seriously reduce or eliminate these exemptions after the Madoff fiasco.

I have investigated ponzi schemes for over thirty years, both as a securities regulator and as a court appointed receiver. And I can tell you that the Madoff scheme exhibits many of the earmarks of a ponzi scheme….. in hindsight. But I hope the public, the news media, and the politicians will reserve judgment on the performance of the SEC until we learn exactly what was reported to the SEC and what the SEC did to follow up on these reports.

Of the hundreds of ponzi schemes I’ve investigated, the perpetrator is almost always someone with a lack of accomplishments in their background. Previously they were working a low level sales job and then suddenly they show up as an investment guru who can make people rich. Madoff certainly does not fit that pattern. Also, most ponzi schemes are obvious for the outlandish profits they promise to investors. Madoff’s scheme provided returns of an average of one percent per month, not outlandish compared to the track records of many popular mutual funds.

This case will certainly be a wake up call to the fact that any transaction involving the management of funds requires strict regulation and oversight, even at the expense of capital formation.

High Yield Investment Schemes- Redux

Since my last post, I have received several requests to perform due diligence by potential investors. While I am encouraged that these investors were wise enough to investigate before they invested, I am surprised that a majority of these investments were in High Yield Investment Programs (HYIP).

The HYIPs are not new, and in fact have grown in numbers that are simply mind boggling over the last eight years (see my June 2006 post). And HYIPs all fall within the definition of "Ponzi" schemes. For those who are not familiar with the term, a ponzi scheme is where the promoters will promise large returns to investors, and will pay the early investors the promised returns, but the returns are paid with the investor's own funds or the funds of later investors, and not from any legitimate investment profits. The promoters will encourage investors to leave their money in the HYIP instead of taking investment payouts in order to build up the hoard of cash and then eventually disappear with the money. Some ponzi schemes operate for years without detection.

The flashing red light warning of a ponzi scheme is always the unrealistic rate of return promised. I recently viewed one of the many HYIP directories on the web and all of the HYIPs listed were promising rates of 1% to 10% DAILY!!! 300 to 3000% per annum!!!

Now, come on folks! Don't these rates of return seem a little unrealistic to you? And the central question you have to ask yourself is, "Why would anyone, or any company, capable of generating 300+% profits want to deal with the headaches of working with individual investors when they could raise all of the investment capital they needed from investment banks or funds?

The last three receivership cases I've handled involved ponzi schemes. And I've asked some of the victims of these schemes this very question. And their response is a real knee slapper! They said they asked the promoters, or the recruiters working for the promoters, this question and the answer was "they were doing this to help out the little guy". What a crock!

I've seen another phenomemon in these cases, the "gamers". The gamers are people who are fully aware that the HYIPs are fraud schemes, but they are willing to take the risk intending to make a quick profit and pull out before the scheme collapses. It''s a game to them. And if you troll the various HYIP discussion groups, these people are not hesitant to admit their intentions.

Look folks, as we've seen over the last few weeks, the investment world is a slippery slope even when we operate within the regulated investment environment. Don't throw your money away in HYIPs.