By Patrica Uceda, Fall 2014 Graduate Research Assistant
The SEC recently stopped an unregistered broker from selling allegedly fraudulent securities in a real estate investment fund. M. Shi Shailendra, of Jonesboro, Georgia, served as the manager of Shi Investments Six, LLC, a Georgia limited liability company. In 2008 and 2009 he solicited investors and sold membership interests in Shi Six, allegedly touting it as a real estate investment vehicle that would invest in newly acquired real estate. He claimed that the real estate was being purchased at a discount because of the financial crisis, and that he would flip the properties in three to five years for large profits.
To add legitimacy to the real estate investment fund, Shailendra allegedly told some of the investors that a prominent financier and former politician would be investing $15 million. He also allegedly told investors that he was placing his own funds at risk by investing in Shi Six. While he did initially invest $500,000, the SEC alleges that Shilendra reimbursed himself a few months later but failed to reduce his recorded interest in Shi Six to zero.
In reality, the SEC alleges that Shailendra was misappropriating investor funds for himself and using them for personal use. Between October 2008 and 2009 he allegedly misappropriated approximately $2,586,935 of the funds invested in Shi Six. He was charged by the SEC with making false representations to investors, misappropriating money, and acting as an unregistered broker. Shailendra agreed to settle the case and consented to the entry of a final judgment permanently enjoining him from participating in the issuance, purchase, offer, or sale of any security. He was also ordered to disgorge his ill-gotten gains and resign as manager of Shi Six.
Investing in unregistered securities can be very risky because unlike registered securities, which are subject to many laws and regulations such as disclosure requirements, unregistered securities are not as heavily regulated. Therefore they are often used to conduct investment scams, and investors should be particularly wary of unregistered investments. Here are some common warning signs to look out for:
- Claims of high returns with little or no risk: Every investment has some degree of risk. Be skeptical of any investment that is said to have no risks.
- Unregistered investment professionals: Always check to see whether the professional you are dealing with is registered and properly licensed by checking on the FINRA’s BrokerCheck or the Investment Adviser Public Disclosure website.
- Aggressive sales tactics: Fraudsters often claim that the investment is a “once-in-a-lifetime” offer that will expire quickly if you don’t invest now. Legitimate investment professionals will let investors take their time do research and will not be overly aggressive.
- Problems with sales documents: Always make sure you are provided a private placement memorandum that appears legitimate and matches what the investment professional is telling you.
- No net worth or income requirements: Federal securities laws limit private securities offerings to accredited investors who meet certain net worth or income requirements. If the investment professional offering you private investment opportunities does not ask about your net worth or income, that could be a sign of fraud.
For more warning signs, as well as what you can do to help protect yourself against unregistered security scams, go here.