The Vigilant INVESTOR A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments Pat Huddleston Bulk discounts available For details visit: www.amacombooks.org/go/specialsales Or contact special sales: Phone: 800-250-5308 E-mail: specialsls@amanet.org View all the AMACOM titles at: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional person should be sought Library of Congress Cataloging-in-Publication Data Huddleston, Pat The vigilant investor : a former SEC enforcer reveals how to fraud-proof your investments / Pat Huddleston.—1st ed p cm Includes index ISBN-13: 978-0-8144-1750-8 ISBN-10: 0-8144-1750-7 Investments Securities fraud Swindlers and swindling—Prevention I Title HG4521.H846 2011 332.6—dc23 2011019827 © 2012 Pat Huddleston II All rights reserved Printed in the United States of America This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019 About AMA American Management Association (www.amanet.org) is a world leader in talent development, advancing the skills of individuals to drive business success Our mission is to support the goals of individuals and organizations through a complete range of products and services, including classroom and virtual seminars, webcasts, webinars, podcasts, conferences, corporate and government solutions, business books, and research AMA’s approach to improving performance combines experiential learning—learning through doing—with opportunities for ongoing professional growth at every step of one’s career journey Printing number 10 Contents Introduction PART 1: The Wide World of Fraud: First Steps and Advanced Tactics on the Path to Vigilant Investing Vigilant or Vigilante? Protecting Your Investments in the Age of Fraud The Posse and the Prey: The Investment Cops and the Scam Artists They Pursue Rich Man, Poor Man: An Investment Scam for Every Economic Bracket The Phantom Factory and the Origami Airline: Offering Frauds, Pump and Dumps, and Why You Can’t Believe Your Eyes Affinity Fraud and the Evil Twin: How Someone Who Looks a Lot Like You Is Plotting to Take Your Nest Egg Only Amateurs Make It Sound Too Good to Be True: Tricks of the Trade and the Future of Financial Fraud PART 2: The Securities Industry: Hunting the Wolf with the Million-Dollar Smile Truth, Lies, and “Why Don’t They Supervise?” Inside Boiler Rooms and Brokerage Firms Managing Mavericks: Knowing How Compliance Systems Work Can Help You Protect Your Nest Egg Sales Scripts, Bullets, and the One-Two Punch: A Peek into the Stockbrokers’ Bag of Tricks 10 Variable Annuities: Bells, Whistles, and Porcine Cosmetics 11 Making Sense of Alphabet Soup: RIAs, CFAs, CFPs, and Your Friendly Neighborhood Insurance Agent 12 Low-Hanging Fruit: Seniors, the Sick, and the Solution Notes Index Acknowledgments I describe in the Introduction the moment that the idea for an investor protection company came to me All I’ve done since is to follow where that idea led All credit for the good we’ve done and that this book will belongs to God He’s blessed our efforts mostly through the people he’s put in our path; people like Wendy Keller, my literary agent, and Bob Nirkind, my editor at AMACOM, both of whom were, by turns, gracious and firm with this rookie author At Investor’s Watchdog, Lauren Bowman and Rosey Sumrall have been diligent fact checkers, as has Cherie Eason, my senior legal assistant and right arm in law practice I am forever indebted to my former colleagues in the Atlanta office of the SEC They made me a fraud hunter and infused a spirit of public service that stuck when I returned to private law practice My brothers and sisters at North Metro Church have been a constant source of encouragement It is a long path to publication, and I’d never have been able to envision the end clearly enough to begin the journey without lessons in possibility, determination, and hard work from my parents, Mike and Bettie, and unwavering love and support from my brothers, Porter and Matthew Porter, the true writer in the family, gave invaluable guidance over the many months that we worked to find an agent and craft a winning proposal All love and thanks to my wife Carol, our family MVP, who bore the strain of the effort with grace while giving