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NFA Investor Newsletter


April 30, 2014
In this Issue:
Who are scammers targeting? Look in the mirror. Scammers holding your files for a king's ransom Common investment traps to avoid CFTC's whistleblower program ups the ante Recent enforcement actions

 

Who are scammers targeting? Look in the mirror.

It's easy to think you could never be the victim of a fraud. After all, you are well-educated, optimistic and have a fair amount of financial knowledge. What you may not know, however, is that those very characteristics make you a prime target for investment fraud.

According to the Better Business Bureau, recent research has shattered the stereotype of investment fraud victims as isolated, frail and gullible. Ask yourself if the following description sounds familiar:

  • Self-reliant when it comes to making decisions
  • Optimistic
  • Above-average financial knowledge
  • Above-average income
  • College-educated
  • Experienced a recent health or financial setback
  • Open to listening to new ideas or sales pitches

These are the characteristics of today's fraud victim. Today's fraudsters are masters of persuasion who tailor their pitches to match the psychological profiles of their targets.

The truth is anyone with money is at risk. The key is to recognize when an investment is "too good to be true," and unfortunately, there's no flashing sign to warn you when you're being scammed. Fraudsters make their living making their "deals" appear both good and true.

Some of the common tactics include:

  • The "phantom riches" tactic: Dangling the prospect of wealth, enticing you with something you want but can't have. "These gas wells are guaranteed to produce $6,800 a month in income."
  • The "source credibility" tactic: Trying to build credibility by claiming to be with a reputable firm, or to have special credentials or experience. "Believe me, as a senior vice president of XYZ firm, I would never sell an investment that doesn't produce."
  • The "social consensus" tactic: Leading you to believe that other savvy investors already have invested. "This is how Warren Buffett got his start. I know it's a lot of money, but I'm in and so is my mom and half of her church. It's worth every dime."
  • The "reciprocity" tactic: Offering to do a small favor for you in return for a big favor. "I'll give you a break on my commission if you buy now — half off."
  • The "scarcity" tactic: Creating a false sense of urgency by claiming limited supply. "There are only two units left, so I'd sign today if I were you."

With coercive tactics such as these, it's important for investors to distinguish good offers from bad ones. Here are three things you can do to help weed out the fraudulent investment opportunities:

  1. End the conversation: Practice saying "No." Knowing your exit strategy in advance makes it easier to leave the conversation, even if the pressure starts rising.
  2. Turn the tables and ask questions: Ask questions about the person's registrations and licensing, and then verify the answers.
  3. Talk to someone first: Be extremely skeptical if the person promoting the deal says, "Don't tell anyone else about this special deal." A legitimate investment professional won't ask you to keep secrets.


Scammers holding your files for a king's ransom

If there's one thing you can count on these days, it's that cyber criminals are constantly devising new ways to steal people's personal information. One of the latest cyber scams involves a piece of malware — a malicious type of software — called CryptoLocker.

Typically spread via email, once CryptoLocker is installed on a computer, it locks people out of their files so that they can't access them without release from the cyber scammer.

According to the Federal Trade Commission, after the malware is unsuspectingly installed on a computer, the CryptoLocker crooks send a ransom note demanding payment for the release of the files, usually via Bitcoin or another anonymous payment method. Of course, once the victim pays the ransom, there's no guarantee that the fraudster will honor their promise to unlock the files. According to a study by the University of Kent, as much as 40 percent of CryptoLocker victims pay the ransom.

Usually, malware is inadvertently installed after disguising itself as fairly innocuous looking files, such as JPEG images, PDF files, Microsoft Office files or other familiar formats. There are even reports that Facebook could be one of the likeliest places to get a CryptoLocker malware.

Additionally, businesses potentially are even more vulnerable to this type of attack, because it can affect entire computer networks. At least one local television station has been targeted, and said the virus could have affected 10 years' worth of work by several departments.

So, how can you protect yourself from CryptoLocker and other malware scams? Here are three steps you can take to make yourself a more difficult target:

  1. Be on the lookout for suspicious looking emails and links. Don't click on links or attachments from untrusted senders, and always know what you are installing on your computer.
  2. Back-up your files frequently on a separate device that is not permanently connected to your computer. This ensures that all of your important files always will be accessible in case of a malware attack.
  3. Consider using free browser-based ad-filtering applications to avoid clicking on suspicious links from pop-ups.


Despite a world filled with competent investment professionals and abundant resources for investors to make smart investment decisions, there always will be plenty of opportunities for people to make mistakes.

