Wednesday’s Word: Boiler Room

By Ben Dell’Orto, Spring 2018 IAC Student Intern

In addition to inspiring a Hollywood movie, Boiler Rooms are a common scheme to pressure investors into purchasing an investment that most likely is not a good one for them. The scheme involves a large group of “salesmen” trying to attract as many investors as possible to the scam. The most common method is through cold calling, where the schemers use high-pressure sales tactics to encourage the potential investor on the other end of the phone call to take advantage of an investment that will yield “high returns” and “no risk” but is only available for a short time. FINRA notes that the caller will often attempt to explain the miracle investment by suggesting that it is founded in an emerging industry or will “play off recent events” to lend legitimacy to the lie. One recently-busted scam in England took advantage of the rising wine industry, and this blog reported on a recent FINRA report of scams increasing on this side of the pond.

While previously usually conducted over the phone, the SEC adds that boiler rooms now may use “emails, text messages, social media, and other means.” These methods lack the pressure created by a persuasive voice speaking directly over the phone, but can still be effective by suggesting that the time to buy is limited, or by pestering with frequent messages.

The most important thing to remember to avoid falling victim to a Boiler Room scheme is to




The fraudsters behind this kind of scheme are relying on a quick decision, so taking a moment to run a broker check and an internet search of the investment before buying will save you from taking a big loss.

Dangerous Clickbait: The SEC Warns Investors About Paid-to-Click Scams

By: Esmat Hanano, IAC Student Intern Spring 2018

At the tail-end of last year, the Securities and Exchange Commission (SEC) issued a warning to investors about Paid-To-Click (PTC) scams. PTC websites “…promise investors a share of the program’s profits in exchange for paying an upfront fee or buying products.” The PTC site might even promise the investor advertising space on its network of ads in addition to a share in the program’s profits. In this way PTC sites seem to offer the best way of making money on the internet—buy online “ad packs” then sit back and watch as your profits roll in! However, the SEC warns that these websites are being used to further Ponzi schemes. In fraudulent schemes, a new investor will place money in a PTC program which will then be sent to previous investors in the same program as their “profits.” Not all PTC sites are malicious, but investors thinking about buying into such programs must be wary of the promises these websites make. Continue reading

Investor Alert: Promissory Notes Don’t Offer Much Promise

Ben Dell’Orto, Spring 2018 IAC Student Intern

When the North American Securities Administrators Association (NASAA) polled state securities regulators on the “top five current investment practices, products or schemes” leading to a customer complaint or investigation, the results were overwhelming: 74% of those surveyed listed promissory notes among the top five.

So what is a promissory note? On the surface, the concept is simple; companies in need of capital reach out to investors to lend them some money with the promise of eventually returning the initial investment along with fixed interest payments. The length of time the company has to repay can vary from months to years.

Though this sounds like a simple process with potential for high returns, most of us are unlikely to get an offer to purchase legitimate promissory notes. The NASAA notes that “legitimate promissory notes are marketed and sold almost exclusively to sophisticated or corporate investors with the resources to research the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal.” This means that most offers the average investor receives for promissory notes are actually fraudulent.

While FINRA notes that fraudsters offering promissory notes most frequently target elderly investors with fixed income for their retirement savings, anyone is at risk. This brochure, produced by FINRA, the NASAA and others describes instances where a coffee company sold $4 million in notes to at least 100 investors and a veterinarian in Kansas sold $1.3 million in notes to friends and church members. In both situations, the investors lost everything. Last April, an insurance agent plead guilty to defrauding almost eighty of his clients out of $8.2 million by promising a 10 percent return to borrow against their life insurance plan.

The key to avoiding fraudulent promissory notes is the same as avoiding most scams: research. Use the SEC’s EDGAR search tool to make sure your promissory note is properly registered. Also avoid any notes which claim to be “guaranteed,” as nothing is.

Wednesday’s Word: Unit Investment Trust

By Esmat Hanano, Spring 2018 IAC Student Intern

The Financial Industry Regulatory Authority (FINRA) has released its annual Regulatory and Examination Priorities Letter. One of the biggest priorities for FINRA in 2018 is monitoring the use of Unit Investment Trusts, or UITs. What exactly is a UIT you may ask? Continue reading

Investor Advocacy Clinic Welcomes Back Eric Peters

Eric Peters decided to return to the Investor Advocacy Clinic for a second semester in spring 2018.  Peters returned to continue his creative investor education work and to provide legal advice to real investors who have been wronged by their broker. According to Peters,

“The Investor Advocacy Clinic is important because it helps real people solve problems from unsuitable advice.  I feel for my clients because this can happen to anyone — and it has happened to my family.  I came back to the clinic to help new clients and finish the work I started with clients whose matters are not yet resolved.”

IAC Comments on FINRA Regulatory Notice Concerning Expungements

The Investor Advocacy Clinic evaluates and comments on regulatory matters and proposed rules in order to provide a voice for small retail investors.  As part of that mission, on Monday, February 5, 2018, the clinic submitted a comment letter on FINRA Regulatory Notice 17-42, a proposal making changes to the expungement process.  Expungement is the process by which broker dealers and associated persons are able to remove items, like customer complaints, from their CRD, which provides the information for BrokerCheck.

The Investor Advocacy Clinic’s comment, available in full here, expressed support for most of the suggested changes as they encouraged investor participation in the expungement process while simultaneously ensuring that only brokers actually entitled to expungement obtain that extraordinary relief.  We frequently recommend that investors consult BrokerCheck before investing, and the clinic believes that maintaining its accuracy and reliability is of the utmost importance.  We appreciate FINRA’s invitation to comment on such important matters.  Spring 2018 students Ben Dell’Orto, Esmat Hanano and Alisa Radut were the primary authors of the comment.

FINRA’s Crypt[ic] Message

By W. Dowdy White, Spring 2018 IAC Student Intern

If you were going to walk across a balance beam one hundred feet in the air, would you prefer for that beam to be made out of either steel or a toothpick? The answer to that question is easy – everyone would pick steel. If you were investing all of your money with the risk of losing it all, would you prefer to invest in a fund that promises huge returns at a high risk or would you rather invest in a fund that promises small returns at a low risk? The answer to that question is bit more difficult to answer.

Cryptocurrencies are currently the latest fad in investing. Specifically, consumers flock to these investments by the boatload because these funds promise exponentially high returns. However, according to a recent investor alert from the Financial Industry Regulatory Authority (FINRA) in December 2017, cryptocurrencies may not be the slam-dunk investment that everyone makes them out to be. In fact, FINRA warns potential investors not to be fooled by “unrealistic predictions of returns and claims made through press releases, spam emails, or posted online . . .” at the risk of their money vanishing into thin air.

There have been many cryptocurrency-related stock scams over the past several years. In fact, the Securities and Exchange Commission (SEC) suspended trading in a large number of securities because of some questions about the accuracy of some cryptocurrency-related activities. Specifically, the SEC questioned the accuracy of claims ranging from the value of the assets of the now-defunct company, DIBCOINS, to statements by several companies who planned to conduct Initial Coin Offerings (ICO).

Because of the very prominent success of companies like Bitcoin, the cryptocurrency marketplace is emphatically booming. With more cryptocurrencies appearing on the market on a regular basis, it is easy for company promoters to make outrageous claims about their product without the research and facts to back them up. To assist consumers in avoiding these situations, FINRA released six tips to avoid costly mistakes in cryptocurrency investing.

Continue reading