our sons, Mike and Ben, love, support, and guidance Finally, thanks to every victim of investment fraud who is brave enough to throw off misplaced guilt and shame to seek justice To the memory of Bettie Beck Huddleston, my loving Mom All glory to God Introduction In July 2006, I closed the door of my law office after saying good-bye to a 70-year-old man who had lost his life savings to a Ponzi scheme This retiree—a family patriarch who had saved for decades in hopes of paying for his grandchildren’s college educations—had come to me because he knew that I had been an Enforcement Branch Chief at the U.S Securities and Exchange Commission (SEC) He wanted me to help him get his nest egg back, but I couldn’t The confidence man who had taken it had no liability insurance, and he had never worked for a brokerage firm that could have detected and prevented the scam The man had spent this senior citizen’s nest egg, and many others’, on homes, cars, expensive vacations, and phony “distribution” payments to earlier investors I could have won this prospective client a multimillion-dollar civil judgment—including punitive damages and attorney’s fees—but we would never have collected a dime In more than two decades of protecting investors, both as an SEC enforcer and as an attorney for investors, I’d had conversations like this one with hundreds of investors, from institutions to bluecollar retirees It’s never fun, especially with seniors, who cannot rebuild their nest eggs through several more decades of work Usually they try to remain stoic, but you can see them deflate and their minds wander to the painful practical implications of the bad news The blood drains from their faces as they try to reconcile their image of themselves as smart and competent with the reality that a stranger has already spent the money that it took them decades to earn and save Sometimes they shed tears of shame and humiliation, feeling more guilt in that moment than the people who defrauded them will feel in their entire lives I expected nothing more from the rest of the afternoon than I’d experienced all of the other times I’d given this kind of bad news: a lingering sadness But this day was different As I turned away from the door, a thought exploded into my head with lightning-strike power; I actually felt a physical impact How long are you going to keep having these conversations before you something to protect these people? In that moment, Investor’s Watchdog, LLC, was born We began by building a database to hold information on stockbrokers, investment advisers, and scam artists nationwide We added thousands of customer complaints that had been expunged from stockbrokers’ official regulatory rap sheets—not because the brokers were exonerated, but because the brokers made this a condition of settlement with their victims We gathered information on actions against the horde of unregistered salespeople who operate off the regulatory grid We put it all in the IW database Within days of launching Investor’s Watchdog, we saved a church in Arizona from losing its entire building fund to a man who was operating under an assumed name Since 2006, Investor’s Watchdog has investigated unregistered investments on three continents, including supposed luxury resorts on the Red Sea; investments in renovated hotels in the United Kingdom; private banks in Geneva, Switzerland; and oil and gas projects in Texas We’ve also investigated stockbrokers that the Financial Industry Regulatory Authority (FINRA) rates as perfectly clean but who have been the subject of so many customer complaints that no investor would ever use them if he knew the truth Shortly after opening Investor’s Watchdog, I received my first assignment as a court-appointed receiver in an SEC fraud case, cleaning up the mess from the collapse of an investment scam in South Carolina I’ve cleaned up that kind of mess in three SEC cases as of this writing (one involving an international hedge fund fraud), and two more for the Federal Trade Commission That work has taken me all over the United States and beyond, closing down fraudulent operations, recovering assets from overseas, and pursuing litigation (against people