Oregon. Securities Law. A guide for law enforcement. Division of Finance and Corporate Securities

Transcription

1 Oregon Securities Law A guide for law enforcement Division of Finance and Corporate Securities

2 In compliance with the Americans with Disabilities Act, (ADA) this publication is available in alternative formats. Call

3 Contents What we do... 3 How DFCS can help you... 3 Types of securities... 4 Stocks, bonds, and partnerships... 4 Investment contracts... 5 Signs of securities violations... 6 Preliminary securities investigation checklist... 7 Basic information and questions... 8 Examples of securities cases involving fraud Resources available to law enforcement personnel Search warrant information Training opportunities Assistance to prosecutors Oregon securities statutes Commodities The bottom line... 17

4 What we do In Oregon, the Division of Finance and Corporate Securities (DFCS), through its Enforcement and Securities Section, protects the public relating to the offer and sale of securities, commonly known as investments. The division licenses those companies and individuals who sell investment products and registers, with some exceptions, the investments they sell. The section also enforces Oregon securities laws by investigating investment fraud, issuing administrative orders including cease-and-desist orders, and working with other law enforcement agencies to prosecute those who con unsuspecting people. Unfortunately, each year, hundreds of Oregonians lose millions of dollars in fraudulent investment schemes. Individual losses can range from $10,000 to $1 million or more. Securities cases are often some form of theft by deception. We can help you investigate and charge these cases in order to stop further financial fraud in Oregon. How DFCS can help you This booklet provides you with a basic working knowledge of Oregon s securities laws by outlining: n Types of securities n Signs of securities law violations n Search warrant information n Examples of securities fraud, including a preliminary securities investigation checklist n Resources and training opportunities n Oregon securities statutes 3

5 Types of securities Chapter 59 of the Oregon Revised Statutes governs the offer and sale of securities in Oregon. Although the definition of a security names a number of instruments, application of the statute is relatively straightforward. Generally, a security is a passive investment of money in virtually any sort of enterprise from which the investor expects to earn a profit. A security includes the purchase of stock in a company, the loan of money in return for a note or debenture, or an agreement to invest in a company that doesn t yet exist. Most securities fall into one of three categories: 1) stocks, bonds, notes, and evidence of indebtedness; 2) partnerships or limited liability companies; and 3) investment contracts. Stocks the most common kind of securities sold in Oregon, evidencing ownership of a company, but not the only kinds of securities involved in scams. Fraud perpetrators often attempt to disguise the investment to make it look like something other than a stock. Bonds, notes, and evidence of indebtedness these include writings that promise to pay a certain sum at a certain time or upon a certain event, or simply, promissory notes or a bond or debenture. Notes and evidences of indebtedness are the second most common type of securities fraud, because people believe that loans are not securities. Because these types of transactions are not readily identified as securities, victims will often overlook the securities aspect of a transaction. This is an evolving area of securities law. Partnerships (general, limited) a commonly used security scam often in the form of oil, gas, and mining deals, these are used as the invest- 4

6 ment vehicle for some real estate and start-up business scams. In a limited partnership, the victim puts in money and will supposedly receive a percentage of the profits of the venture, but will have little or no say about how the money will be spent or about the management of the venture. Even if the enterprise is not called a partnership, it may still act like a limited partnership. Oregon looks past the label to the investment substance, regardless of what the promoter (the person behind the enterprise or scam) calls it. For example, promoters will offer investment opportunities labeled general partnership or limited-liability company interests. Depending on the circumstances, these labels may only be an effort by the promoters to hide the fact that they are offering a security. Investment contracts another common kind of security involved in fraud cases, probably because investment contracts cover a wide range of investment opportunities. Investment contracts have the following characteristics: n They involve the investment of money in a common enterprise n Investors contribute their money with the expectation that they ll be making a profit n The profit is expected by the investors to be generated through the managerial efforts of others Common enterprise means that the investor s money is pooled with other investors money or that the promoter s and investor s fortunes are intertwined (the investor s profits are tied to how well or poorly the promoter s enterprise performs). Efforts of others means the investor depends on the managerial, sales, or other performance of others, typically the enterprise s control people, in order to receive a profit from the investment. 5

7 For instance, the following is an investment contract: investment in 10 cubic feet of in-ground ore (in other words, dirt) that can only be mined if all the investors pool their individual interests so that mining, by the organizers, becomes economically feasible. It is important to look at any transaction in which a passive investment is made, because it may be a security. Signs of securities violations Securities violations usually begin with someone promoting an investment opportunity that is not registered with state or federal regulators and has one or more of the following characteristics: 1. A guarantee: The investment opportunity is a sure thing ; promises high rates of return with little risk; or involves some unusual type of investment, e.g., gold mines, radically new technology, old bearer gold bonds, offshore bank debentures, or certificates of deposit. 2. Unverified claims: The information in the promotional literature or prospectus does not make sense or cannot be easily verified. 6

