SEC INVESTOR ALERT REGARDING SOCIAL MEDIA AND INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE

Updated Investor Alert: Social Media and Investing - Avoiding Fraud

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help investors be better aware of fraudulent investment schemes that may involve social media. U.S. retail investors are increasingly turning to social media, including Facebook, YouTube, Twitter, LinkedIn and other online networks for information about investing. Whether it be for research on particular stocks, background information on a broker-dealer or investment adviser, guidance on an overall investing strategy, up-to-date news, or to simply discuss the markets with others, social media has become a key tool for U.S. investors.

While social media can provide many benefits for investors, it also presents opportunities for fraudsters. Social media, and the Internet generally, offer a number of attributes criminals may find attractive. Social media lets fraudsters contact many different people at a relatively low cost. It is also easy to create a site, account, email, direct message, or webpage that looks and feels legitimate – and that feeling of legitimacy gives criminals a better chance to convince you to send them your money. Finally, it can be difficult to track down the true account holders that use social media. That potential for anonymity can make it harder for fraudsters to be held accountable. As a result, investors need to use caution when using social media and considering an investment.

What You Can Do To Protect Yourself - Tips to Help Avoid Fraud Online

So, what can individual investors do to protect themselves while using social media? The key to avoiding investment fraud on the Internet is to be an educated investor. Below are five tips to help you avoid investment fraud on the Internet:

Be Wary of Unsolicited Offers to Invest

Investment fraud criminals look for victims on social media sites, chat rooms, and bulletin boards. If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme. Many scams use spam to reach potential victims. For example, with a bulk e-mail program, spammers can send personalized messages to millions of people at once for much less than the cost of cold calling or traditional mail. If you receive an unsolicited message from someone you don’t know containing a “can’t miss” investment, your best move is to pass up the “opportunity” and report it to the SEC Complaint Center.

Look out for Common “Red Flags”

Wherever you come across a recommendation for an investment – be it on the Internet or from a personal friend (or both), the following “red flags” should cause you to use extreme caution in making an investment decision:

It sounds too good to be true. Any investment that sounds too good to be true probably is. Compare any promised return with the returns on well-known stock indexes. Any investment opportunity that claims you’ll receive substantially more than that could be highly risky – or be an outright fraud. Be extremely wary of claims on a website that an investment will make “INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK” or has “HUGE UPSIDE AND ALMOST NO RISK!” Claims like these are hallmarks of extreme risk or outright fraud.
The promise of “guaranteed” returns. Every investment entails some level of risk, which is reflected in the rate of return you can expect to receive. If your investment is 100% safe, you’ll most likely get a low return. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or that the investment is a “can’t miss opportunity.” Don’t believe it.
Pressure to buy RIGHT NOW.  Don’t be pressured or rushed into buying an investment before you have a chance to think about – and investigate – the “opportunity.” Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.
Look out for “Affinity Fraud” Never make an investment based solely on the recommendation of a member of an organization or group to which you belong, especially if the pitch is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

Be Thoughtful About Privacy and Security Settings

Investors who use social media websites as a tool for investing should be mindful of the various features on these websites in order to protect their privacy and help avoid fraud. Understand that unless you guard personal information, it may be available not only for your friends, but for anyone with access to the Internet – including fraudsters. For more information on privacy and security settings, as well as other guidance regarding setting up on-line accounts with an eye toward avoiding investment fraud, see our Investor Bulletin Social Media and Investing: Understanding Your Accounts.

Ask Questions and Check Out Everything

Be skeptical and research every aspect of an offer before making a decision. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Never rely on a testimonial or take a promoter’s word at face value. You can check out many investments using the SEC’s EDGAR filing system or your state’s securities regulator. You can check out registered brokers at FINRA’s BrokerCheck website and registered investment advisers at the SEC’s Investment Adviser Public Disclosure website. See our publication “Ask Questions” for more about information you should gather before making an investment.

A Few Common Investment Scams Using Social Media and the Internet

While fraudsters are constantly changing the way they approach victims on the Internet, there are a number of common scams of which you should be aware. Here are a few examples of the types of schemes you should be on the lookout for when using social media:

“Pump-and-Dumps” and Market Manipulations

“Pump-and-dump” schemes involve the touting of a company’s stock (typically small, so-called “microcap” companies) through false and misleading statements to the marketplace. These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms. Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create. Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money.

For an example of an actual case, see Securities and Exchange Commission v. Carol McKeown, Daniel F. Ryan, Meadow Vista Financial Corp., and Downshire Capital, Inc., Civil Action No. 10-80748-CIV-COHN (S.D. Fla. June 23, 2010).

