What is New in Free Lunch Scams?
According to the SEC report on Free Lunch Scams
, "Half of the examinations found that firms used advertising and sales materials that may have been misleading or exaggerated or included seemingly unwarranted claims (in 63 of 110 examinations, or 57%). Many broker-dealer firms did not submit their sales material to NASD (now FINRA) for review, as required by NASD advertising rules. The most common types of apparently misleading statements appeared on mailers and advertisements for the sales seminars, and involved statements about the safety, liquidity or anticipated rates of return. Statements included, for example: "Immediately add $100,000 to your net worth," "How to receive a 13.3% return," and "How $100K can pay 1 Million Dollars to Your Heirs." Additionally, some sales materials made comparisons between dissimilar investments or services, included representations about the expertise or credentials of the registered representative that may have been misleading or confusing, or involved testimonials that may have been misleading."
The SEC report was constructed from attending 110 Free Lunch Seminars, during the period April 2006 through to June 2007, and also found that "Examiners found indications of possible fraudulent practices in 14 examinations (or 13% of the examinations conducted), that involved potentially serious misrepresentations of risk and return, liquidation of accounts without the customer's knowledge or consent, and sales of fictitious investments."
What does the SEC conclude about the problem? "In addition, regulators conclude that, because seniors are targeted as attendees for sales seminars, ongoing investor education efforts for seniors should provide education with respect to "free lunch" sales seminars. Specifically, senior investors should understand that these are sales seminars -- that is, they are intended to result in the sales of financial products, and they may be sponsored by an undisclosed company with a financial interest in product sales."
This is the typical regulatory response, with its unacknowledged reliance on a discredited model of rational action. Just disclose to the attendees that are attending a sales presentation, that the presenters may have an interest in the products, and all will be fine. There is no evidence that would support this happy conclusion. Does the SEC really believe that the attendees are so lacking in basic knowledge that they cannot tell that they are being pitched? Why are these pitches succeeding is the important question.
Here is how a presentation is conducted.
"Typically at a seminar, the seniors arrive at the restaurant or hotel and are shown to a private room, and to a seat. At the outset, they are usually given a questionnaire or contact card to fill out with their name, address, telephone number, and interests in particular investments or financial goals and are asked to return the card to the host. A slide show or power point presentation usually follows as drinks are served. Examiners found that the most commonly discussed products at the sales seminars were variable annuities, equity indexed annuities, real estate investment trusts, mutual funds, private placements and reverse mortgages. The food is usually not served until after the presentation is complete and the host has collected the contact information from the attendees. To ensure the attendees stay until the presentation is over, the door prizes are given last. The financial adviser speaking at the seminar also evaluates individual attendees' level of interest in opening an account and/or purchasing products."
What did the regulators conclude from observing these seminars?
"Examiners found that some firms used testimonials from satisfied customers as part of their sales materials and presentations at sales seminars. Examiners observed that firms sometimes used testimonials by seniors who attested to the quality of service or the investments offered by the firm in their marketing efforts to other seniors as prospective customers.As described above in this report, to protect investors from being misled by testimonials, broker-dealers must prominently disclose that the testimonial may not be representative of the experience of other customers, the testimonial may not be indicative of future performance or success, and if more than a nominal sum is paid, broker-dealers must disclose that it is a paid testimonial (under NASD Conduct Rule 2210(d)(2)(A) and NYSE Rule 472(i)(7)). Investment advisers registered with the SEC may not use testimonials at all (under Rule 206(4)-1 under the Advisers Act)."
Is there any evidence that compliance with these disclosures makes the misleading advertising easier to resist? Every crappy fraudulent securities offering could have the template "testimonial not indicative of future performance" plastered all over it without reducing its seductive appeal. Virtually, every franchise fraud I have seen makes an earnings claim, and then states that it may not representative.
