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Ripped off by stock fraud? Here's what you should do.
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(February 16, 2009 - Monday) - By PAMELA YIP / The Dallas Morning News
pyip@dallasnews.com
http://www.dallasnews.com/sharedcontent/dws/bus/personalfinance/stories/021609dnbus.3d34a56.html
The massive fraud allegedly committed by New York investment manager Bernard Madoff is the nightmare that investors dread.
Madoff was arrested in December and charged with criminal securities fraud for allegedly operating a Ponzi scheme that's said to have uncorked an estimated $50 billion in losses.
In such a fraud, a scammer promises high rates of return with little risk to investors.
The Ponzi scheme generates returns for older investors with money from new investors.
The scheme usually collapses on itself when new investors dry up.
If something similar to this happens to you, there are specific steps you should take to recover your money.
People who think they're victims of a stock fraud "should complain to a securities regulator as quickly as possible," said John Gannon, senior vice president of investor education at the Financial Industry Regulatory Authority, which oversees the U.S. brokerage industry.
"The sooner the regulator knows about it, the sooner a regulator can freeze the assets of that entity," he said.
The primary regulators to contact are the U.S. Securities and Exchange Commission, the Texas State Securities Board and FINRA.
"If you believe your situation may be similar to a Madoff investor situation, you need to contact the Securities and Exchange Commission first because they have primary jurisdiction over big firms like Madoff," said Denise Voigt Crawford, Texas securities commissioner.
"If you're not sure who your regulator is and if the SEC says, 'We don't have jurisdiction over that firm,' you need to contact our office."
Review your contract
One of your first steps should be to "look at your contract when you started this business relationship," said Richard A. Lewins, a former stockbroker and now a lawyer at Burg Simpson Eldredge Hersh & Jardine P.C. in Dallas. "It is going to have language that will tell where you are going to bring this claim."
If you purchased your investment from a stockbroker, "then I know of no case where you could not find yourself in FINRA arbitration," he said.
"Every single new account form at every broker/dealer in this country has a pre-dispute binding mandatory arbitration agreement in it," Lewins said.
Brokerage firms must register with the SEC and be members of FINRA.
Individual brokers, also known as "registered representatives," must register with FINRA, pass a qualifying examination, and be licensed by state securities regulators before they can do business.
There's also what's called a Registered Investment Adviser. An investment adviser is a person or company who's paid for providing investment advice and management to clients.
The SEC regulates investment advisers who manage $25 million or more in assets; those who manage less than that are regulated by the state.
While a broker may also give investment advice to clients, the two jobs are not the same.
"A broker is compensated usually on a transaction basis," Lewins said. "They make commissions."
Some brokers are also RIAs.
If you have a complaint about a registered investment adviser, check your account agreement for directions on what steps to take.
"There's going to be some kind of account agreement, and with that agreement, it's going to cover what happens if there's a problem," Lewins said.
Check the records
Your next step is to determine whether regulators have taken enforcement action against the investment professional.
If so, check to see if an investor claims fund has been established, said John Nester, SEC spokesman.
Funds that are recovered and available for investors will be distributed according to an approved plan.
You should do this at the same time you complain to regulators.
"There's no reason you can't pursue parallel tracks," said Gannon of FINRA.
Prepare for the worst
Gird yourself for the possibility that you may get little or nothing back.
"Ponzi schemes by nature are set up in a way that the money runs out because the perpetrator of the Ponzi scheme is spending the money that he or she brings in," said Crawford, the Texas securities commissioner.
In non-Ponzi schemes, there's a greater possibility of recovering funds, she said.
"A company will go into receivership, the receiver will marshal the assets, and we will try to get restitution for the defrauded investors," Crawford said. "You see a lot of that in oil and gas frauds."
That's why it's so important to complain to regulators as quickly as possible because there may be a limited amount of money that's recovered.
"First pig to the trough, and when it's gone, it's gone," said Lewins, the securities lawyer.
"Get advice quickly, so if there's going to be an issue of it being only be a few bucks to get, you're first in line to get them."
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