Fraud Using “Research Opinions,” Online Investment Newsletters, and Spam Blasts

While legitimate online newsletters may contain useful information about investing, others are merely tools for fraud. Some companies pay online newsletters to “tout” or recommend their stocks. Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock. But fraudsters often lie about the payments they receive and their track records in recommending stocks. Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks – often, but not always, penny stocks. The fact that these so-called “newsletters” may be advertised on legitimate websites, including on the online financial pages of news organizations, does not mean that they are not fraudulent. To learn more, read our tips for checking out newsletters.

For an example of an actual case, see Securities and Exchange Commission v. Wall Street Capital Funding LLC, Philip Cardwell, Roy Campbell, and Aaron Hume, Civil Action No. 11-cv-20413-DLG (S.D. Fla. February 7, 2011).

High-Yield Investment Programs

The Internet is awash in so-called “high-yield investment programs” or “HYIPs.” These are unregistered investments typically run by unlicensed individuals – and they are often frauds. The hallmark of an HYIP scam is the promise of incredible returns at little or no risk to the investor. A HYIP website might promise annual (or even monthly, weekly, or daily) returns of 30 or 40 percent – or more. Some of these scams may use the term “prime bank” program. If you are approached online to invest in one of these, you should exercise extreme caution - they are likely frauds.

Fraudsters may use social media to promote a HYIP website or may encourage investors to use social media to share information about a HYIP website with others. For example, in In the Matter of Srivastava and Kavuri, the respondents allegedly used social media to promote their HYIP website, advertising “huge,” “lucrative,” “handsome,” and “guaranteed” profits with “minimal” risk. They also allegedly encouraged their Twitter followers to “use a referral link and promotional banner on social media, blog, forum, and email to share [the HYIP website] with interested parties.” Additionally, according to the Commission’s Order, they created a Facebook page and YouTube video that promoted the HYIP website and advertised supposed daily returns of 1.5% to 2%.  

Internet-Based Offerings

Offering frauds come in many different forms. Generally speaking, an offering fraud involves a security of some sort that is offered to the public, where the terms of the offer are materially misrepresented. The offerings, which can be made online, may make misrepresentations about the likelihood of a return. For example, in a recent case, Securities and Exchange Commission v. Imperia Invest IBC, the fraudsters allegedly used a website to offer investors a “guaranteed return” of 1.2% per day. Other online offerings may not be fraudulent per se, but may nonetheless fail to comply with the applicable registration provisions of the federal securities laws. While the federal securities laws require the registration of solicitations or “offerings,” some offerings are exempt. Always determine if a securities offering is registered with the SEC or a state, or is otherwise exempt from registration, before investing.

Where can I go for help?

Investors who learn of investing opportunities from social media should always be on the lookout for fraud. If you have a question or concern about an investment, or you think you have encountered fraud, please contact the SEC, FINRA, or your state securities regulator to report the fraud and to get assistance.

U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, DC 20549-0213
Telephone: (800) 732-0330
Fax: (202) 772-9295

Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, MD 20850
Telephone: (301) 590-6500
Fax: (866) 397-3290

North American Securities Administrators Association (NASAA)
750 First Street, NE
Suite 1140
Washington, DC 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571

CFTC CHAIRMAN'S STATEMENT ON $1.4 BILLION BANK ENFORCEMENT FINE AND SETTLEMENT

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Chairman Tim Massad on today’s Forex Enforcement Announcement
November 12, 2014

Washington, DC – U.S. Commodity Futures Trading Commission Chairman made the following statement on today’s enforcement action against five banks for attempting to manipulate the foreign exchange benchmark rate. The five banks settled with the CFTC and agreed to pay a $1.4 billion fine, and they will be required to implement policies and procedures to prevent this misconduct going forward.

“Integrity of the market place is a paramount concern to the CFTC, and today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated,” said Chairman Massad. “I want to especially thank the dedicated and hardworking staff of the CFTC’s Enforcement Division, who spent countless hours in order to uncover this egregious behavior and hold those responsible accountable for it.”

Last Updated: November 12, 2014

SEC, FINRA ISSUE ALERT TO INVESTORS REGARDING SHELL COMPANIES BEING SOLD AS PENNY STOCKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) issued an alert warning investors that some penny stocks being aggressively promoted as great investment opportunities may in fact be stocks of dormant shell companies with little to no business operations.

The investor alert provides tips to avoid pump-and-dump schemes in which fraudsters deliberately buy shares of very low-priced, thinly traded stocks and then spread false or misleading information to pump up the price.  The fraudsters then dump their shares, causing the prices to drop and leaving investors with worthless or nearly worthless shares of stock.

