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Investors: Don't Get Scammed Twice

Third-party asset recovery companies advertise directly to investors known to be victims of investment fraud.  A third-party asset recovery company gathers information regarding scams after they have become public, and targets the investors of those scams offering recovery services.  According to the  North American Securities Administrators Association (NASAA), these firms employ high pressure sales tactics to get the investor to spend as much as $10,000 to hire the company.  But investors risk becoming victimized a second time.  See NASAA’s Informed Investor Advisory:  Third-Party Asset Recovery Companies here.

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Real Estate Investment Scams in Colorado’s Hot Market

Investors have been lured to real estate investing through get-rich-quick schemes pitched by Armando Montelongo and his company Armando Montelongo Seminars, LLC.  According to the North American Securities Administrators Association, real estate-related investments and promissory notes are two of the top threats to investors.

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Definition of 'Note' in Colorado Securities Act Limited

The Colorado Court of Appeals reversed a criminal conviction for securities fraud pursuant to C.R.S. § 11-51-501(1)(b) finding the trial court erred in refusing to give a proffered instruction that not all promissory notes are securities for purposes of the Colorado Securities Act (CSA).  In People v. Mendenhall, 363 P.3d 758 (2015), the court examined an instruction defining ‘security’ for purposes of the CSA which stated simply that the term “security means any note.”  Relying upon Reves v. Ernst & Young, 110 S.Ct. 945 (1990), the Colorado Court of Appeals concluded that the term “any note,” included in the definition of security under both the CSA and federal Securities Exchange Act of 1934, should not be interpreted to mean literally ‘any note’ because not all notes are securities.  Mendenhall, 363 P.3d at 768, Reves 110 S.Ct. 945.  Instead, the term ‘note’ under the CSA must be interpreted under the so-called “family resemblance” test articulated in Reves and the four factors articulated therein.  Although Mendenhall was a criminal prosecution, it nevertheless amounts to an interpretation of the CSA.  It remains to be seen what impact Mendenhall will have on the Colorado Securities Commissioner's decisions in bringing civil enforcement or cease and desist proceedings involving promissory notes.  A copy of Mendenhall can be found here.

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Ponzi Schemes Use All Investment Types

Recent Ponzi Schemes have utilized a variety of investment types to entice unsuspecting investors.  The U.S. Securities and Exchange Commission (SEC) announced on July 23, 2013 that it filed securities fraud charges against Trendon T. Shavers and his company Bitcoin Savings and Trust.  The SEC alleged that Shavers promised high returns to investors by trading in Bitcoin, a virtual online currency, through an arbitrage process.  Contrary to these promises, the SEC alleged that Shavers liquidated investors’ Bitcoin investments for the purpose of paying for his personal living expenses and paying off earlier investors in a Ponzi Scheme.

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ETF Recommendations Under Scrutiny

Regulators have been warning investors about investing in Exchange-Traded Funds (ETFs), a unit investment trust or open-end investment company whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.  In June 2009, those warnings were directed to broker-dealers and investment advisers.  The Financial Industry Regulatory Authority (FINRA), formerly the NASD, issued Regulatory Notice 09-31 in which it warned industry firms of their obligations to assess their customer’s suitability before recommending an ETF.  FINRA pointed out in the Notice that “inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session. . . .”  In March 2013, the Staff of the Colorado Division of Securities brought a licensing action against a Colorado-licensed investment adviser, Wilson Advisory Group and Jeff M. Wilson, alleging violations of the Division’s rules prohibiting unsuitable recommendations and breach of fiduciary duty in connection with Wilson’s recommendation of ETFs in his retail customer accounts.  In the Consent Order, Wilson was ordered to pay $56,000 in restitution for the resultant investment losses was ordered not to solicit or obtain any new investment advisory clients.

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Investor Choice Act of 2013: A Radical Transformation for Investor Litigation

On August 2, 2013, Rep. Keith Ellison (D-MN) introduced into Congress the Investor Choice Act of 2013 (H.R. 2998). The provision would amend the Securities Exchange Act of 1934 to prohibit mandatory pre-dispute arbitration agreements by brokers and dealers. These firms now utilize a provision in their new account documents that requires that any customer dispute an investor may have to be resolved through binding arbitration under the auspices of the Financial Industry Regulatory Authority (FINRA). In addition, the proposed provision would also modify the Investment Advisers Act of 1940 to make it unlawful for any investment adviser to enter into an agreement with a customer that includes a pre-dispute arbitration agreement.

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Colorado Securities Commissioner Loses Important Case Interpreting Definition of ‘Security’

A Denver District Court recently determined that oil and gas joint venture interests promoted by Colorado companies HEI Resources, Inc. and Heartland Energy Development Corporation were not securities under the Colorado Securities Act.  On October 17, 2013 following an intensely contested case brought by the Colorado Securities Commissioner, the Honorable Michael A. Martinez issued a 33 page ruling that analyzed oil and gas joint venture interests.  Generally, an interest in a partnership or a joint venture (a partnership established for a particular purpose) is presumed not to be a security.