What concerns me greatly is the regulators are focussed on creating work for themselves, setting themselves up as a review board,
"As described earlier in this report, to help ensure that communications by broker-dealers to the public are fair, balanced and not misleading, broker-dealers must provide certain sales material to NASD's Department of Advertising Regulation for review (now, this function is performed by FINRA's Department of Advertising Regulation). Advertisements and sales literature concerning mutual funds and variable annuities must be submitted for review within 10 business days of first use or publication (NASD Rule 2210(c)(2)(A)).These examinations found that many firms did not submit materials to NASD as required. Specifically, NASD's Advertising Regulation Department reviewed all the advertisements and sales literature collected in these examinations that were used by NASD member firms or their associated persons. This review found that 31 broker-dealer firms had failed to submit their advertising and sales literature to NASD as required. If these materials had been submitted for review, it is likely that the firms would have been advised of potentially misleading or exaggerated statements or other concerns."
In the previous conference Senior Fraud, the SEC had the good sense to get some actual data about what compliance techniques worked, unfortunately they seemed to have backed away from real social psychology and are back in the land of creating bureaucratic empires.
Someone call John Stossel.
Thanks to Victoria Pynchon for alerting me to the Los Angeles story on Seniors Fraud.
Comments
September 11, 2008
Yesterday, a Cameron County jury awarded $9 million in damages to Dr. Juan and Sylvia Mancillas in their lawsuit against the National Heritage Foundation (“NHF”). Dr. and Mrs. Mancillas sued NHF in 2005 because NHF changed the beneficiaries of three multi-million dollar life insurance policies from the Mancillas children to itself.
NHF is a 501(c)(3) organization headquartered in Falls Church, Virginia that manages thousands of accounts called “donor advised accounts” created by individuals who engage in various charitable projects. NHF acts as the bookkeeper for the hundreds of millions of dollars kept in these donor advised accounts.
The lawsuit involved what the IRS called an abusive tax shelter known as a charitable split dollar life insurance plan. Between 1997 and 1999, NHF peddled this tax scheme to people across the country. The typical arrangement worked like this—a donor made a charitable “donation” to NHF and took a tax deduction. NHF used those donations to pay premiums on large life insurance policies. The beneficiaries of the life insurance policies were primarily the donor’s heirs, but a smaller portion of the death benefit would go to a charity chosen by the donor. NHF made money by charging a 4.5% fee on the full amount of the death benefit.
In December 1997, NHF sold Dr. and Mrs. Mancillas a charitable split dollar life insurance plan with annual premiums of about $85,000 on $7 million in life insurance. The Mancillases two sons were the beneficiaries of $5 million of the life insurance, and the Sisters of the Incarnate Word, a organization of Catholic nuns in Brownsville, were the beneficiaries of the other $2 million. The large amount of life insurance was necessary because the Mancillases youngest son suffered a severe brain injury at the age of 6 that has left him unable to speak, walk or care for himself.
In 1999, the IRS determined that donations made in connection with these plans were not tax deductible. At that time, NHF had about 600 of these plans nationwide, with potential life insurance death benefits aggregating between $600 million and $2 billion. If these deals went away, NHF stood to lose between $25 and $90 million in fees.
NHF did not inform the Mancillases that the tax deduction was not allowed or that it could have just paid the premiums themselves to insure that their sons still got the life insurance benefits. Had they done that, NHF would be out of the picture and would lose out on their substantial fees. NHF instead modified the plan—without telling Dr. or Mrs. Mancillas—so that it was the sole beneficiary of millions of dollars in life insurance policies and the Mancillases children would get nothing. Believing that their sons were still the beneficiaries, Dr. and Mrs. Mancillas continued paying the premiums. They paid a total of $548,000 in premiums over seven years with no knowledge that NHF had changed the beneficiary to itself.
“I can’t help but wonder how many of the other 600 families with charitable split dollar life insurance plans with NHF have also had their children removed as beneficiaries just so that NHF could be the sole beneficiary”, said the Mancillases attorney, Albert Garcia. “Hundreds of families may still be sending NHF millions of dollars each year for life insurance premiums, thinking that their kids will receive the death benefits when they die,” warned Mr. Garcia. He added, “NHF said nothing to the Mancillases so why wouldn’t they pull the same stunt with these 600 other families.”