“Fraudsters continue to try to use dormant shell company scams to manipulate stock prices to the detriment of everyday investors,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Before investing in any company, investors should always remember to check out the company thoroughly.”

Gerri Walsh, FINRA’s Senior Vice President for Investor Education, said, “Investors should be on the lookout for press releases, tweets or posts aggressively promoting companies poised for explosive growth because of their ‘hot’ new product.  In reality, the company may be a shell, and the people behind the touts may be pump-and-dump scammers looking to lighten your wallet.”

The investor alert highlights five tips to help investors avoid scams involving dormant shell companies:

Research whether the company has been dormant – and brought back to life.  You can search the company name or trading symbol in the SEC’s EDGAR database to see when the company may have last filed periodic reports.
Know where the stock trades.  Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges.
Be wary of frequent changes to a company's name or business focus.  Name changes and the potential for manipulation often go hand in hand.
Check for mammoth reverse splits. A dormant shell company might carry out a 1-for-20,000 or even 1-for-50,000 reverse split.
Know that "Q" is for caution.  A stock symbol with a fifth letter "Q" at the end denotes that the company has filed for bankruptcy.

SEC CHARGES GLOBAL WATER MANAGEMENT COMPANY WITH VIOLATING FCPA

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a global water management, construction, and drilling company headquartered in Texas with violating the Foreign Corrupt Practices Act (FCPA) by making improper payments to foreign officials in several African countries in order to obtain beneficial treatment and reduce its tax liability.

After Layne Christensen Company self-reported its misconduct, an SEC investigation determined that the company received approximately $3.9 million in unlawful benefits during a five-year period as a result of bribes typically paid through its subsidiaries in Africa and Australia.  Some payments were funded through cash transfers from Layne’s U.S. bank accounts.

In addition to self-reporting the misconduct, Layne cooperated with the SEC’s investigation by providing real-time reports of its investigative findings, producing English language translations of documents, and making foreign witnesses available.  The company also undertook an extensive remediation effort.  Layne agreed to pay more than $5 million to settle the SEC’s charges.

“Layne’s lack of internal controls allowed improper payments to government officials in multiple countries to continue unabated for five years,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “However, Layne self-reported its violations, cooperated fully with our investigation, and revamped its FCPA compliance program.  Those measures were credited in determining the appropriate remedy.”

According to the SEC’s order instituting settled administrative proceedings, Layne’s misconduct occurred from 2005 to 2010.  In addition to favorable tax treatment, the improper payments helped the company obtain customs clearance, work permits, and relief from inspections by immigration and labor officials in various African countries.

Among the findings in the SEC’s order:

Layne paid nearly $800,000 to foreign officials in Mali, Guinea, and the Democratic Republic of the Congo (DRC) to reduce its tax liability and avoid associated penalties for delinquent payment.  The bribes enabled Layne to realize more than $3.2 million in improper tax savings.

Layne made improper payments to customs officials in Burkina Faso and the DRC to avoid paying customs duties and obtain clearance to import and export its equipment.  The bribes were falsely recorded as legal fees and commissions in the company’s books and records.

Layne paid more than $23,000 in cash to police, border patrol, immigration officials, and labor inspectors in Burkina Faso, Guinea, Tanzania, and the DRC to obtain border entry for its equipment and employees.  The bribes also helped secure work permits for its expatriate employees and avoid penalties for non-compliance with local immigration and labor regulations.

The SEC’s order finds that Layne violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act of 1934.  Layne agreed to pay $3,893,472.42 in disgorgement plus $858,720 in prejudgment interest as well as a $375,000 penalty amount that reflects Layne’s self-reporting, remediation, and significant cooperation with the SEC’s investigation.  For a period of two years, the settlement requires the company to report to the SEC on the status of its remediation and implementation of measures to comply with the FCPA.  Layne consented to the order without admitting or denying the SEC’s findings.

The SEC appreciates the assistance of the Fraud Section of the Department of Justice and the Federal Bureau of Investigation.

Statement on Jury Verdict in Case Against Charles Kokesh

Statement on Jury Verdict in Case Against Charles Kokesh

FED BANKING AGENCIES REPORT "SERIOUS DEFICIENCIES IN UNDERWRITING STANDARDS AND RISK MANAGEMENT OF LEVERAGED LOANS"

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 

For Immediate Release November 7, 2014 

Credit Risk in the Shared National Credit Portfolio is High; Leveraged Lending Remains a Concern

The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations (FBOs), and nonbanks is generally unchanged in 2014 from the prior year, federal banking agencies said Friday. In a supplemental report, the agencies highlighted findings specific to leveraged lending, including serious deficiencies in underwriting standards and risk management of leveraged loans.

