By: Phil Robertson
September 28, 2012
On August 29, 2012, the Securities and Exchange Commission (SEC) proposed rules to eliminate the prohibition against general solicitation and general advertising for private offerings of securities that are conducted pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended (Securities Act) and Rule 144A of the Securities Act, provided the securities are sold to accredited investors in the case of a Rule 506 offering, and qualified institutional buyers (QIBs) in the case of a Rule 144A offering. The proposed amendments to Rule 506 and Rule 144A were mandated by Section 201 of the Jumpstart Our Business Startups Act (JOBS Act), which was signed into law on April 5, 2012.
Rule 506 of Regulation D is one of the most often used safe harbor exemptions from the registration requirements of Section 5 of the Securities Act that issuers rely upon to conduct a private offering of their securities. Under the current Rule 506, securities may be sold to an unlimited number of accredited investors, as well as up to 35 nonaccredited, but sophisticated, investors. Issuers that rely on the Rule 506 safe harbor for their private offering of securities are not currently permitted to use any form of general solicitation or general advertising when conducting such offering. This restriction is interpreted broadly and prohibits, among other things, advertisements published in newspapers and magazines, the use of publicly available websites, communications broadcast over radio and television, mass email campaigns, unrestricted websites and/or public seminars or meetings as part of an issuer’s capital raising activities.
Some view the proposal as a way to open up private offerings to a wider investor audience; others are concerned about potential fraud and how to protect investors. Despite regulations there are always people who scam investors. These scammers include:
RON THE CON
Bon “Ron the Con” Levi, born Ronald Frederick in Western Australia in 1943, is a serial con man who conned investors out of money on two continents. Levi left Australia and headed for the United States, where he resurrected his fraudulent franchise business, including manufacturing, escort agencies, transportation and catering companies. He opened Midas Cameras to run another disposable camera business. Levi then branched out into foodstuffs, with another business selling franchises for the delivery of potato chips and other snack foods. Levi sold franchises in both business for between $30,000 and $68,000 apiece, promising his gullible investors an income of up to $2,000 a week.
Both businesses turned out to be scams, and investors never received the materials they were supposed to get. In 1998 Levi was arrested, convicted and sentenced to a 37-month stretch. The FBI estimated that he had swindled U.S. investors out of more than $2 million
Between 1978 and 1983 Ron Rewald ran an investment firm in Hawaii. The firm declared bankruptcy in 1983 and was revealed to have been a Ponzi scheme which defrauded over 400 investors of more than $22 million. The firm claimed that funds were guaranteed by the Federal Deposit Insurance Corporation up to $150,000, and that minimum returns of 20% annually were guaranteed. In reality the firm was not a chartered bank and was therefore not eligible for FDIC insurance.
Rewald used money from new investors to pay interest to earlier investors, all the while siphoning off funds to pay for his lavish lifestyle. Rewald’s trial lasted for 11 weeks in 1985; he was sentenced to 80 years in prison.
Nevin Shapiro, 42, is currently serving a 20 year federal prison sentence for orchestrating a $930 million Ponzi scheme. Shapiro started Capitol Investments USA, which he claimed bought wholesale groceries and shipped them to more expensive markets (although he subsequently said that he never actually sold the groceries). Shapiro’s Ponzi scheme was based on attracting investors to Capitol Investments.
He promised investors they would make 10 to 26 percent commissions every month. According to the FBI, Shapiro “directed others to create and show to the investor’s documents fraudulently touting Capitol’s profitability. Those documents included: financial statements; profit and loss figures fraudulently representing that Capitol’s wholesale grocery business was generating tens of millions of dollars in annual sales; personal and business tax returns for Shapiro and Capitol also fraudulently reflecting those sales; and numerous invoices fraudulently reflecting transactions between Capitol and other companies in the wholesale grocery business.”
The scheme fell apart in November 2009 when Chicago real estate investor Sherwin Jarol sued to force him into involuntary bankruptcy after Shapiro had stopped making payments to his investors. More than 60 investors filed claims.
In April 21, 2010 he was charged in New Jersey with securities fraud and money laundering.
On September 15, 2010, he pled guilty before U.S. District Judge Susan D. Wigenton in Newark, to one count of securities fraud and one count of money laundering. On June 7, 2011, he was sentenced to 20 years in federal prison and ordered to make $82,657,362.29 in restitution. He is currently serving time at United States Penitentiary, Atlanta (inmate #61311-050).
A bogus press release stated that Uniprime Capital claimed to have documentation from the government of Spain indicating that the Plasma Plus was a breakthrough treatment for the virus that causes AIDS. The stock was touted online in several investment chat rooms as undervalued. In a few days, more than 5 million shares were traded, and the stock skyrocketed by 800 percent. The “pump and dump” scam cost investors about $20 million.
In a similar story, an individual posted a negative message about Emulex, a fiber-optic company. In the press release, the fraudster claimed that the CEO had quit and that the company was restating its quarterly earnings. In an effort to cover his tracks, the fraudster who lived in El Segundo, California went to a hotel room in Las Vegas to make his online stock trades on the day of the hoax. The stock dropped by 62 percent, and the con artist made $241,000 by short-selling the stock.
The founder of stock message board website InvestorsHub.com, Matthew Brown, pleaded guilty in February 2010 to four counts of fraud and money laundering. He faces up to 20 years in prison and a $500,000 fine. Federal prosecutors charged Brown along with six other individuals for creating a pump and dump scheme. The scheme hyped five lightly traded stocks using InvestorsHub to drive up the price. The perpetrators then sold the shares they had obtained at a lower price. In the plea agreement, Brown admitted that investors had lost at least $1 million because of the scheme.
THE SEC AND FRAUD
Every year the Securities and Exchange Commission files Internet fraud charges against companies. In 2011, the SEC filed fraud charges against the operators of a $33 million international microcap stock scheme involving the stocks of eight small U.S. companies headquartered in the People’s Republic of China, Canada, and Israel. In a complaint filed in U.S. District Court for the Eastern District of Michigan, the SEC charged three companies and eight individuals with engaging in unlawful spam e-mail campaigns to pump and dump securities of microcap companies.
If you have a comment or a suggestion of how to protect investors should the SEC proposal to eliminate the prohibition against general solicitation and general advertising for private offerings of securities be finalized, use the link below to contact the SEC: