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The Securities and Exchange Commission (SEC) Commission issued a new bulletin educating investors about performance claims. And this new bulletin is a good reminder to analyze performance claims on two separate but equally significant bases: How is the performance calculated and presented? How reliable is the performance claim? How is the performance calculated and presented? When it comes to calculations and presentations of performance, marketing materials and other documents should state the methodology for determining the investment’s value. For example, it should identify the relevant market and economic conditions used to calculate the investment’s return. It should describe the firm’s process for assessing performance. And importantly, it should explain how an investment firm charges the client—breaking out fees and expenses. If it fails to do so, the firm inflates the anticipated gain’s size.The Securities and Exchange Commission (SEC) Commission issued a new bulletin educating investors about performance claims. And this new bulletin is a good reminder to analyze performance claims on two separate but equally significant bases:

  • How is the performance calculated and presented?
  • How reliable is the performance claim?

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With their varying portfolios, hedge funds are not obligated to complete some of the registration and reporting requirements that apply to other types of securities investments. But that doesn’t mean that hedge funds are exempt from any reporting. Instead, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) promulgated joint reporting requirements specifically for advisers of hedge funds and other private funds. Under the Advisers Act, hedge fund advisers who are registered with the SEC or CFTC and have a fund of at least $150 million must file Form PF filings on an annual basis. Smaller advisers must identify: the assets under their management, the use of leverage, liquidity, fund performance, counterparty credit risk exposure, and trading and clearing mechanisms.With their varying portfolios, hedge funds are not obligated to complete some of the registration and reporting requirements that apply to other types of securities investments. But that doesn’t mean that hedge funds are exempt from any reporting. Instead, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) promulgated joint reporting requirements specifically for advisers of hedge funds and other private funds. Continue reading

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In May of this year, a New York City jury convicted a man known as “Mr. T” for running a boiler room operation that defrauded dozens of American and Canadian victims. Of course, the defendant was not the famed actor. Instead, it was another man, Robert Lenard Booth. But the confusion over his name is worth noting because it’s related to Booth’s boiler room scam. Booth was convicted of securities fraud, wire fraud, and money laundering. He set up fake investment companies with names that were similar to real firms, to convince his victims they were investing with legitimate companies. Then, to seal the deal, he had his victims sign non-disclosure agreements and send money to accounts they believed were held by clearinghouses in New York, Hong Kong, and Singapore. But the firms were in fact boiler rooms located in New York, Panama, and Thailand, and clearinghouses were fronts for Thai money laundering operations. Following his conviction, Booth faced up to 45 years in prison.In May of this year, a New York City jury convicted a man known as “Mr. T” for running a boiler room operation that defrauded dozens of American and Canadian victims. Of course, the defendant was not the famed actor. Instead, it was another man, Robert Lenard Booth. But the confusion over his name is worth noting because it’s related to Booth’s boiler room scam. Continue reading

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Continuing to award bounties to those who step up to report securities fraud, the SEC has recently awarded $5 million to a whistleblower for offering information and assistance. This information eventually led to a successful enforcement action where the SEC collected fines, sanctions, and other funds from the company. The whistleblower first reported their concerns internally, then reported them to the SEC. The press release indicated that the whistleblower’s information also helped the SEC with their investigation. This included the identification of witnesses and the creation of requests for information and documents. Creola Kelly, Chief of the SEC’s Office of the Whistleblower, stated, “­Th­­­­­­­­­e whistleblower in this case provided helpful information and substantial ongoing assistance, saving the SEC time and resources during its investigation."Continuing to award bounties to those who step up to report securities fraud, the SEC has recently awarded $5 million to a whistleblower for offering information and assistance. This information eventually led to a successful enforcement action where the SEC collected fines, sanctions, and other funds from the company. Continue reading

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Private placements are a specialized kind of securities offering generally open only to accredited investors—for the most part, high net-worth individuals and licensed brokers. Given the investors’ sophisticated understanding of securities transactions, private placements are not subject to the same rigorous disclosure requirements as public offerings. Because of this lower disclosure requirement, it’s sometimes easier with private placements for bad actors to commit fraud. If you’re working on a private placement, here are some of the red flags to watch out for: The offering company fails to provide even basic information. Companies offering a private placement aren’t required to disclose a great deal of information, but most will create a Private Placement Memorandum (PPM) outlining their financial situation in broad strokes. The absence of a PPM could be a sign the offering company has something to hide.Private placements are a specialized kind of securities offering generally open only to accredited investors—for the most part, high net-worth individuals and licensed brokers. Given the investors’ sophisticated understanding of securities transactions, private placements are not subject to the same rigorous disclosure requirements as public offerings. Because of this lower disclosure requirement, it’s sometimes easier with private placements for bad actors to commit fraud. Continue reading

