By: Alexandra Hughes, Spring 2016 Clinic GRA
On April 4, 2016, the SEC published a press release, SEC Charges Four in Fraudulent Free Dinner Scheme, “announc[ing] it has charged four individuals in a fraud whose victims included seniors who were solicited at ‘free dinner’ investment seminars in Florida.” The “cast of characters” in this free dinner scheme were: Joseph Andrew Paul, John D. Ellis, Jr., James S. Quay, and Donald H. Ellison.
Essentially, the SEC alleges that Paul and Ellis created fraudulent marketing materials, which included materials that were literally copy and pasted from an unrelated firm’s website. According to the SEC’s allegations, false materials in hand, Quay and Ellison sent out a mass-mailing offer enticing seniors to come to a free dinner to learn about the investments. The SEC alleges in its complaint that most of the money raised from these hoodwinked senior investors was never actually invested. Instead, the money allegedly went into the palms of Paul, Ellis, Quay, and Ellison. To make matters worse, Quay was the subject of a previous 2012 enforcement action and was using an alias “Stephen Jameson.” Neither “Stephen Jameson” nor Ellison were registered during the period the scheme took place.
This certainly isn’t the first and probably isn’t the last time fraudsters will attempt to use a “free lunch” or “free dinner” scheme to convince seniors to invest in products that don’t exist. Senior investors should refer to Investor Alert for Seniors and Seniors—Beware of Investment Seminars for more information. The SEC also advises investors to check the registration status and disciplinary history of financial professionals, before making an investment, via its website.
FINRA has also discussed the dangers of these “free lunch” investment seminars in Investor Alert: “Free Lunch” Investment Seminars—Avoiding the Heartburn of a Hard Sell. In this Investor Alert, FINRA advises investors, especially senior investors, to be on the look out for these seminars which generally put on a convincing show but not necessarily a good investment. Persuasion techniques that fraudsters may try to use at such seminars include:
- Phantom Riches: A tactic that entices the investor with the “riches” that can be produced by the investment.
- Source Credibility: A tactic that uses a reputable firm or an individual’s special credential to persuade the investor to invest.
- Social Consensus: A tactic that makes the investor believe the investment is a good idea because “other savvy investors have already invested.”
- Reciprocity: A tactic that uses a prize or meal to guilt the investor into reciprocating with an investment.
- Scarcity: A tactic that “creat[es] a false sense of urgency by claiming limited supply.”