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Colorado Investment Adviser Revoked for Non-Securities Transactions

As a cautionary tale, Colorado licensed investment advisers should be mindful that non-securities transactions with their clients will be scrutinized by the Colorado Divisions of Securities. In December 2013, Secure Retirement Group, Inc. doing business as Secure Financial Group, Inc. and its principal David L. Gonzales entered into a Stipulation for Consent Order with the DOS. The Stipulation recites DOS allegations that Secure Financial, a licensed investment adviser, had engaged in the sale of precious metals to its advisory clients. Secure Financial recommended that clients liquidate a portion of their securities, took custody of these liquidated client funds prior to the purchase of the coins, and marked up the purchase from third parties precious metal vendors without disclosing this to their clients. The Stipulation stated that Secure Financial violated requirements of the Colorado Securities Act relating to custody of client funds, § 11-51-407(5), C.R.S., and failed to disclose substantial markups of the coins to its clients.

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Tenth Circuit Adopts Williamson Factors in Investment Contract Analysis

Last week on February 24, 2014, the Tenth Circuit reversed the Honorable Robert E. Blackburn's decision in SEC v. Jeffory D. Shields and Geodynamics, Inc. granting Defendants' motion to dismiss on the basis that the joint venture interests offered to the public were not securities under the Securities Acts. The court's decision turned on whether the third prong in SEC v. Howey, 328 U.S. 293 (1946), was met in the context of joint venture agreements. The third prong of the test whether an investment is a security is whether the investment is "premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." The Tenth Circuit previously has held there is a strong presumption that an interest in a general partnership is not a security because partners ordinarily have significant control over the enterprise. Banghart v. Hollywood Gen. P'ship, 902 F.2d 805 (10th Cir. 1990), 902 F.2d 807-08. But in Shields, the Tenth Circuit adopted the Fifth Circuit's approach from Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), and applied its three non-exhaustive factors of how the presumption that a general partnership interest is a security may be rebutted. The court then considered not only the control and power over the venture provided by the terms of the instrument, but also the SEC's allegations that the promoter was the sole source of access to information and the investments were marketed to thousands of people across the country with little or no experience in the oil and gas industry. Under this analysis, the court concluded that there was "a fact issue about whether the voting rights were illusory or a sham." The court held that the allegations in the SEC's complaint in Shields were sufficient to rebut the presumption that the general partnership interests were securities.

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Investment or Financial Professional Titles: Making Sense of It All

Deciding upon whom to trust to deliver accurate and fair advice is an investor's first difficult decision.  In the investment world, a number of titles may be used by a professional offering various investments.  But most of these are marketing tools issued by various organizations, and are not officially granted by a regulator.  For example, a person holding him or herself out as a 'Certified Financial Planner' may have obtained permission from the Certified Financial Planner Board of Standards to claim the designation.  This designation does not, however, mean that the individual has been licensed to sell or advise concerning securities.  There are many of these types of designations offered by a variety of organizations.  The Financial Industry Regulatory Authority (FINRA) provides an extensive list of these titles, their abbreviations and the requirements necessary to obtain them here.

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Uncertainty Continues Among Marijuana Industry Participants

FusionPharm, Inc. (FSPM) is a company attempting to capitalize on opportunities presented in the rapidly growing vertical farming and cannabis industries. FusionPharm's primary focus is the development and deployment of the patent pending PharmPods (TM) advanced hydroponic commercial cultivation systems. According to FusionPharm, PharmPods are constructed from standard ISO steel shipping containers that are repurposed for use in indoor controlled environment agriculture.

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The Latest Threat to Investors: Private Offerings May Now Be Sold Directly to the Public

For 80 years, the securities law restricted how small securities offerings could be marketed and advertised to the investing public. Securities offerings pursuant to Regulation D / Rule 506 were restricted in a variety of ways including the prohibition that they could not be marketed to the general public. The purpose of these offerings was to permit small businesses to raise capital without imposing many of the expensive obligations required of a public offering of securities.

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Colorado Rejects Williamson “Presumption”

Today, a panel of the Colorado Court of Appeals issued an opinion giving the Colorado Securities Commissioner a victory in a long standing effort to regulate joint ventures and general partnerships. In Rome v. HEI Resources, Inc. et al, 2014 CA 160, the Court first held that there is no presumption in Colorado that a joint venture or general partnership interest is a security. Second, the Court held that, in considering the circumstances where an interest in a general partnership or joint venture may be a security, the "Williamson Test" required an assessment of whether investors had the requisite knowledge and experience in the particular business of the joint venture or partnership, as opposed to general business knowledge. See, Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981). The Court of Appeals reversed the trial court because it relied on the presumption that a general partnership interest was not a security and because it failed to assess investor knowledge specific to the operation of oil and gas exploration, drilling and production. On this point, the Court reasoned that a standard that requires investor knowledge of the specific business enterprise is necessary because unsophisticated investors are more likely to rely on promoters to obtain profits.

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291 Hits