This content is from: Portfolio

No Sympathy for Investors Fooled by Outlandish Scams

Can you predict the moon’s effect on equities? Can a robot pick stocks? Can a sweepstakes machine generate returns of 300 percent? No, but gullible investors still got scammed.

Who needs roll-up-your-sleeves fundamental analysis to pick stocks when you could simply rely on the alignment of the stars or stock-picking robots?

These are just two scams that recent stock schemers convinced wealthy wannabes to invest in, according to SEC documents. And when you read those documents, it’s very hard to feel sorry for the victims.

Most recent case in point: A few days ago, the Securities and Exchange Commission charged that a former broker — Gurudeo ‘Buddy’ Persaud (As a policy, I never trust a guy whose name is Buddy) — convinced family, friends, and other gullible individuals into investing in his firm, White Elephant Trading Co. All “Buddy” did was guarantee their money would be safe and throw off returns ranging from 6 to 18 percent.

And how would he pull this off? Persaud promised to invest in the debt, stock, futures and real estate markets.

However, Persaud kept to himself his secret sauce: The belief that markets are affected by gravitational forces. (Who can blame him? Everyone knows the top hedge fund managers NEVER give up their proprietary methodology.) According to the SEC’s complaint, Persaud mainly relied on a website that provided directional market forecasts based on lunar cycles and gravitational pull. How do these forces impact the markets? Persaud believed that gravitational forces affect mass human behavior, and in turn, the stock market. According to the SEC, Persaud believed when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities.

The SEC said Persaud raised more than $1 million from at least 14 investors, lost $400,000 of investor funds through his trading and used at least $415,000 to pay personal expenses. Persaud — a registered representative at a Florida-based broker-dealer who operated White Elephant on the side starting in mid-2007 — also created phony account statements to hide his trading losses “and give investors a false sense of security,” the SEC noted.

This case evokes memories of a case brought earlier this year by the SEC.

Back in April, the SEC charged twin teenage brothers from the U.K. with defrauding about 75,000 investors through what it described as an Internet-based pump-and-dump scheme.

The brothers — Alexander John Hunter and Thomas Edward Hunter — who were just 16 when they began their fraudulent scheme in 2007, created websites called Doublingstocks.com and Daytradingrobot.com to falsely claim a former trading algorithm programmer from a large investment bank had designed a stock picking robot that they named “Marl.” The brothers asserted that their robot could analyze the over-the-counter securities markets and identify penny stocks that were about to surge in price, according to the regulator’s complaint.

The brothers peddled paid subscriptions to their e-mail newsletter that would contain the robot’s latest stock pick, the SEC explained.

“The Hunters sent out their newsletters near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares,” the SEC explained. “However, the stocks typically fell precipitously shortly thereafter, leaving investors with shares worth less than they had purchased them for earlier in the day.”

Here is the most amazing part of the story: Investors plunked down $47 apiece for the annual subscriptions, generating at least $1.2 million in revenues for the brothers. Some investors paid an additional fee for the "home version" of the robot software.

Alas, the SEC alleges that the Hunters actually used another website to offer their services as stock promoters, claiming that they could rocket a stock’s price and increase its volume by sending out newsletters. Altogether, they were paid at least $1.865 million in fees from known or suspected stock promoters, and they did not disclose to their newsletter followers the conflicting relationship between their two businesses.

“The Hunters used the anonymity of the Internet and the promise of easy riches to prey on investors,” said Thomas Sporkin, chief of the SEC’s Office of Market Intelligence, in a statement. “While touting their supposed breakthrough investment technology on two websites, the Hunters were racking up fees as stock promoters through a third.”

Sometimes, the schemers don’t need to rely on stars or robots. Sometimes SCAM simply screamed out in uppercase, bold-faced letters, but the gullible victims didn’t want to concede that the promised investment returns alone were preposterous.

For example, in May the SEC charged a California investment adviser with running a $60 million investment fund like a Ponzi scheme and defrauding investors by touting imaginary trading profits instead of reporting the actual trading losses he incurred.

The SEC alleges that John Geringer, who managed the GLR Growth Fund, used false and misleading marketing materials to convince investors he was generating double-digit annual returns by investing 75 percent of its assets in investments tied to major stock indexes. In reality, Geringer was losing money, eventually stopped trading and then paid millions of dollars in “returns” to investors mostly using money received from newer investors.

Here is where the red flags should have gone up. Geringer — who started the fund in 2003 — claimed he generated 25 percent returns in 2001 and 2002 investing in stock indexes like the S&P 500, Nasdaq and Dow Jones Industrials. Of course investors could have easily learned from their own research all three of those indexes lost money in 2001 — by between 7 percent and 31 percent — and lost money by double-digits in 2002.

Geringer also claimed he generated a nearly 24 percent return in 2008 from investing mainly in publicly traded securities, options and commodities. Alas, that year the S&P 500 lost 38.5 percent.

And there’s more.

In April the SEC halted a Ponzi scheme that targeted members of the Persian-Jewish community in Los Angeles.

For two years, Shervin Neman raised more than $7.5 million from investors by claiming to be manager of a hedge fund called Neman Financial. According to the SEC, he claimed to have invested in foreclosed residential properties that would be quickly flipped for profit as well as in Facebook shares obtained in private transactions and other high-profile initial public offerings including Groupon, LinkedIn and Angie’s List.

The SEC alleged that Neman promised investors returns of 11 percent to 18 percent to be paid within 30 to 180 days. Again, the red flag should have gone up.

Ponzi schemers, however, don’t just favor one religious group. Also in April, the SEC charged Ephren Taylor II, which the regulator described as a self-depicted "Social Capitalist," with running a Ponzi scheme that targeted socially conscious investors in church congregations. “He preyed upon investors’ faith and their desire to help others, convincing them that they could earn healthy returns while also helping their communities,” said David Woodcock, director of the SEC’s Fort Worth Regional Office, in a statement.

The SEC alleged that Taylor and his firm City Capital offered two primary investments: promissory notes supposedly funding various small businesses, and interests in sweepstakes machines, which were computers loaded with various games that resembled those found at casinos. He also promised high rates of return at the same time devoting “considerable time to denigrating” investment vehicles such as CDs, mutual funds and the stock market, labeling them as "foolish" and "money losers."

City Capital and various affiliates issued promissory notes bearing annual interest rates of 12 percent to 20 percent, telling investors their funds would be used to purchase and support various small businesses — such as a laundry, juice bar or gas station — that City Capital had identified as good opportunities for the investors, according to the complaint.

Taylor and his firm also sold sweepstakes machines. According to the SEC, Taylor claimed the machines would generate returns of as much as 300 percent or more in the first year.

Given all of the gullible people who bought into these various schemes, no wonder there is a cottage industry of fraudsters out there.

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