who received investors’ funds or who contributed to the scam) to generate a fund from which to repay investors Sometimes we’ve been able to pay back more than half of what was lost Other times, we’ve been able to return only nickels on the dollar Although our receivership work always produces far more for investors than it costs, we cannot make the victims whole We can neither unscramble their nest eggs nor fully assuage the feelings of humiliation and misplaced guilt that grip them in the wake of their financial loss In 2008, hoping to reach more investors, I launched www.investorswatchblog.com, where we cover the hundreds of financial scams that come to light every year I write a new post every weekday, linking to a news story about the case and drawing lessons from it that can help others avoid a similar fate Most days I have to choose from among several scams that have come to light in the previous 24 hours The FBI estimates that Americans lose $40 billion annually to investment fraud That’s the equivalent of one Madoff-sized mega-fraud every single year And the problem is only getting worse Despite access to innumerable resources published by regulators and consumer reporters on how to avoid scams, we are falling for them in record numbers Why? There are three reasons First, the pool of attractive victims is bigger If there was ever a time to get into the investment fraud business, this is it The first baby boomers began turning 65 in May 2011 and will turn 65 at the rate of 10,000 per day until 2030 As they retire, those boomers will move $2.5 trillion in assets from the relative safety of company-sponsored 401(k) accounts into self-directed accounts at brokerage firms, where they will be as vulnerable as a wounded rabbit in the forest Second, the world is getting smaller Technology allows men in Russia and Dubai to rob pension plans, business owners, baby boomers, and senior citizens in America, while American scamsters can return the favor, swindling investors wherever people speak English Finally, the advice we get from regulators and well-meaning consumer reporters is always dangerously incomplete It fails to address key information that is emerging from those who study the science of decision making That information explains why, despite all the warnings, we are so prone to fall victim to investment fraud and unethical brokers Contrary to almost universal belief, neither gullibility nor low intelligence is the problem U.S presidents, rocket scientists, Ph.D.s, MBAs, CPAs, FBI special agents, lawyers, experts on gullibility, and more members of the American Medical Association than you could fit in the nearest major league stadium have been victimized by investment fraud The real culprit behind the worsening epidemic is the human brain—specifically, the cognitive biases that come as default settings in every healthy mind While they are helpful in other contexts, those biases skew how we view information in the investment context, leading us to trust people who have every intention of breaching that trust and leading us into shallow inquiries that we mistake for in-depth investigations An investor who memorizes a complete list of helpful “dos and don’ts” without first appreciating the power of cognitive biases is like an NHL All-Star without his skates; he has impressive knowledge and talent without having the ability to put it to practical use And it isn’t only individual investors who fall victim to scamsters Underfunded pension plans, desperate for a rate of return that will bring them back into the black, fall prey to world-class artists, as endowments, school districts, and family offices People who make decisions for institutional investors are more popular with scam artists than sweet tea at a barbecue The securities industry is as dirty as a plumber’s boots Multimillion-dollar advertising budgets and the charisma and salesmanship of individual brokers keep most investors in an anesthetic fog, through which they cannot perceive a landscape that is strewn with mines and traps The Vigilant Investor burns away that fog We’ll tour an industry that is indifferent, at best, to the welfare of investors This journey will