Fraudulent Investment Scams and Restitution

 In Criminal

Almost all of us have heard the story of how Bernie Madoff swindled billions of dollars from investors who entrusted him with their money. They had high hopes that he would use his investment expertise to give them a healthy return on their investment. However, instead of doing as he promised, he used that money to perpetuate an endless cycle of fraud that would eventually collapse and leave many of his victims’ lives in ruins.

In the aftermath, many people were left asking how they could have become a victim of this kind of fraud, and how they could lose so much money at one time, based on the deception of a very small set of individuals.

Unfortunately, this type of fraud is all too common in the technology driven world we live in. Even intelligent people who have a financial background can be taken for a ride by convincing fraudsters such as Madoff. Worse, because initial investors are often paid with monies swindled from subsequent victims, victims may be enticed by favorable recommendations of friends. Thus, victims could actually have been persuaded by an honest referral of a well-intentioned person.

Typically a scheme begins with an investor investing a small amount with an individual or brokerage firm. Often individuals are cautious and weary at first, and the investment of a small amount builds trust and allows the investor to see what type of return is possible. The scammers use this to their advantage and know they can pay out great returns on a small investment in order to hook the investor. As a result, the happy victim escalates his commitment by giving a larger amount in the future.

After a period of time, the investor is shown reports claiming that the investment has given great returns. In most cases, an actual return is realized on the initial investment. However, false reports are sometimes generated to show a gain, if either the investment flopped or if the money was never invested as promised at all.

Due to the mass accessibility of stock data and the availability of materials that can produce professional-looking reports, it is easy to make it seem as if someone is making more of a return than they really are. For that reason, it takes months if not years to discover that a person has been a victim of investment fraud.

Usually the scam will collapse on itself after the money needed to pay back investors runs out. Not all investors are paid back what they are owed because the money just is not there. Early investors may get lucky and cash out quickly. However, often investors who have invested the largest amounts are left with nothing.

Due to the complicated nature of financial investigations, sifting through the voluminous records and list of investors takes time and the prosecutions are often very lengthy in nature. The investigations are time-consuming, will take place often over years and include a multitude of federal agencies such as the SEC, IRS, Secret Service or FBI or even a state organization such as the Texas State Securities Board.

Most states, and certainly the U.S. Government, provide for the civil forfeiture of money lost as the result of investment fraud. For example, 18 U.S.C. 1341 and 1343 make it illegal to send fraudulent materials via mail or email to garner investments or misrepresent account balances. As another example, the U.S. Government proscribes securities fraud itself via 18 U.S.C. 1348 and 15 U.S.C. 77 and 78.

On the state level, Texas makes any proceeds garnered as a result of any violation of The Securities Act under Texas Civil Statutes Article 581-1 et seq., subject to forfeiture as well. In fact, any proceeds of a crime that constitutes a second-degree felony or higher is subject to forfeiture under Article 59.01 of the Texas Code of Criminal Procedure.

To put it mildly, asset forfeiture is big business for the feds, as well as local and state agencies.

Keep in mind that forfeiture is simply a judicial process whereby a government entity can seize and keep assets because they are connected to crime. Persons who have been accused of a crime or who have had their possessions seized for forfeiture have the right to make a claim and demand the return of their property. See 59.02-59.06 of the Texas Code of Criminal Procedure and 18 U.S.C. 983.

Once the assets of a fraudulent investor have been forfeited to the government, the assets will be sold at auction, given directly to police agencies, or reduced to cash. Interestingly, the U.S. Government has 2 major funds holding forfeited assets. The Department of Justice (which encompasses the FBI, the U.S. Attorney’s Office, and the DEA, along with several other agencies) holds its forfeited funds in the Asset Forfeiture and Money Laundering Section’s (AFML’s) Asset Forfeiture Fund (the AFF). This fund holds more than $1.5 billion. The Treasury Department (which encompasses the U.S. Mint, the IRS, and the Secret Service, among several others including Customs and Border Patrol) has its own fund managed by the Treasury Executive Office of Asset Forfeiture (TEOAF) whose fund holds nearly a half billion dollars.

Also note that virtually every state agency has its own forfeiture initiatives. To put it mildly, asset forfeiture is big business for the feds, as well as local and state agencies.

Also remember that just because assets have been forfeited to the Government does not automatically mean they will be returned to victims. Once forfeited, the assets belong to the Government. It then is subject to the Government’s honor to return the property to private citizens or entities.

There are two methods the government typically uses for returning forfeited assets to victims of fraud. Often, the Justice Department will return civilly forfeited assets to the victim via the Attorney General’s authority for equitable remission. The second method the Justice Department will utilize is to turn over criminally forfeited assets to the district court that is overseeing the criminal case and allow payment to be made through the ‘Restoration’ process.

To see a deeper discussion of the differences between civil and criminal forfeiture, read our previous article on asset forfeitures.

The Justice Department allows for the restoration of crime victims using forfeited assets. If a restitution order is made part of a client’s judgment, then forfeited assets can be applied to that judgment.

However, use of forfeited assets towards restitution is not automatic. It is only available if the U.S. Attorney’s office requests restoration and submits the proper paperwork to the Asset Forfeiture and Money Laundering Section (AFMLS) of the Justice Department. The required paperwork includes the Judgment, any Forfeiture Order (administrative or judicial), Plea Agreements, Indictments, and a letter from the U.S. Attorney containing assurances that all victims have been notified and losses have been verified.

The payment of restitution by fraudulent brokers theoretically can represent the end of a disaster for victims of financial fraud. The restitution process not only serves to compensate the victims, it often allows the victim to return to the level of financial stability they had prior to being swindled. The biggest goal for those who have been a victim of financial crime is getting some of their money back, preferably from those who stole it.

Click here for a more detailed discussion of the differences between forfeiture and restitution.

However, it is important to be aware that in reality, very few fraudulent brokers actually end up paying restitution in full. In many situations, fraudulent brokers will have already spent the money and have no assets to repay the victims. In other cases, the brokers will hide assets in offshore accounts or have assets in the name of others. As a result the victims are only able to collect a small amount of the amount owed.

What are the signs of investment fraud to watch for?

Fraudulent brokers often make misrepresentations to swindle investors into turning over large sums of money by promising great profits with little to no risk. While times may change, the poetry of investment remains the same. Equity investments often include a risk of principal. The most important thing is to be aware, and if the investment sounds too good to be true, then it is usually best to pass on it out of an abundance of caution.

Before investing any money with an individual or organization, a fair amount of research should be done to make sure everything is above board. Written information should be gathered and any financial reports should be reviewed. It is important to remember that every investment has some risk and that if a high return is promised, the investment will carry a higher risk as well. It is also important to ensure that your securities are held at a reputable institution and that you have the right to verify the balance (and existence) of your account.

Also, persons who are victims of a fraudulent scheme need to keep a consistent relationship with police officers, investigating agents, and prosecutors. They should request restoration and remission and ensure that their interests are protected.

To help avoid this type of situation entirely, individuals should heed certain signs to watch for including brokers who do the following: pressure you to invest immediately claiming the investment is time sensitive, promise quick profits with little or no risk, offer to provide you with insider information, encourage you to provide false information, or who do not send your money promptly. People finding themselves in this position need to arrange for legal assistance immediately.

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  • Discuss the defenses that apply to your plan and in general terms discuss our approach to your case.

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