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We often hear about accounting fraud when a big case hits the news. For example: Xerox falsified its financial records for five years, inflating its earnings by $1.5 billion;  Lehman Brothers failed to disclose an accounting loophole that reported short-term loans as sales; and  Haliburton improperly overbooked cost overruns? When the SEC announces large accounting fraud cases, we take notice. After all, many of these fraud cases involve companies with household names. The amounts in cases that hit the news often run into the billions. However, even though many accounting fraud cases aren't as notorious, fraud can still be just as damaging to shareholders in smaller cases. Sound financial practices and accurate accounting is a foundation of our securities markets.  Companies frequently cook their books to make their companies more attractive to investors and driving the stock price up.  However, absent a whistleblower reporting false numbers, this type of fraud can be very difficult to detect. In some cases, companies inflate the valuations of their assets or hedge funds inflate the value of their investments. This can lead to exaggerated returns, excessive fees to the fund managers and, ultimately, significant losses for investors when assets are ultimately marked down. All of these actions can lead to a potential violation of the federal securities laws.We often hear about accounting fraud when a big case hits the news. For example:

  • Xerox falsified its financial records for five years, inflating its earnings by $1.5 billion;
  • Lehman Brothers failed to disclose an accounting loophole that reported short-term loans as sales; and
  • Haliburton improperly overbooked cost overruns.

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It's a well-known rule in "polite society." One simply should not discuss money. And when it comes to asking someone to divulge their salary, Miss Manners has admonished, "It is unequivocally impolite to ask anyone how much money they make. Even if he really wants to know." And so perhaps that helps unscrupulous investment advisers avoid disclosing their commissions, markups, or charges. But if you're aware of advisers who are hiding this information from clients, consider coming forward to become an SEC whistleblower. Because, as we'll discuss, it's not about politeness. Willful failure to disclose their compensation may mean they're failing to fulfill the fiduciary duties they owe their clients. It's been a long-standing requirement that investment advisers' fiduciary duty requires that they disclose any material facts relating to their position. Forms of compensation fall into the category of material facts, because compensation may create conflicts of interest between the adviser and the client. (For instance, conflict arises if advisers are paid for recommending particular mutual funds to their clients.)It’s a well-known rule in “polite society.” One simply should not discuss money. And when it comes to asking someone to divulge their salary, Miss Manners has admonished, “It is unequivocally impolite to ask anyone how much money they make. Even if he really wants to know.” And so perhaps that helps unscrupulous investment advisers avoid disclosing their commissions, markups, or charges. But if you’re aware of advisers who are hiding this information from clients, consider coming forward to become an SEC whistleblower. Because, as we’ll discuss, it’s not about politeness. Willful failure to disclose their compensation may mean they’re failing to fulfill the fiduciary duties they owe their clients. Continue reading

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In our last post, we were talking about how scammers are unfortunately robbing investors with claims that they can purchase pre-initial public offerings (IPOs). And how the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), the not-for-profit overseeing broker-dealers, both effectively warn that, if someone’s not already an accredited investor, they should stay away from pre-IPO investing. It’s probably a scam. While the SEC and FINRA websites include lists of red flags for investors, a case brought in 2020 against Mark Lisser gives us a helpful look into what those on the inside should be looking for if they are contemplating becoming an SEC whistleblower by contacting the SEC about a pre-IPO scam. For example, an unnamed “Salesperson 1” (likely a whistleblower who brought Lisser’s scam to the SEC’s attention) informed the SEC how Lisser misled both staff and customers. The company was unclear about how sales staff were paid and said they’d change accounting to avoid calling bonuses commissions. Lisser transferred the investment firm’s money to his personal bank accounts, and he paid salespeople with personal checks. He created a new LLC that he also used to transfer funds out of the company and to pay himself and a couple of staff members’ personal expenses.In our last post, we were talking about how scammers are unfortunately robbing investors with claims that they can purchase pre-initial public offerings (IPOs). And how the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), the not-for-profit overseeing broker-dealers, both effectively warn that, if someone’s not already an accredited investor, they should stay away from pre-IPO investing. It’s probably a scam. Continue reading

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In May 2022, the Securities and Exchange Commission (SEC) announced that it had filed an emergency action to freeze the assets of StraightPath Venture Partners and other defendants. The SEC alleged that the defendants were committing ongoing securities violations, having already racked up $410 million from 2,200 defrauded investors. The defendants are said to have been running a large network of unregistered broker-dealers who sold shares of a pre-initial public offering (IPO) that the defendants did not have to sell. Pre-IPO sales are ripe opportunities for fraudsters. By definition, the very premise is that investors are being sold shares before they’re available to the public. So those considering an investment may find it difficult, if not impossible, to find reliable information about the stock’s potential value. And the very pitch from fraudsters may include that the investors should not go asking anyone about their purchase because it’s a rare opportunity to get on the inside (perhaps even with a hint of insider trading info mixed in). In May 2022, the Securities and Exchange Commission (SEC) announced that it had filed an emergency action to freeze the assets of StraightPath Venture Partners and other defendants. The SEC alleged that the defendants were committing ongoing securities violations, having already racked up $410 million from 2,200 defrauded investors. The defendants are said to have been running a large network of unregistered broker-dealers who sold shares of a pre-initial public offering (pre-IPO) that the defendants did not have to sell. Continue reading

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