equip you to protect yourself from characters who are determined to take as much of your money for themselves as possible Sir Arthur Conan Doyle understood that the ability to uncover carefully crafted and expertly concealed misconduct has everything to with experience In A Study in Scarlet, Sherlock Holmes explains, “There is a strong family resemblance about misdeeds, and if you have all the details of a thousand at your finger ends, it is odd if you cannot unravel the thousand and first.” What investors lack, and what they desperately need, are the details of the thousand misdeeds to which Holmes refers This book puts the details of many misdeeds at your finger ends to better enable you to unravel the many scams and unethical advisers that will target you over a lifetime of investing Because experience is the best teacher, those who have seen hundreds of scams and reckless brokers are best equipped to uncover a well-disguised ongoing scam or a broker who intends to feast on your savings I’ve spoken to every type of investment criminal imaginable, from professional artists to fund managers who began with good intentions, from highly functioning sociopaths to ineffectual bunglers, from those who flee the country when the jig is up to those who attempt to fake their own death I’ve seen scams and unethical financial advisers up close from a unique combination of perspectives: SEC enforcer, court-appointed receiver, attorney for investors, blogger on breaking scams, and founder and CEO of a professional due diligence company I know how scams and unethical advisers begin, how they operate, what contributes to their longevity, and what tactics they use to ensnare individual and institutional investors alike I know how to recognize scams and bad advisers that other investigators miss This book is my way of equipping you to likewise We’ve organized the book in two parts Part explores the wide world of investment fraud It begins with an examination of cognitive biases and explains how to defuse them We then look at several categories of scam artist, some of their favorite games, and the advanced tactics that they use to pull off these games Along the way, we give you advice that will protect you from getting conned We close Part with a look into the future of investment fraud, where scams will be bigger, last longer, and be harder to spot Part narrows the focus to the U.S securities industry We begin by introducing the investment cops and the limits of their power We then perform a harsh light-of-day examination of the usual suspects (stockbrokers, registered investment advisers, and insurance agents), the duties they owe to investors, and how they often use investors as tools for their own enrichment We also look at brokers who target the most vulnerable of investors, the elderly, and provide advice on how adult children can protect their elderly parents We close the book with a vision of how vigilant investors can band together to cleanse the investing landscape as no investment cop ever can Each chapter uses actual examples of scamsters and brokers who swindled very bright, but notyet-vigilant, investors We provide guidance on how a vigilant investor should approach an investigation of those scams We conclude each chapter with a section entitled “Due Diligence for the Vigilant,” which sums up, in bulleted list form, the action items that will keep the vigilant investor clear of the characters and tricks that have cost so many so much As hard as they work and as dedicated as they are, regulators cannot keep you safe Because it has more lobbying dollars than investors can ever contribute, the securities industry has been—and will always be—successful in keeping the investment cops severely understaffed and underfunded Even variable annuity, 209 conformity bias, 24–25 congruence bias, 28–30, 44–46, 69, 116 conspiracy charges, 61, 103, 142–143 Cooper, Anderson, 86 Coopers & Lybrand, 82, 85 Copperfield, David, 128 credibility cons, 125–128 credit default swaps (CDS), 101 Credit Suisse, 14–15 Cumberland Accounting Services, 97 currency trading, 107–109 Darrah, John, 99 Dateline (TV show), 113 dead to me approach, 134–135 death benefit, variable