A Primer on Securities Fraud Donald W. Searles Senior Trial Counsel Los Angeles Regional Office American Association of Individual Investors November 20, 2010

2 SEC Disclaimer The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation do not necessarily reflect the views of the SEC, its Commissioners, or other members of the SEC’s staff.

3 Did you know? 48% of America’s workforce is not covered in a pension plan Source: GAO Report – October 28, 2009 GAO T 401K Plans

4 Did you know? 58% of Americans have not calculated their retirement needs Source: FINRA Investor Education Foundation National Financial Capability Study December 7, 2009

5 Did you know? 70% of Investors have not checked if their investment professional is registered Source: FINRA 2007 survey (

6 Did you know? 4 out of 10 cash out their retirement plans when changing jobs (leakage) Source: GAO Report – October 28, 2009 GAO T 401K Plans

7 Did you know? Information is the investor’s best tool

8 Did you know? You are responsible for accumulating and managing your own wealth

9 The SEC Stair Steps to Securities  Set a Goal  Understand the Products – Asset Classes  Ask Questions  Research, Research, Research  Avoid Fraud

10  Set a goal  Your Financial Goal Short Term, Medium Term, Long Term Understand Your Risk Tolerance

11 Understand the Products – Asset Classes Certificates of Deposit Money Market Funds Treasuries (Bills, Notes, Bonds, TIPS) Bonds Mutual Funds Exchange Traded Funds (ETFs) Stocks Diversification

12 Understanding Fee Structure Per Transaction Beware inactivity fees Assets Under Management As your wealth increases, their revenue increases Mutual Fund Fees

13 Ask Questions  10 Questions to Ask… Is this product registered with the SEC or my state regulator? Why is this investment suitable for me? How will this investment make money? (Dividends? Interest? Capital gains?) What are the total fees? How liquid is this investment?

14 Ask Questions  10 Questions to Ask… What are the risks with this investment? How much can I lose? Is the company making money? Am I diversified? Where can I get more information about this investment?

15 Research, Research, Research Check out brokers and investment advisers Understand the fee structure Know the companies you buy – use EDGAR Review Mutual Fund Prospectuses (485 filings) Use trusted websites

16 Research, Research, Research  Check out Brokers and Investment Advisers Call State Regulators, visit Call FINRA at 1-(800) or visit FINRA’s Broker Check at Guidance from the SEC SEC Investment Adviser Public Disclosure page:

17 EDGAR – SEC’s free database  Company filings you’ll find in EDGAR Reports: Form S-1:Registration Statement Form 10-K: Annual Report Form 10-Q: Quarterly Report Form 8-K: Current Report Forms 3, 4 & 5: Insider Holdings & Sales Schedule 14A: Proxy Statement - “Filings and Forms”

18 Avoid Fraud  Fraud Types Newsletters On-line Fraud “Free” Lunch Pump & Dump Pyramid/Ponzi Schemes Affinity Fraud Red Flag Sales Techniques

19 Newsletters  Tips for checking out newsletters Don’t believe everything you read Is newsletter paid to “tout” or recommend the stock Independently investigate Be wary of small, thinly-traded companies Check with the SEC or your state securities regulator has the newsletter ever been in trouble

20 On-line Fraud  Websites/phishing Easy to create Often steal the look and feel (including name and logo) of a legitimate company or Government agency Watch out for “SEC Approval” Purports to offer a good or service that appeals to investors (e.g., “secret" systems)

21 On-line Fraud  The Internet Always think twice before investing money in any opportunity you learn about through the Internet Beef Up Your Security Be Careful What You Download Use Your Own Computer & Log-Out Completely Don’t Respond to Requests for Personal Information Be Smart About Your Password Use Extra Caution with Wireless Connections Read Your Statements Monitor Your Credit Report

22 “Free” Lunch  There is no “Free Lunch” Always evaluate the investment thoroughly Be skeptical of titles or designations, such as “Senior Financial Counselor” Get everything in writing, take it home and read it carefully before agreeing to invest

23 Schemes Pump and Dump – Promoter urges you to “buy now or lose out” – Price rises sharply – Fraudsters sell at peak – Price drops when the hype stops – Investors lose money Pyramid/Ponzi – Try to make $$ by recruiting new investors – Promise of sky-high, risk-free returns – Incoming $$ from new investors pays off earlier investors – Scheme gets too big – Promoter can’t find new investors – Pyramid collapses – Investors lose money

24 Pyramid schemes requirements Levels Number of Participants , , , , ,679, ,077, ,466, ,797,056 - more than the U.S. Population 12 2,176,782, ,060,694,016 - more than double the World Population

25 Affinity Fraud  Target members of a group Race, Religion, Social Clubs, Age, Union, Profession  Con-artist infiltrates through trusted member  Often underreported

26 Red Flag Sales Techniques  Top 10 Dubious Sales Techniques 10. Try to be your friend 9. Guarantee high profits or no risk 8. Try to force an immediate decision 7. Little or no written material 6. Promises quick profits 5. Claims to have “insider” information 4. Claims to have Government endorsement

27 Red Flag Sales Techniques  Top 10 Dubious Sales Techniques 3. Uses words like:  “Guarantee”  “High Return”  “Limited Offer”  “As Safe as a CD” 2. Unclear how investment makes money 1. Doesn’t take no for an answer

28 When dealing with salespeople  Don’t be afraid to: Hang up the phone Decline to meet with the salesperson Refuse to make an immediate decision  Do: Monitor your investments READ EVERY STATEMENT Request information in writing Report fraud and abusive sales tactics

29 When dealing with salespeople  Do: Ask questions – be informed Recognize psychological and manipulative tactics Be skeptical of any unsolicited offer Discuss the investment with a third party whom you trust before you make a decision  Contact the SEC immediately if you believe a fraud is being committed

30 What’s new at the SEC  New at the SEC: Proxy voting

31 Investor.gov

32 SEC contact information Website: Toll free number:1-(800) Mail:U.S. Securities and Exchange Commission 100 F Street NE Washington, DC Los Angeles Regional Office:(323) Wilshire Blvd., 11 th Floor Los Angeles, CA Ask for the “DUTY OFFICER”

33 You can search EDGAR in Many different ways from the EDGAR page

34

35 EDGAR Name Search 35

36 Searching EDGAR by latest filing 36

37 Historical searches 37

38 Research mutual funds and compare fees 38

39 Obtain a prospectus for a mutual fund 39

40

41