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Investment Fraud

(The following is a DFI Your Money Matters program brochure reproduction)

Your telephone rings….

A voice on the other end of the line introduces itself as a representative of a company offering you the chance to invest in the opportunity of a lifetime:

" Tired of low interest rates on savings accounts? Tired of losing money in the stock market? Want to make a lot of money? Want to get in on the ground floor of an investment that will triple your money? Well, we have a great opportunity for you!"

Since the invention of the telephone, "get-rich-quick artists" have telephoned large numbers of people for fraudulent promotions. Over the years their sales techniques have become polished and sophisticated. As the schemes have become more complicated, the true nature of the "investments" has been deeply hidden, but fraud against investors is the real goal.

The Wisconsin Department of Financial Institutions regulates the offer and sale of securities under the Wisconsin Uniform Securities Law and pursues actions against individuals and firms engaged in securities fraud. This brochure will help you to recognize the difference between legitimate salespeople and those promoting frauds, and help you to protect yourself BEFORE you invest.

The following terms are critical to a basic understanding of the investment industry. Learning them will help you to distinguish between legitimate securities offerors and those operating outside the law.

SECURITIES as defined by Wisconsin law, include stocks, bonds, promissory notes and other evidences of indebtedness; shares in mutual funds; stock options; limited partnership interests; interests in oil and gas, mining, or real estate ventures or leases; certificates of deposit; some commodity contracts; and "investment contracts" (a catch-all term for certain kinds of unusual investment arrangements in which the investor is to rely on the effort of others for some essential managerial activities).

BROKER-DEALERS are firms which market investments to the public. Broker-dealers and their sales agents who contact persons in Wisconsin seeking to sell them securities must be licensed by the Department of Financial Institutions.

SECURITIES REGISTRATION is a process in which an issuer files securities offering materials with the Department of Financial Institutions. The Department reviews the materials to determine whether they meet minimum standards as to disclosure of facts investors should know. The materials must disclose the background of those making the offering, their financial condition, the risk factors in the offering, and the investors’ ownership rights and obligations under the offering. If those standards do not appear to be met, the securities are not registered. Every securities offering in Wisconsin must be registered with Department of Financial Institutions before being offered for sale to persons in Wisconsin, unless it qualifies for an exemption from the registration requirement.

If you are contacted by a telephone salesperson, you should ask whether the investment offered is registered for sale in Wisconsin. You should also ask whether the person and his or her firm are licensed by the Department of Financial Institutions BEFORE you agree to anything. Legitimate broker-dealers and agents will gladly provide this information to you. If you are in any way uncertain, you should double-check their answers by contacting the Department.

BOILER-ROOM SCHEMES AND SCAMS

Boiler Room and Ponzi Schemes are some of the terms used to describe the sale of questionable investments. They can all be summarized by one term: SECURITIES FRAUD. Many approaches have been used to entice persons in Wisconsin to send money to a company that is really a "boiler room."

BOILER ROOMS are locations where a number of people use telephones to sell interests in a company or product to investors. The term boiler room describes the heat and high pressure generated by the callers as they try to convince investors to send in their money. In most cases, either the company or product does not really exist, or it does not operate as represented. Often, private courier services [such as Federal Express or UPS] are used in attempts to evade the U.S. postal-fraud laws. Here are just a few examples of recent boiler-room schemes:

PONZI SCHEMES use the money of later investors to pay off earlier investors. Early investors receive what appear to be high dividends or interest on their investments. Reports of these high returns are then used to entice new investors. In reality, there is no underlying business. The early investors are simply being paid off with funds received from the later investors. When the scheme collapses, as it always does, current investors lose their money and the promoters walk away rich.

AFFINITY SCHEMES use a common connection between you and the salesperson to establish trust. This is simply a ploy to get you to drop your defenses so that you can be separated from your money. Because you are members of the same group, he or she wants you to believe that you would never be defrauded. The fact that the salesperson is of your race, religion, ethnic or other similar type group does not make the investment legitimate.