Investment executive turned author A. Michael Lipper recently reflected on this fact and concluded that one of the most common reasons people make mistakes is that they fall victim to investment traps. Many times, he says, these traps are the very shortcuts on which we rely when making decisions. An example of this is relying on labels to quickly narrow our investment focus. Lipper says that people believe they can predict the relative outcome of an investment simply because it is labeled "growth" or "value." The comfort afforded by these terms and other navigational tools can lull people into a false sense of confidence.

Although these sort of heuristic devices are essential for navigating the ocean of investment options, recognizing the potential traps they present can ensure you don't fall into them. Here are five investment traps to avoid:

  1. Value. There are few things as satisfying as walking away from a transaction where you know that you got a bargain. We all want to pay a price at a significant discount from its true value. Unfortunately, there are two traps here: The first is thinking that we can mathematically determine the true value of something, including investments. The second is not taking into account the seller's motivation. There's always a reason someone wants to sell, and they just might be smarter than you.
  2. Successful young investors. Although wisdom does not depend on age, memory plays an important role in judgment. For many younger investors that have only experienced the decline and recovery phase of the last five to 10 years, a bull market is a new phenomenon. They need to remember, however, that with every swell of prices and volume comes and inevitable decline. So enjoy the good times, but recognize that all good times must come to an end.
  3. The book value trap. Many investors use a corporation's book value as a measure of investment value, but that is a very limited view of the company. Lipper goes so far as to compare it to choosing new friends based solely on their precise phone numbers. Remember, the book value that is taught in college or graduate schools is meant to be a teaching device, not a measure of reality.
  4. Predictability of VIX. In its simplest terms, VIX is a measure of implied volatility — usually referring to S&P 500 Index options — but VIX products track other assets as well. Often viewed as a measure of fear in the market, its current low level easily could be the contrarian indicator that a negative surprise isn't far off. In other words, don't be complacent just because everyone else is.
  5. Failure of stock investors to consider bonds (or other assets). Tunnel vision and lack of diversity is a great way to fall into an investment trap. The performance of certain asset types can differ widely in relation to the same economic event. Even if you're not invested in bonds, watching their performance can provide indicators you can use in your other investments.


CFTC's whistleblower program ups the ante

As the Commodity Futures Trading Commission's (CFTC) jurisdiction expands to include the $400 trillion over-the-counter derivatives market, its budget increased only slightly this year. Nonetheless, this year could be a big one for CFTC enforcement actions for one reason: whistleblowers.

The CFTC was authorized to create a whistleblower program as part of the 2010 Dodd-Frank Wall Street Reform Act to reward individuals for coming forward with information that could lead to enforcement actions. The program allows for payments of monetary rewards and provides anti-retaliation protections for whistleblowers who share information with the CFTC. However, providing information does not grant the whistleblower immunity from prosecution.

Individuals who share information about Commodity Exchange Act violations that lead to an enforcement action and result in a monetary sanction of more than $1 million may be eligible for a monetary reward between 10 and 30 percent of the sanction collected, including amounts recovered in related actions by other agencies.

The CFTC received 58 whistleblower claims filed in fiscal year 2012, 138 in fiscal year 2013, and the Agency expects that number to grow in 2014.

To learn more about the detailed procedures and requirements for obtaining a whistleblower award, visit the CFTC's website.



Recent enforcement actions

In the first quarter of 2014, NFA issued Decisions, Final Orders in registration cases and Complaints against the following NFA Member firms and individuals. Click on the name for more detailed information.

Decisions in Disciplinary Cases
Southern Trust Securities, Inc.
Robert Juan Escobio
Equity Swarm LLC
Daryl P. Jamison
Level III Management LLC
Level III Trading LLC
Bruce A. Gwyn
Adantia LLC
Punardeep Sikka
Jaqit Sikka
Friedberg Mercantile Group, Inc.
Newport Private Capital LLC
Jonathan M. Hansen
David M. Giunta
EXC Global Investment Management LLC
Douglas Todd Goeckel
SK Madison LLC
Michael James Seward

Decisions continued
Majestic Commodity Corp.
Ryan Ehrhart
FX Bootcamp LLC
Wayne A. McDonell
QFC LLC
Rylan Peters
Alpari US LLC

Final Orders
Spergon Wynn
Ashish M. Yagnik
Walter J. Simon

Complaints
Ascona Management LLC
Andrew M. Keller
Swenson Investment and Commodities, Inc.
Mike Teslow
Andrew Wieting
Pan Asia Investment Group, Inc.
Xiao Peng Hu
Newport Private Capital LLC
Jonathan M. Hansen
David M. Giunta


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