NHF is no stranger to controversy. Its founder, J.T. “Dock” Houk started the original NHF in 1968. In 1982, the IRS filed suit to revoke NHF’s charitable status for violations of the federal tax laws. Mr. Houk was then ousted as NHF’s CEO and the organization changed its name to the National Foundation. In 1993, he started the current NHF and installed himself as the CEO, his son, J.T. “Tick” Houk as President, his wife as the chief operating officer, and his daughter and daughter-in-law as vice presidents. In 1999, the IRS disallowed tax deductions for NHF’s charitable split dollar life insurance plans, effectively ending that tax avoidance scheme. In 2006, the Congress also outlawed another NHF scheme—charitable employment. Under that program, one would “donate” money to his foundation that was managed by NHF, and take a tax deduction on his tax return. The donor would then “work” for his foundation as a director and pay himself a salary with the very money he donated and took a tax deduction for. Very little, if any, of the donated money would go to charity because it would come back to the donor as a salary.
Dr. and Mrs. Mancillas were represented by Albert Garcia and Adrian Martinez of the McAllen, Texas law firm of Garcia & Martinez, L.L.P. They specialize in complex commercial and personal injury litigation.
Posted By Eduardo Alarcon
19319 Inverness Dr.
Spicewood, TX 78669
(512) 217-6655
Eduardo.alarcon@sbcglobal.net
P.S. If you want to contact the Law Firm mentioned in the press release please contact them directly at:
April P. Adrian, Paralegal
GARCIA & MARTINEZ, L.L.P.
10113 N. 10th Street, Suite H
McAllen, Texas 78504
(956) 380-3700 – office
(956) 380-3703 – fax
april@garmtzlaw.com
Posted by: Eduardo Alarcon | January 25, 2009 8:40 PM
Please let your readers know about the National Heritage Foundation
State of Maine
Office of Securities_
21 State House Station
Augusta, Maine 04333-0121
IN RE: NOTICE OF INTENT
06-073
JAMES L. CLIFFORD
ALLEGATIONS
1. James L. Clifford (�Clifford�) (CRD # 1419478) is an individual who has been licensed in Maine as a sales representative or agent since at least 1985. His last known address is 955 Eastern Avenue, Holden, Maine 04429.
2. From December 4, 1997, to the present, Clifford has worked as a sales representative or agent at the Brewer, Maine, branch office of Investors Capital Corp. (�ICC�).
3. Pearl P. Schoppe (�Ms. Schoppe�) was a life-long resident of Orono, Maine, and the valedictorian of the 1936 graduating class of Husson College in Bangor, Maine.
4. In May of 1996 Ms. Schoppe established a living trust (the �Schoppe Trust�) with herself as trustee and with two of her relatives designated as trustees upon her death. The original trust document directed that upon Ms. Schoppe�s death, after payment of any of Ms. Schoppe�s debts, expenses and taxes, and certain distributions, the remainder of the trust property was to be held in trust for Husson College with income distributions to fund a scholarship program.
5. Ms. Schoppe was conservative with her investments. She essentially bought only certificates of deposits and fixed annuities.
6. In October of 1998, Ms. Schoppe, then age 80, amended the trust document to, among other things, change the trustee upon her death to Clifford. The amendment also changed the provision regarding the distribution of the remainder of her trust property. As amended, instead of the property being held in trust for Husson, the trust instrument dictated that the property was to be �distributed to the National Heritage Foundation F.B.O. Pearl P. Schoppe Foundation.�
7. The charitable purpose stated by Ms. Schoppe on the National Heritage Foundation application was �Assist students of the Greater Bangor/Brewer, Orono/Old Town, ME area who need financial aid to attend Husson College. To be paid out interest only 80% of interest to go to students, 20% of the interest to go back into the Foundation so foundation will continue to grow.�
8. Ms. Schoppe died on January 19, 2000.
9. On March 7, 2000, in Singer Island, Florida, Clifford and John T.�Dock� Houck, II, CEO of National Heritage Foundation, (�NHF�) completed the paperwork for �National Heritage Foundation Inc. FBO Pearl Schoppe FNDTN� to purchase a $150,000 variable annuity from Conseco Variable Annuity Insurance Company through ICC, using funds from the Schoppe Trust.