TELECOM FRAUD uses recent news stories about the revolution in telecommunications and the use of the internet. Scam artists concoct schemes that, at first glance, seem possible. However, check to see how much of your money actually goes toward the investment. Very often as much as half of your investment goes for fees of one kind or another. The more of your money that goes into "up front" fees, the lower any return on your investment would be, if there is any legitimate business operation involved at all. In addition, the systems are often not built or are of substandard quality. The fact that there are high "front end" fees is almost always an indicator that fraud is the case. Legitimate operations rarely build such front-end profits for themselves into the price.

REAL ESTATE SCHEMES AND OIL AND GAS VENTURE SCAMS come in many forms. Most are designed to convince you to invest in some kind of property or mineral rights at a location that neither you nor other investors have ever seen. Statistical reports and glowing projections are produced to entice you to invest in the hope of becoming an oil baron or a real estate magnate. In fraudulent promotions, even if the property or oil well does exist—which is often not the case—the proposed income-producing activity either does not exist, or does not operate as represented.

The schemes described above are just a few examples of the fraudulent offers made to persons in Wisconsin every month. You work hard for you money; DO NOT allow a smooth-talking caller to take it away from you. If you receive an unexpected telephone call from someone who tries to convince you to send money so that you can take advantage of a great investment opportunity: ASK if the firm and salesperson are licensed with the Department of Financial Institutions to do business in Wisconsin. ASK if the investment is registered with the Department for sale in Wisconsin. CONTACT the Department’s Division of Securities at 608-266-2139 if you wish to verify the answers. Many of these schemes claim that what is being sold is not a security. Some sellers falsely claim that promissory notes or the like are not securities. Or the interests they are selling are labeled "general partnership interests" or "limited liability membership interests" or the like. If they are doing the essential managerial work and you are mostly just giving them money, then they are selling a security and it must be registered with Department unless otherwise exempt from such registration. People offering and selling fraudulent investments normally do not even attempt to register them under the securities laws, because of the factual disclosures they must make in order to get the securities registered. That is why you should always check to see whether the investments being offered to you are registered.

Rules to Remember

DO NOT give out personal information such as your social security number, your financial condition, your past investment history, or your bank, credit union, or savings and loan accounts unless you feel confident about dealing with the salesperson and the firm. And, you should not deal with any securities dealer or its representative unless you know that both the firm and the representative are licensed under the Wisconsin securities law. If you give a caller such information, a claim may later be made that you did authorize a transaction; otherwise, why would you give have given the caller such information?

INSIST that written information about the investment be sent to you—before you make any investment decision—by U.S. mail, not by a private courier service [such as Federal Express or UPS]. After you receive the information, seek the opinion of a local brokerage firm, accountant, attorney, or someone you trust who is knowledgeable about making investments.

NEVER let a salesperson use high-pressure or hard sell tactics to coerce you into agreeing to make a purchase. Boiler-room callers are experts in using language that sounds "right." They use all the current industry slang and will, if necessary, invent more to sound as though they really know more about the investment than you will ever need to know. A boiler-room caller will often tell you to "trust me." DON’T!

MAKE NO PROMISES, regardless of what the salesperson says. Wait until you receive all the information you requested by U.S. mail, and have had time to evaluate it before giving the caller any indication of possible interest.

DO NOT be afraid to hang up the telephone if someone continues to pressure you. You do not owe this type of salesperson any explanations or courtesies.

Those who market investment fraud rely on the telephone as their primary sales tool. Legitimate investment firms and their salespersons use the telephone to identify new customers. You can use the information in this brochure to help you distinguish between them. The key is to investigate before you invest!

DFI is a self-supporting agency funded by fees charged to those it regulates.

DFI is here to serve you!

Above all, the most important thing to remember is investigate before you invest!

If you have concerns or questions

If you believe that you have been victimized by investment fraud or have questions concerning an offer being made to you, you should contact state or federal securities regulators.

If you were in Wisconsin when the offer or any other part of the transaction occurred, contact the:
Department of Financial Institutions
Division of Securities
1-800-47CHECK

Or send your written complaint or inquiry to:
Department of Financial Institutions
Division of Securities
PO Box 1768
Madison, Wisconsin 53701