annuity, 192, 202–203, 227 DeCaprio, Leonardo, 142 decision-making cognitive biases in, see cognitive biases emotions in, 25–31 Dehmer, Willy, 11–16 Deloitte & Touche, 82, 85 Delta Air Lines, 193–194 DePauw University, 66 Deutschland Invest und Finanzberatung (DIF), 88, 90–91 diamonds, 39, 41 Dietrick, Mary, 225–228 Digital Global Net USA, Inc., 12 DIME Capital LLC, 108 DIME Financial Group LLC, 107–109 DIME Foundation, 108 DIME FX, 108 discretionary authority, 147, 227 Dodd-Frank Act of 2010 (Dodd-Frank), 35–36, 70, 133–134, 208, 214–216 Dreier, LLP, 116–119 Dreier, Marc, 116–119 due diligence dead to me approach, 134–135 fees for, 68–69 insurance broker, 222, 223 role of vigilant investors, 133–134, 235–238 tips for, 31, 57, 80, 94–95, 111, 135–136, 154–155, 171–172, 187, 204–205, 223, 238 Dunning, David A., 50–51 economic crisis of 2007-2008, 13, 36, 153 Edgeworth, Homer, 40 Edwards, Albert Gallatin, 158 Einstein, Albert, 33, 203–204 emotions, in decision-making, 25–31 Empire Capital Asset Management (ECAM), 72–73 energy technology con, 120–121 Enron, 88, 93–94 escrow accounts, in prime bank scams, 63 exception/activity reports, 162–164, 165–168 fake trading rooms, 93–94 false consensus effect, 51 false identity, 116–119 false press releases, 86–87 false writings charges, 212 Farahi, John, 109–110 Fastow, Andrew, 93 Federal Bureau of Investigation (FBI), 3, 12, 34, 36, 43, 47, 67, 82, 83, 106, 118, 142–143 Federal Bureau of Prisons, 143 Federal Deposit Insurance Corporation (FDIC), 98, 100, 200 Federal Trade Commission (FTC), 3, 73 feeder funds, 53, 68–69, 71, 127–128 fees due diligence, 68–69 hedge fund referral, 69–70 registered investment adviser (RIA), 209–210 stockbroker fee-based accounts, 180–181 variable annuity, 184–185, 202, 204 see also commissions Fell, Gerald, 12–16 Fell, Iris, 12–16 Fergo, Carl, 226, 227 Fergo, Josephine, 225–228, 233, 236–237 Fevola, Simone, 218 Fibber, 34, 46–49 Fidelity Investments, 209 fiduciary duties of registered investment advisers (RIAs), 209–218, 220 of stockbrokers, 214–216 Fields, W C., 59 financial crisis of 2007-2008, 13, 36, 153 Financial Industry Regulatory Authority (FINRA) BrokerCheck database, 2, 55, 161–162 complaints, 148–149, 150, 169–170 FINRA Enforcement, 168–171, 177, 184, 186, 229, 235 Follieri, Raffaello, 121–124 Follieri Foundation, 122–124 Follieri Yucaipa Investments, Inc., 122–123 Ford, Stuart, 59–61 foreign currency trading, 107–109 Form 8-K, 85 Form ADV, 48–49, 220 Forster, Homer, 54 Franklin, Benjamin, 70 “free lunch” programs, 185–186, 196–198 Freese, James, 210–213 Friehling & Horowitz, 45 F&S Asset Management Group, 207–209 funds of funds, 53, 68, 69 futures, 46–47 Galvin, William, 145 Garfunkel, Art, 87 Gates, Bill, 75 Gennelly, Fred, 159 Geritol Gang, 11–16, 237 giveaway, 77–79 Glantz, Harold, 59–61 Glengarry leads, 79 Global Diamond Fund (GDF), 39, 41 Gold, James M., 22–23 Golden Boy, 34, 42–46 gold mining, 91–92 Goode, Erica, 50–51 Google Maps, 91 Google searches, 91, 177 Gore, Al, 120 grand larceny charges, 104 Grant, Julia, 125, 126 Grant, Ulysses S., 125–127 Grant & Ward, 126–127 Greenspan, Stephen, 22, 53 Griffith, Jimmie, 233–234 Griffith Financial Services, 234 guarantees in affinity fraud, 100–101, 103 guaranteed investment contracts, 115 gullibility, 22 Guntensperger, Josef, 134–135 Haak, Guido, 61 “happiness letters,” 164–165, 232 Harris, Charles Lee, 46–47 Hartford, 200 Hatfield, Roc “Rocky” G., 33–34, 38–41 Hathaway, Anne, 122–124 hedge fund fraud, 64–71, 98 identifying, 68–71 long and, 64, 66 operations of, 64–68 phony accounting con, 65–66 promissory note scams, 116–119 hedge funds accredited investors, 69–71 feeder funds, 53, 68–69, 71, 127–128 Golden Boy and, 42–44 marketing programs, 45–46 referral fees, 69–70 RIAs as hedge fund managers, 213–214 turnover rate, 52–53 see also hedge fund fraud Hennessee Group LLC (Hennessee), 66–69 Heritage USA, 103–104 Heritage Wealth Management, Inc., 189–191 Hernandez, David, 115 Houdini, Harry, 128 Howard, Clark, 189 How We Decide (Lehrer), 25–27 H&R Block Financial Advisers, 174 hubris, 19–21 identity falsification, 116–119 impersonation, 116–119 Inconvenient Truth, An (film), 120 Indiana Insurance Commission, 