8 3. Don t tell anyone about this : The investor is required to sign special noncircumvention, nondisclosure, or secrecy documents. 4. Out of area: The investor is required to wire or send money to another state or country. 5. Suspect documents: Share certificates, certificates of deposit, or other documents given to investors as evidence of their investment appear poorly designed, contain spelling errors or bad grammar, or have ownership or transfer restrictions. 6. Little substantive information provided: The person offering the investment omits, fails to disclose, or makes false statements about the investment, its risk, the financial history of the promoter (e.g., bankruptcies and judgments), prior securities violations, or disciplinary action against control people. 7. Source of profits unclear: The opportunity involves participation in what amounts to a Ponzi scheme (where later investors money is used to make payments to earlier investors), pyramid, or similar scheme, in which profits are derived solely from the participation and investments of others. In many cases, a con artist will phrase an investment as a business opportunity or other noninvestment sounding term. 7

9 Preliminary securities investigation checklist If you suspect violations involving securities laws, contact the Enforcement and Securities Section s investigators and enforcement officers (lawyers) early in the investigation. They can help you determine whether or not the matter involves a security, identify and interview involved people, gather evidence, and assist in the investigation of your case. Our assistance is free to your agency. Attempt to obtain the basic facts behind the complaint, identify the person or companies involved, and establish the order in which events occurred. Securities cases are often documentintensive. Preserve any documents or records you find and advise the complainant or victim to do the same. In an ongoing scheme, advise the complainant or victim to keep notes of all conversations with the parties involved. The following checklist will help you with a potential securities case, however you don t need all the information described below before you consult with us: Basic information and questions Identify the complainant and potential victims. Who invested money? Was the money invested individually or did a group make the investment? How was the money for the investment paid or contributed? Does the investor have a copy of the check (front and back) or wire transfer? Identify who offered or sold the investment. What is the background of the seller? Where can the seller be found? How did the investor meet the seller? 8

10 Identify the entities or companies involved or the issuer of the investment. Where are they located? What type of investment was offered? Was it stock in a company? An investment program? Part of a limited partnership? Describe the investment. How did it work? Who created or organized it? What was the complainant told about the investment? Was the complainant promised a return on the investment? How much? Did the investor have any control over the funds invested or the way the program was run? Were there any commissions, fees, or other monies paid to the seller? Did the issuer or company charge any fees for handling the account? Did the investment work as promised? Did the investor receive any return on the investment? Were any of the proceeds reinvested? Were proceeds reinvested automatically? Is the investor satisfied with the investment? Has the investor complained to the seller or issuer? What was the result? Has the investor obtained legal counsel or taken legal action? Obtain promotional materials used to describe the investment program such as brochures, fliers, or a prospectus. Obtain receipts, copies of checks, money orders, wire instructions, wire transfers, or other means of payment. Obtain records that may show where the funds were sent, such as wire transfer receipts, canceled checks, or money orders. Obtain resumés, licenses, or other materials that may identify the seller or promoters, or their office locations. Obtain documents that describe the background or employment history of the seller. 9

11 Obtain correspondence, , faxes, or other records with letterhead or telephone numbers, and envelopes that would prove the use of the U.S. mail. Obtain investment agreements or contracts, promissory notes, stock or share certificates, partnership agreements, or certificates of participation, and other documents that might show whether the investor was able to control or direct any activity related to the investment. For example, was the investor able to exercise a vote or participate in company decision-making? Obtain account statements, commission receipts, checks, or other evidence of payment of commissions or account fees. In addition, get correspondence, receipts, check stubs showing proof of payment, or bank statements or deposit receipts from the investor. Obtain documents or receipts showing that money or investment proceeds were reinvested. Obtain correspondence concerning investor complaints, either to the seller or to any government agencies. Identify legal counsel on both sides, if any. Obtain copies of legal documents or court filings, or the name of the court and docket number. If the case has been settled, obtain a copy of the settlement agreement. Provide the Securities Section a copy of your initial police report. 10

12 Examples of securities cases involving fraud Securities cases vary in their size, form, and complexity. They may involve only one or two victims or hundreds of victims throughout several states. The following are examples from Oregon: n A licensed stockbroker with numerous investors in their 70s and 80s convinced several to become general partners in risky oil and gas ventures an investment not considered appropriate for this age group. These clients could potentially have lost their entire life savings had the oil and gas wells been unproductive or the partnerships been sued or otherwise gone out of business. In one instance, the broker accompanied an elderly client with dementia to the bank to withdraw funds for investment purposes. The division fined the broker $100,000 and revoked his license. n Approximately 300 investors invested more than $18 million with an Oregon husband and wife team in what they thought were safe real estate development projects and loans promising annual returns. Most of the invested money was spent by the couple on a lavish lifestyle, including a corporate jet and exotic vacations. They were both convicted, among other counts, of securities fraud. He was sentenced to almost 20 years in federal prison and ordered to pay $10.3 million in restitution and she was sentenced to five years. 11