10. On May 11, 2000, Clifford sent an additional $50,000 from the Schoppe Trust�s checking account to Conseco to add to the variable annuity.
11. The subaccounts chosen by Clifford and Houck were largely more-risky growth funds, when Ms. Schoppe�s stated intent and investment history dictated the use of more conservative income-producing investments.
12. The variable annuity sold by Clifford to the foundation was unsuitable for the charitable purposes expressed by Ms. Schoppe. There was no tax benefit and no value to having a death benefit on the life of Mr. Houck to offset the higher costs and reduced liquidity of the investment.
13. Clifford received $12,600 in commissions on these transactions. In addition, Clifford has paid himself trustee fees exceeding $42,000.00 from the trust assets despite the fact that he appears to have provided little if any valuable services to the trust.
14. Since the purchase of the variable annuity in March of 2000, Husson College has received no scholarship money from the Pearl P. Schoppe Foundation.
15. Under federal law, variable annuities are securities and the offer and sale of variable annuities is regulated by the United States Securities and Exchange Commission (the �SEC�) under the Securities Act of 1933 and Securities Exchange Act of 1934.
16. The NASD is a national securities association registered with the SEC under �15A and in accordance with the provision of �19(a) of the Securities Exchange Act of 1934.
17. NASD Rules are filed with the SEC and promulgated under �19(b) of the Securities Exchange Act of 1934. NASD rules apply to �all members and persons associated with a member. Persons associated with a member shall have the same duties and obligations as a member� under the association�s rules. NASD Rule 0115.
18. ICC is a member of NASD and Clifford is a person associated with ICC.
19. NASD Rule 2310 requires that a member have reasonable grounds for believing that a recommended purchase is suitable for a customer based on the facts disclosed by the customer including the customer�s investment objectives.
20. By virtue of his training and experience, Clifford knew the requirements of NASD Rule 2310. Through his customer relationship with Ms. Schoppe, Clifford knew her investment objectives and the charitable purpose for which she established the Pearl P. Schoppe Foundation. Thus, Clifford intentionally or knowingly failed to comply with NASD Rule 2310. 32 M.R.S.A. �10313(1)(B).
21. By using funds of the Schoppe Trust to purchase an unsuitable investment, Clifford engaged in unlawful or unethical conduct in the securities business. 32 M.R.S.A. �10313(1)(G).
22. Pursuant to 32 M.R.S.A. ��10313 and 16702, the Securities Administrator may, after notice and opportunity for hearing, issue an order to revoke the license of a licensee or impose a bar on a licensee if the Securities Administrator finds that the order is in the public interest and that the licensee: (1) has engaged in unlawful, unethical or dishonest conduct in the securities business; or (2) has intentionally or knowingly violated or failed to comply with a rule under the Securities Exchange Act of 1934.
NOTICE
Notice is hereby given that the Securities Administrator intends to issue an Order to Revoke Clifford�s Agent License and Censure Him or Bar Him from Association under 32 M.R.S.A. ��10313(1) and 16702(1).
If Clifford wants to request a hearing in this matter, he must do so in writing within thirty (30) calendar days of the date of this Notice of Intent. 32 M.R.S.A. ��10708, 16702(1).
Date: November 28, 2006 /s/ Michael J. Colleran
` Michael J. Collera
Securities Administrator
Date: November 28, 2006 /s/ Bonnie E. Russell
Bonnie E. Russell
Assistant Securities Administrator
Date: November 28, 2006 /s/ Willis P. Smedberg
Willis P. Smedberg
Investigator/Examiner
Last Updated: December 20, 2006 4:42 PM
Posted by: EduardoAlarcon
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November 21, 2007 6:57 PM