190, 191 insurance agents, 220–223 insurance declarations page, 100–101 International Chamber of Commerce, 62 International Management Associates (IMA), 42–44, 45 International Monetary Fund (IMF), 62 International Security Investor Protection Corporation (ISIPC), 75–77 Interpol, 54, 75 interstate transport of stolen property charges, 222 investment adviser fraud, 212 Investment Advisers Act of 1940, 210 Investment Cops, 34–37 limitations of, 36–37 state regulatory agencies, 35–36, 38–39, 54–56 see also Federal Bureau of Investigation (FBI); U.S Securities and Exchange Commission (SEC) investment fraud affinity fraud, 97–111 blaming the victim, 16–17 Bungler role, 34, 49–53 Career Criminal role, 34, 38–41 categories of, 34 due diligence tips, 31, 57, 80, 94–95, 111, 135–136, 154–155, 171–172, 187, 204–205, 223, 238 extent of, 3–5, 12 Fibber role, 34, 46–49 giveaway, 77–79 Golden Boy role, 34, 42–46 growth of, 3–4 hedge fund frauds, 64–71, 98 Investment Cops role, 34–37 prime bank fraud, 59–64, 66, 74, 98 receivership actions, 2–3, 35, 73, 123–124 recovery scam, 75–77 renting credibility, 125–128 scam malls, 71–75 Thief role, 34, 54–57, 104–107 see also hedge fund fraud; stockbrokers; variable annuities investment objectives, 167–169 Investor’s Watchdog, LLC database, future scams, 135 impact on scam avoidance, 30 methods used, 2–4, 52, 55, 91, 107, 110, 134 origins of, 1–3 receivership actions, 2–3, 73, 123–124 reporting fraud to, 45, 232 web site, 3, 232 Irish Travelers, 113 Israel, Samuel, III, 64–68, 74, 89 Jeffery, James, 49–50, 53 John Paul II, Pope, 121–122, 124 Johnson, Andrew, 125 Johnson, Samuel, 21 Kahneman, Daniel, 132 Kansas Securities Commissioner, 211 Katzman, Dan, 175 Keener, Clint, 169–170 Kelly, George “Machine Gun,” 40 Kennelly, Matthew F., 47 KIRN Radio, 109–110 Klucharev, Vasily, 24–25 Koenig, Roland, 11–16 Koenig, Sieglinde, 11–16 Kruger, Justin, 50–51 Lay, Ken, 93 Lazarus, Adam, 234 Lehrer, Jonah, 25–27 Lewis, C S., 21 LexisNexis, 106–107, 119, 220, 222 Lincoln National Life Insurance Company, 221 Lone Star (TV show), 94 long con, 64, 66 loss aversion bias, 131–132 LPL Financial, 152, 160 Machiavelli, Niccolo, 207 Madoff, Bernard auditor, 45 credibility cons, 126–128 due diligence success, 134–135 fall of, 22 feeder funds, 53, 68–69, 71 impact of, 44, 114, 115–116, 117, 131, 135 SEC misses, 35 victims of, 18, 22, 53, 68–69, 75–77 mail fraud charges, 43, 54, 103, 115, 213–214, 222 Mamet, David, 39 Mansell Capital Partners, 50 Marada Capital, Inc (Marada), 38–40, 41 margin accounts, 179–181 margin calls, 180 Marino, Daniel, 65–67 marketing programs “free lunch,” 185–186, 196–198 hedge fund, 45–46 image and, 153–154 Marquez, James, 65–67 Marx, Groucho, 219 Maryland Securities Commission, 227–228 Massachusetts Securities Commission, 160 May, Thomas, 159 McHugh, Howard “Buck,” 157–162 McLaughlin Vogel Securities Inc (MVS), 233–234 McLeod, Wayne, 207–209 McMahon, Colleen, 67 McMillan, David, 151–152 Mead, Margaret, 225 Merendon Mining Corp Ltd., 92 Merrill Lynch, 146, 153, 170, 184 mild cognitive impairment (MCI), 228–230 Miller, Robert, 117–118 Min, John, 107–109 Mogilevich, Simeon, 83–85, 140 money laundering charges, 43, 61, 123, 141, 142–143, 213–214 Morgan Stanley, 153, 234 multifamily real estate properties, 143 multilevel marketing programs, 72–73 Naguib, Gamil, 59–61 name changes, 104–105, 106–107 National Association of Personal Financial Advisors (NAPFA), 217 National Football League (NFL), 26–27, 42–43 National Society of Compliance Professionals, 161 National Student Clearinghouse (NSC), 52, 74, 90, 220, 222 new-account documents, 165–168, 170 Newman, Paul, 39–40 New Point Financial Services, Inc., 109–110 New York Stock Exchange (NYSE), 158, 234 NFL Players Association (NFLPA), 42–43 North American Securities Administrators Association (NASAA), 36, 102–103, 186 objections, to stockbrokers, 175–177, 178, 200 off-balance sheet transactions, 93 offering frauds, 81–95, 98 Canadian stock exchanges and, 84–87 due diligence, 94–95 pump-and-dump operations, 38–39, 81–94, 139–143 Syndicated Gold Depository, S.A (SGD), 91–92 Trans Continental Airlines, 87–91 YBM Magnex International, Inc (YBM), 81–85, 86 