worried wrote:"Due Diligence" is getting information from IMPARTIAL, 3RD PARTIES, whose BUSINESS is making SURE other businesses are telling the TRUTH!!... like, say, financial auditors!.... or the SEC!!
Having done due diligence in the securities industry for some 20 years I define it this way: Examining a company, business plan or investment and its related market to the extent that you can recommend its acceptability or lack thereof with a confidence level sufficient to avoid getting sued or fired.
What due diligence is not is cruising the Internet trying to interpret legal opinions and commentary. That falls under the heading of personal education. If you want a legal opinion, ask a lawyer.
If you have a securities question about a company operating in California, call the CA Dept. of Business Oversight. This is a new department created in 2013 from the combination of the old Department of Corporations and Department of Financial Institutions which is the regulating authority for financial entities in CA. I called and verified that the company in question was a CA corporation and is not registered as a financial firm in California.
I asked to speak to a financial department attorney and was connected with a Sr. Counsel. The woman was spectacularly uninterested but was willing to speculate that yes, a sale/leaseback with a guaranteed rate of return was probably a security in the State of California. And, I had to pry that out of her. I asked if the State of California had any interest in investigating an unlicensed firm selling unregistered securities in the state. She told me perhaps if I wanted to file a complaint. This, of course, is a bureaucratic brush off. Being unharmed, any complaint by me would simply get me a computer generated form thanking me for my interest and assuring me that the State was ever vigilant with no mention of the complaint's final resting place in the round repository.
Still, it's interesting that a government Sr. Counsel would even grudgingly admit the possibility that something might be afoot. And, it was a free legal opinion. We also know that the State of Colorado shares that opinion as does the SEC.
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L.A. Judge Issues Orders in ATM SchemeBRIEFLY / SECURITIES
March 28, 1998|Reuters
A Los Angeles federal judge ordered four men to repay more than $1 million they reportedly bilked from investors in an alleged scheme to sell and lease back ATMs, the Securities and Exchange Commission said. U.S. District Judge George King also ordered the four to stop selling unregistered securities and selling securities by fraudulent means.
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Regulators target ATM investment
Colorado Securities Commissioner Fred Joseph has issued a cease-and-desist order against OneSource Financial Group LLC, a California company, and two of its principals -- Mark Lebowitz and Alex Roderick of Costa Mesa, Calif. -- for violating the securities registration and anti-fraud provisions of the Colorado Securities Act.
At least 23 Colorado investors have invested more than $600,000 with the company, state officials said.
Securities officials allege that from at least October 2005, OneSource has been selling automated teller machines to investors in Colorado for $4,000 apiece. OneSource told investors that the ATMs would be placed in casinos in Las Vegas and Atlantic City, N.J., or in Chevron gas stations, and that investors would receive $1 for each transaction conducted at their ATM.
But the state securities division staff said the ATMs never existed and that interests in the ATMS are securities under the Colorado Securities Act that should have been registered with the Colorado securities commissioner.
The state also alleged that Lebowitz and Roderick made false statements and omissions of material fact to investors, all in violation of the anti-fraud provisions of the act.
The cease-and-desist order, which was made final on May 23, orders OneSource, Lebowitz and Roderick to immediately stop offering or selling any "security" in or from the state of Colorado.
"The sale and leaseback of a piece of equipment like an ATM has been a scam that has been around before," Joseph said in a statement. "And it is not uncommon for the promoters of these schemes to say that the ATM will be located in a casino."
He urged investors to contact the securities division with any questions about an investment product, broker or adviser before making an investment.
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Notice that in both cases, after finding the defendents guilty, the punishment was orders to stop selling unregistered securities and in the California case reparations were ordered. No one went to jail.
Ponzi schemes, at least at the federal level, are investigated by the SEC which must then file suit in the state in which the crime has been committed. I posted an inquiry with the SEC a week ago but do not expect any kind of rapid response.
What makes a Ponzi scheme so lucrative and relatively safe, and I'm speaking theoretically here, is that it is a confidence game. Investors have confidence because early investors are always paid on time and in full so that they may retell the story of risk free high returns to others who may be persuaded to invest. It's an affinity scheme. And, investors being "true believers," roll over their investments never actually withdrawing much in the way of "profits." They are compounding their wealth. This gives the scheme legs. It's why they can run for years. If few people take their profits out of the system and new money is continually brought in you have plenty to pay outsized returns.
In today's climate of low investment returns, gullible investors are pushed way out on the risk spectrum and want to believe. They will not question the authenticity of the investment because they have been paid regularly for years.
This is long, and I'm sure you are all bored by now, but let me end with this:
I have read many hundreds of financial statements and I can assure you that there would be no difficulty hiding a Ponzi scheme in an audit. After all, NASI stated in their 1998 10(g) form that the company would buy additional ATMs for itself from "cash flow." So requesting a firm's financials would do you no good.
Law enforcement and regulatory agencies will take no interest until someone is visibly harmed. After all, they have an inbox full of complaints for which they have limited resources to investigate. I offer the challenge to find any securities fraud or Ponzi case that was investigated before they blew up.
The only thing that would prove malefaction would be a detailed sampling of the actual existence of the ATMs and a thorough cross reference of their client ownership proving that no ATM was assigned to more than one person. And ... who's going to pay for that.
Pay your taxes and you have no trouble with the IRS.
A successful scheme would involve a mix of legitimate business and fraud - expensive to prove. I would reject the investment simply because of the cost of due diligence - the verification issue.
It is interesting that paragraph
12) Non-Interference of the lease agreement we are admiring specifically enjoins the lessor from "... contacting the locations where the ATMs is/are installed and/or any service providers under contract with (the company) relating to the operation of such ATMs."
That sort of makes verification difficult unless one simply ignores that paragraph in the interests of maintaining one's financial security.
Perhaps in a later post we can talk about why ATMs are irrelevant and what the company is really selling is a 10 year renewable annuity and it is selling it for way too low a price.
is 