13 n Two associates, one an insurance agent, convinced family members, longtime friends, and employees to invest in a number of great opportunities, including an invention that turns water into electricity, an overseas business that could double their money in a year, and an exclusive bank. One employee of the insurance agent invested $100,000 after taking out a second mortgage. No investment return was realized as the two scammers spent the money on fancy cars and other luxuries. One received a 19-month prison sentence and the other received three years of probation. Both were individually ordered to pay $200,000 in restitution. Resources available to law enforcement personnel We have worldwide contacts in the banking, finance, and securities industries. In addition, we can access proprietary databases from the Financial Industry Regulatory Authority, the North American Securities Administrators Association, the National White Collar Crime Center, and the corporations divisions of many states. As a state agency, we have access to records for corporations registered in Oregon. As part of a national organization of securities regulatory agencies, we can find out whether any other state securities offices have investigated or taken action against the company or people involved in your investigation. We also have established working relationships with federal government agencies, including the Securities and Exchange Commission, the Federal Trade Commission, the U.S. Postal Inspection Service, the FBI, the IRS, and the U.S. Attorney s Office. 12

14 Search warrant information Securities violations may be prosecuted criminally as Class B felonies in Oregon. Securities fraud cases often include elements such as falsifying business records, issuing false financial statements, theft by deception, money laundering, and computer crime. Securities violations also are predicate offenses for racketeering. Our investigators and enforcement officers can help you prepare and execute search warrants. We have sample affidavits and search warrants for a number of different types of securities cases. Training opportunities We are available to provide training to law enforcement agencies interested in improving their ability to combat securities crimes and other financial crimes. We can tailor training sessions to meet your departmental needs. Training and materials are free to your agency. We also operate the Financial Information Program, which provides reliable, nonbiased information about investing and protecting your money, tips to avoid securities or investment fraud, and requirements to protect personal information and obtain a security freeze under the Oregon Identity Theft Protection Act. Speakers and written materials for groups of any size are free. We encourage law enforcement agencies with crime prevention or community policing programs to use the program. For more information on the Financial Information Program, call the program coordinator at

15 Assistance to prosecutors Criminal prosecution is a priority for us. We will assist in any way to further the criminal prosecution of securities violations. This assistance ranges from preparation and participation in the execution of search warrants and case development to motion and memoranda work and participation in litigation as a special deputy district attorney. Although our resources are limited, we can bring experience and expertise to a given case. 14

16 Oregon securities statutes Three securities statutes are most commonly violated by those offering securities: ORS , ORS , and ORS ORS defines a security and includes the types of securities described earlier. Criminal violations of the securities law are Class B felonies in Oregon. ORS This anti-fraud statute makes it unlawful for any person to engage in fraud in connection with the sale of a security. Fraud is committed by the omission or misrepresentation of a material fact. A material fact is any fact that a reasonable investor would find important to his or her investment decision. Material facts include the following: n Money invested was not used for the purpose the investor was told it would be n The seller has been the subject of previous convictions or administrative orders concerning securities violations n Previous investors money was not used for the stated purpose n Earlier, similar business ventures resulted in losses to investors Your own judgment is useful in determining the materiality of a fact: Would the disclosure of a particular fact have been important to you if you were making a decision to invest? ORS This statuate generally requires all people and entities offering or selling securities in Oregon to be licensed here. Offering or selling a security in Oregon if not licensed even in an isolated circumstance may be a violation of the statute. 15

17 ORS This statute requires all securities offered or sold in Oregon to be registered with the Securities Section unless the securities themselves or the transaction in which they are offered or sold are exempt from the registration provisions of the law. We can help explain the exemptions. Remember that there is never an exemption from the application of the fraud statutes. Commodities Commodities are physical things such as pork bellies, crops, platinum bars, gold coins, and foreign currency that may be within the division s jurisdiction depending on whether they are sold outside of a regular commodities exchange, purchased as investments, and delivered within a specific time. Oregon s commodities laws are part of a comprehensive regulatory framework that includes federal laws. Cases involving commodities occur much less frequently than securities violations. A definition of a commodity can be found in ORS If you are investigating a crime involving a contract to purchase commodities (such as an options contract), call us at , and we can assist you in your investigation or refer you to the proper agency. 16

18 The bottom line There are no hidden aspects to the securities statutes. In a securities fraud prosecution, the culpable mental state is that the seller knew that the act or information was false, or knowingly omitted the information. As illustrated in the securities fraud examples, a con artist will lie to: n persuade the victim or victims to invest in a business opportunity or investment ; n obtain their money; and n perpetuate the crime. If your initial investigation doesn t meet the smell test, it s worth a hard look. If you have questions, want to discuss particular facts, or meet with our staff, please call, write, or send a fax to: Division of Finance and Corporate Securities 350 Winter St. NE, Room 410 P.O. Box Salem, OR Phone: Toll-free: Fax: dcbs.dfcsmail@state.or.us Web: click on Securities 17

19 Division of Finance and Corporate Securities Securities Section 350 Winter St. NE, Rm. 410 P.O. Box Salem, Oregon (8/09/COM)