The annual Shared National Credits (SNC) review found that the volume of criticized assets remained elevated at $340.8 billion, or 10.1 percent of total commitments, which approximately is double pre-crisis levels. The stagnation in credit quality follows three consecutive years of improvements. A criticized asset is rated special mention, substandard, doubtful, or loss as defined by the agencies' uniform loan classification standards. The SNC review was completed by the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency.

Leveraged loans as reported by agent banks totaled $767 billion, or 22.6 percent of the 2014 SNC portfolio and accounted for $254.7 billion, or 74.7 percent, of criticized SNC assets. Material weaknesses in the underwriting and risk management of leveraged loans were observed, and 33.2 percent of leveraged loans were criticized by the agencies.

The leveraged loan supplement also identifies several areas where institutions need to strengthen compliance with the March 2013 guidance, including provisions addressing borrower repayment capacity, leverage, underwriting, and enterprise valuation. In addition, examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor's projections.

Federal banking regulations require institutions to employ safe and sound practices when engaging in commercial lending activities, including leveraged lending. As a result of the SNC exam, the agencies will increase the frequency of leveraged lending reviews to ensure the level of risk is identified and managed.

In response to questions, the agencies also are releasing answers to FAQs on the guidance. The questions cover expectations when defining leveraged loans, supervisory expectations on the origination of non-pass leveraged loans, and other topics. The FAQ document is intended to advance industry and examiner understanding of the guidance, and promote consistent application in policy formulation, implementation, and regulatory supervisory assessments.

Other highlights of the 2014 SNC review:

Total SNC commitments increased by $379 billion to $3.39 trillion, or 12.6 percent from the 2013 review. Total SNC outstanding increased $206 billion to $1.57trillion, an increase of 15.2 percent.

Criticized assets increased from $302 billion to $341 billion, representing 10.1 percent of the SNC portfolio, compared with 10.0 percent in 2013. Criticized dollar volume increased 12.9 percent from the 2013 level.

Leveraged loans comprised 72.9 percent of SNC loans rated special mention, 75.3 percent of all substandard loans, 81.6 percent of all doubtful loans, and 83.9 percent of all nonaccrual loans.

Classified assets increased from $187 billion to $191 billion, representing 5.6 percent of the portfolio, compared with 6.2 percent in 2013. Classified dollar volume increased 2.1 percent from 2013.

Credits rated special mention, which exhibit potential weakness and could result in further deterioration if uncorrected, increased from $115 billion to $149 billion, representing 4.4 percent of the portfolio, compared with 3.8 percent in 2013. Special mention dollar volume increased 29.6 percent from the 2013 level.
The overall severity of classifications declined, with credits rated as doubtful decreasing from $14.5 billion to $11.8 billion and assets rated as loss decreasing slightly from $8 billion to $7.8 billion. Loans that were rated either doubtful or loss account for 0.6 percent of the portfolio, compared with 0.7 percent in the prior review. Adjusted for losses, nonaccrual loans declined from $61 billion to $43billion, a 27.8percent reduction.

The distribution of credits across entity types—U.S. bank organizations, FBOs, and nonbanks—remained relatively unchanged. U.S. bank organizations owned 44.1 percent of total SNC loan commitments, FBOs owned 33.5 percent, and nonbanks owned 22.4 percent. Nonbanks continued to own a larger share of classified (73.6 percent) and nonaccrual (76.7 percent) assets than their total share of the SNC portfolio (22.4 percent). Institutions insured by the FDIC owned 10.1percent of classified assets and 6.7 percent of nonaccrual loans.
The SNC program was established in 1977 to provide an efficient and consistent review and analysis of SNCs. A SNC is any loan or formal loan commitment, and asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates $20 million or more and is shared by three or more unaffiliated supervised institutions. Many of these loan commitments also are participated with FBOs and nonbanks, including securitization pools, hedge funds, insurance companies, and pension funds.

In conducting the 2014 SNC Review, the agencies reviewed $975 billion of the $3.39 trillion credit commitments in the portfolio. The sample was weighted toward noninvestment grade and criticized credits. In preparing the leveraged loan supplement, the agencies reviewed $623 billion in commitments or 63.9 percent of leveraged borrowers, representing 81 percent of all leveraged loans by dollar commitments. The results of the review and supplement are based on analyses prepared in the second quarter of 2014 using credit-related data provided by federally supervised institutions as of December 31, 2013, and March 31, 2014.