Olde, Ernest J., 174 Olde Discount Corp., 173–179, 200 one-two punch, 181–183, 186 Ontario Teachers’ Pension Plan, 117–118 Oppenheimer & Co., 144–146 optimism bias, 22–24, 233 options, 46–47, 109–110 Oracle at Delphi, 11 Orman, Suze, 189 Osama bin Laden, 83 PACER (Public Access to Court Electronic Records), 41, 74, 162, 220, 222 Pacific Life, 199–200 patents, 121 Pearlman, Lou, 87–91 Peterson, David, 82 Pets.com, 153 phony accounting con, 65–66, 93–94 Picard, Irving, 75–76 Pictet & Cie, 134–135 Pilon, Mary, 218 Pitera, William and Doris, 144–146 Plainfield Asset Management, Inc., 123 Ponzi schemes, 1–2 credibility cons, 125–128 decision-making in, 27–31 guaranteed investment contracts, 115 hedge fund, 213–214 registered investment adviser (RIA), 210–214 remote supervision, 151–153 test drives, 128–131 see also Madoff, Bernard power of attorney, 227 Prentice, Kristen J., 22–23 pride attacks, 19–21 prime bank fraud, 59–64, 66, 74, 98 Prime Capital Services, Inc., 196–198 Principal Mutual Life Insurance Company, 226, 227 private placement memorandum (PPM), 28, 48–49, 50 promising less, 114–116 promissory note scams, 97–100, 116–119, 133–134 prospectus, annuity, 193 prosperity theology, 103–104 Prudential, 199–200 PSA Equities, Inc (PSA), 225–228 PTL Club, 103–104 pump-and-dump scams, 81–94 boiler rooms, 38–39, 139–143, 181–183, 186 false press releases, 86–87 identifying, 84–87, 89–91 operations of, 81–84, 87–89 Putman, James F., 217–218 Putnam New Century Growth Fund, 234 radio programs, 109–111 RAND Corporation, 210, 215, 219–220 Raymond James Financial, 152 receivership actions, 2–3, 35, 73 recovery scam, 75–77 Reeves, Vaughn, Sr., 101–102 registered investment advisers (RIAs), 46–49, 207–216 commissions of, 210 dual registration, 210 due diligence fees, 68–69 fees charged, 209–210 fiduciary duties, 209–218, 220 as hedge fund managers, 213–214 radio hosts, 109–110 as Thief, 54–57 Regulation D, 133 remote supervision, 151–153 Repke, Thomas, 49–50, 53 Retirement Planning Associates, Inc., 221–222 Reynolds, Archie Paul, 124 Richards, Lori, 161, 163 Richmond-Fairfield Associates, 71 Roesser, Eugene, Jr., 170 Rousch, Robert, 228–229 Royal Alliance Associates, Inc., 151–152 Royal Canadian Mounted Police (RCMP), 91–92 Ruth, Babe, 114, 225 Ryan, Debra, 67 Sadano, Angelo, 121–122 Salvation Army, 59–61 scam malls, 71–75 Schrenker, Marcus, 189–191, 193–194 Schrenker, Michelle, 189 Scoppetta, Nicholas, 59 Scorsese, Martin, 142 scripts, 173–179, 200 Securities Act of 1933, 133 securities attorneys, 232 securities fraud charges, 43, 106, 141, 143, 144–146, 212 securities industry credibility cons, 125–128 lobbying by, 7, 35–36, 214–216 problems of, see also hedge fund fraud; hedge funds; investment fraud; securities fraud charges; stockbrokers; variable annuities Securities Investor Protection Corporation (SIPC), 76 Seeger, Pete, 157 self-confidence, 19–21 senior citizens deathbed trading, 233–235 Geritol Gang, 11–16, 237 insurance agent fraud, 220–223 mild cognitive impairment (MCI), 228–230 protecting your parents, 228–233 stockbroker abuse of, 144–146, 157–162, 225–235 variable annuity purchases, 226–228, 235 Series examinations, 141, 175 Series 65 examinations, 212 Shereshevsky, Joseph, 104–107 short sales, 43 Silver, Chaim, 104–105 60 Minutes (TV show), 119 Skilling, Jeffrey, 93 Smith Barney, 146, 153 Solow Realty, 116–119 Sorenson, Gary, 91–92 Spanish Prisoner, The (film), 39 “special supervision,” 170–171 “special venture stocks,” 175 speculation, 167, 191 standby letters of credit, 59–61, 62 state regulatory agencies, 35–36, 38–39, 54–56 Stifel, Nicolaus & Company, Inc., 169–170 Sting, The (film), 39 Stitsky, Irving, 142–143 stockbrokers, 139–187 abuse of senior citizens, 144–146, 157–162, 225–235 account-opening documents, 165–168, 170 boiler-room operations, 38–39, 139–143, 181–183 branch manager conflict of interest, 145–146, 149, 150, 157–162 brokerage account statements, 44–45, 52, 65, 130, 168–169, 209, 211, 232, 234 charisma of, 233 churning accounts, 144–145, 157–162, 235 commissions, 144–145, 147, 148, 152, 157–162, 183–185, 235 computer monitoring systems, 162–164, 165–168 deathbed trading, 233–235 due diligence tips, 154–155, 171–172, 