Friday’s Fraud – Third Party Service Providers: The Importance of Regulation

By Benjamin Stubbs, Spring 2014 Student Intern

referee flagA few weeks ago, I wrote about how private offerings are more risky for investors because they are not regulated in the same way as public offerings. I compared regulators and regulations to referees and noted that fewer referees often means that more mistakes and misconduct will go unnoticed. The same analogy applies to today’s topic—third party service providers.

Like last week’s post, this week’s post is geared more towards small business owners than individual investors. Listed tenth on NASAA’s list of common investment frauds of 2013 are unregulated third party service providers. Below I’ll explain a little about the dangers of using unregulated service providers and how you can protect yourself.

Continue reading

Update on SR-FINRA-2014-005: SEC Institutes “Rare” Proceedings on Proposed FINRA Rule Concerning Arbitrators’ Mid-Case Referrals

In March, the Investor Advocacy Clinic, led by student interns Scott EvansBenjamin Stubbs and Patricia Uceda, filed a comment on SR-FINRA-2014-005.  As explained in Evans’ earlier post describing the proposal and the clinic’s comment, the proposed rule would permit arbitrators to speak up mid-case and refer up the ladder their belief, based on more than just the pleadings, that investors may be threatened by the continuing conduct of a wrongdoer.  While the clinic supported the proposal’s goal of protecting innocent investors, we raised concerns about the individual investor in the proceeding and how such a mid-case referral would impact the proceeding and the complaining investor.

After receiving comments on the proposal, FINRA responded to all comments, including those made by the clinic.  You can read FINRA’s response here.

In addition, the SEC instituted formal proceedings to consider FINRA’s proposal. Citing FINRA’s former director of arbitration, Investment News reports that the SEC’s institution of proceedings on a proposed FINRA rule change is rare.

You can read the SEC’s full notice in the Federal Register here.  Specifically, the SEC has asked interested parties to consider providing information in response to several questions directly related to the concerns raised by the clinic in its comments:

  • Would the proposal adversely affect retail investors?  If so, how?
  • Should FINRA propose a different standard for referral? If so, what standard(s) would be appropriate?
  • Does Partial Amendment No. 1 ameliorate commenters’ concerns that notifying parties of a mid-case referral could lead to adverse consequences to the claimant, including requests for recusal and challenges to an award? If not, should FINRA amend the proposal to preclude the Director, or anyone else, from notifying the parties of a referral?

Parties interested in providing information for the SEC’s consideration should do so by the June 26, 2014 deadline.

The clinic will continue to monitor SR-FINRA-2014-005 and other proposals that may impact individual investors.

Friday’s Fraud – Digital Currency: The Dangers of Modern Monies

By Benjamin Stubbs, Spring 2014 Student Intern

digital currencyYou may have heard of digital, virtual or cryptocurrencies before. If you haven’t, check out former Student Intern James Gallagher’s post on Bitcoin from last November. You may also remember that back in March, we told you that FINRA released an alert about the risks and potential scams involved with Bitcoin and other digital currencies.

Digital currencies have been in the news a lot lately, and not all of the news has been positive. Digital currency is eighth on NASAA’s list of most common investment frauds of 2013, and is listed as one of the newer threats that individual investors face.

Continue reading

SEC Files Complaint Related to Unregistered Oil and Gas Investments

In his Friday’s Fraud series, Spring 2014 Student Intern Benjamin Stubbs wrote about oil and gas investment frauds, encouraging investors to conduct research on those selling such investments before investing.

Stubbs’ advice came just a few days before the SEC issued a press release detailing a complaint against Behrooz Sarafraz.  The SEC alleged Sarafraz sold millions in oil and gas investments without being properly registered or associated with a broker-dealer.  The release reports that Sarafraz agreed to settle the charges by consenting to a $22 million dollar judgment.  The settlement is still subject to court approval.

When investing your hard-earned money, be sure you are working with a properly registered professional.  Use FINRA’s BrokerCheck tool as part of your due diligence before making any investment.

Friday’s Fraud – Proxy Trading Accounts: Make Sure Your Trust has a Backup

By Benjamin Stubbs, Spring 2014 Student Intern

keysHow trusting are you? You probably would not lend the keys to your car or your house to someone except for limited situations. For example, you may have freely given your car keys to a valet at a restaurant or hotel, or you may have given your house keys to a neighbor or a house sitter when you went out of town. You probably would not lend the keys to your house or your car to a total stranger, however, regardless of what that stranger promised you. The risk of damage to your property would be too great, and how would you ever find the person if they stole your car or your belongings and made a run for it?

The same should be true for your investment accounts. How freely would you give someone the keys to those? This week’s fraud involves people who gave control over their investment accounts to scam artists who posed as trustworthy experts. Coming in seventh on NASAA’s list of most common investment frauds of 2013 is proxy trading accounts.  These are fairly simple schemes that are based on two words—trust me. When the trust is unfounded, though, people can lose a lot of money and have no way to get it back.

Continue reading

Friday’s Fraud – Oil and Gas Drilling Scams: Don’t Drop Money Down Dry Wells

By Benjamin Stubbs, Spring 2014 Student Intern

oil gasFrom the Beverly Hillbillies to John D. Rockefeller, many people have struck it rich in the oil industry, and currently, many are hopeful that natural gas will prove to be just as rewarding. Before you invest in oil or gas, however, take a little advice from the Securities Exchange Commission (SEC): “If you think you’ve found the right oil or gas investment to ‘strike it rich,’ consider this: it may be a scam.”

Coming in sixth on NASAA’s list of most common investment frauds of 2013 is oil and gas drilling scams. NASAA explains that many who are frustrated with the volatility of the stock market turn to oil and gas but that “energy investments generally prove to be a poor substitute for traditional retirement planning.” Scammers often use high pressure tactics, combined with the glamour that many associate with oil drilling to steal investors’ money. I’ll give you a few tips below on how you can avoid falling prey.

Continue reading

Friday’s Fraud- Self-directed IRAs: Being the Head Chef Can Be Risky

By Benjamin Stubbs, Spring 2014 Student Intern


Self-directed IRAs came in fifth on NASAA’s list of most common investment frauds of 2013.  For some help conceptualizing today’s tip, think about your next meal.  First picture going to a restaurant to order from a prix fixe menu.  You can choose anything you want from the list, but the list is short and was chosen for you by the chef. Though it’s limited, the risks that the restaurant will be out of those items or that the chef won’t know how to prepare them are slim.

Continue reading