187 exception reports, 162–164, 165–168 fee-based accounts, 180–181 fiduciary duties of, 214–216 “free lunch” programs, 185–186, 196–198 “happiness letters,” 164–165, 232 investment objectives, 167–169 margin accounts, 179–181 marketing programs, 153–154, 185–186, 196–198 monthly statements, 44–45, 52, 65, 130, 168–169, 209, 211, 232, 234 one-two punch, 181–183, 186 pump-and-dump operations, see pump-and-dump scams registered investment advisers (RIAs) versus, 209–210 remote supervision, 151–153 reversal of unauthorized trades, 148–149, 150 scripts of, 173–179 SEC actions, 141–143, 143, 151–152, 161, 173–174, 175 Series exam, 141, 175 “special supervision,” 170–171 state regulatory actions, 55, 141, 143, 145, 152, 177, 189–191, 211, 222, 227–228 as Thief, 54–57 three bullets and a close, 178–179 trade confirmations, 147–148, 169–171 unauthorized trading, 144–151, 169–170, 234–235 unsolicited trades, 169–170 see also variable annuities stock options, 109–110 Stratton Oakmont, Inc., 139–143 Study in Scarlet, A (Conan Doyle), Sturman, Robert, 221–222 subprime mortgage market, 13 Success Trust and Holdings, LLC, 123–124 Sun Empire, 72–73 Sun Tzu, 81 surrender charges, variable annuity, 184–185, 192, 194, 197–199 Sutton, Willie, 19 Syndicated Gold Depository, S.A (SGD), 91–92 takeaway pitch, 131–132 tax fraud charges, 142–143 Teresa, Mother, 21 test drives, 128–131 theft charges, 115 Thief, 34, 54–57, 104–107, 115 three bullets and a close, 178–179 Toronto Stock Exchange, 81–84, 85–87 Toussaint, Stephen, 144–146 trade confirmations, 147–149, 169–171 Tradewinds International, LLC (Tradewinds), 46–47 Trans Continental Airlines, Inc., 87–91 transparency, 44 Troubled Asset Relief Program (TARP), 109–110 Trump, Donald, 66 turnover rate, 52–53 Tversky, Amos, 132 Twain, Mark, 113, 126 UBS Financial Services, 146 unauthorized trading, 144–151, 169–170, 234–235 undue influence, 229 United Kingdom, Serious Fraud Office (SFO), 61, 76 U.S Customs Service, 54, 67 U.S Justice Department, 61, 82, 99, 123, 141 U.S Patent and Trademark Office, 121 U.S Securities and Exchange Commission (SEC), 18, 38–41, 108–111, 114, 162 affinity fraud, 98 confirming registered status, 220 enforcement role of, 1, 33–36, 38, 43, 54, 67–68, 72–75, 82, 84, 87, 108, 115, 123–124, 130–131, 141–143, 151–152, 173–174, 186, 196–198 fear of penalties from, 62 Form 8-K, 85 Form ADV, 48–49, 220 impact of Dodd-Frank Act of 2010, 214–216 Madoff case and, 35 Office of Compliance Inspections and Examinations, 161 Registered Investment Advisor (RIA) designation, 207–216 Regulation D, 133 reporting fraud to, 45, 74–75, 101, 133–135, 212 web site, 41, 48, 74, 85, 143 Unity Mutual Life Insurance Company, 226 unsolicited trades, 169–170 variable annuities, 189–205 abuse of senior citizens, 226 annual fees, 184–185, 202–204 annuitizing, 192 annuity flipping, 193–194, 195 basics, 191–193 bonuses for purchase, 195–196 commission runs, 199–200 commissions, 192, 194, 196–201, 209 death benefit, 192, 202–203, 227 due diligence tips, 204–205 equity-indexed annuities, 204 ethical brokers, 200–203 free lunch seminars, 196–198 prospectus, 193 for senior citizens, 226–228, 235 surrender charges, 184–185, 192, 194, 197–198 Thief role and, 54–57 wholesalers, 198–200 withdrawal rights, 195 vigilante justice, 11–16, 237 Vitangelo’s Pizza and Restaurant, 97 Wachovia Securities, Inc., 158 Wachovia Securities LLC, 168 Walsh, Kevin J., 197–198 Ward, Ferdinand, 126–127 Washington Mutual, 88, 89 Wealth Management LLC, 218 Weiss, Fredric, 221–222 Wells, Mark W., 198 Wells Fargo Investments, 168 Western Reserve Life Insurance Company, 226, 227 WexTrust Capital, Inc., 105–107 WexTrust Securities, 105 whistle-blower provisions, 133–134 wholesalers, variable annuity, 198–200 Wilde, Oscar, 139, 173 wire fraud charges, 54, 61, 103, 106, 107, 115, 123, 222 Wolf of Wall Street, The (Belfort), 142 Wood, Kimba, 143 World Bank, 62 Wright, Kirk S., 42–44, 45 YBM Magnex International, Inc (YBM), 81–85, 86 Young, Donald Anthony Walker (“Tony”), 213–214 Zweig, Jason, 218 ... boring paperwork to put a meth addict to sleep The Career Criminal is not a fast-talking, fly-by 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