Area Investors Lost $7.2M to Fraudsters

A man’s word and a handshake don’t mean as much as they used to. Nowadays, there are so many contracts, promissory notes and legal documents to sign that it can cause acute carpal tunnel syndrome.

Investors lost about $7.2 million to alleged fraudulent investment opportunities in Northwest Arkansas in 2003 and 2004, according to orders issued by the Arkansas Securities Department. whether it’s a “good word” investment or a registered broker that doesn’t make good judgments with their clients’ money.

Investment scams happen every day. In order to cut down on fraudulent crimes, state departments like the ASD keep an eye out for scams. But it takes more than the ASD to control fraudsters. It takes potential investors questioning investment companies or so-called brokers before they give their life savings away.

Ninety percent of the cases the ASD handles every year involve the elderly. Michael Johnson, ASD commissioner in Little Rock, said senior citizens are known as the weakest segment of society when it comes to sophisticated things such as investing in an Individual Retirement Account or a variable annuity. Potential investors are often suckered in because of the promise of big returns from their investment.

“People have a desire to get higher returns,” Johnson said. “They’re not being smart about it, and they’re falling for just about anything.”

And it’s not just the elderly. Johnson said there are things that everyone should know when approached about an investment opportunity they’re not familiar with.

Many licensed and legitimate brokers make cold calls to potential investors, he said. But if a so-called broker wants a person to make an on-the-spot decision, then it’s not a legit deal. It’s also important to ask tough questions.

“If you don’t understand something, if they’re using big words or say anything you don’t understand, don’t assume that you’re going to look like an idiot if you ask a question,” Johnson said. “It’s best to ask and if they can’t give you a good answer, that’s a red flag.”

Scammers use fraudulent investments because people are looking for a quick and high return. Money can’t be made in certificates of deposits or savings accounts right now, Johnson said.

“What we’re seeing and what is motivating a lot of corrupt brokers are that people are used to the ’80s and early ’90s when they could get a decent return on a CD, and they’re not getting that now, especially people on a fixed income,” Johnson said. “What’s getting [investors] is a desire for a higher return. Scam artists know that.”

Johnson said people should call ASD to check on any potential investment opportunities before they decide to invest their money. ASD will run a check on them, which will show any complaints within the last five years and if any action has been taken against them.

For brokers to sell securities in Arkansas, they need to be registered with the National Association of Securities Dealers, and the product they sell needs to be registered.

Many times ASD gets leads through people verifying with the department about a broker or investment company, Johnson said. ASD doesn’t have the power to indict criminals in Arkansas, but the department does try to get money back through restitution and fines.

Prosecutors have the option of filing criminal charges, but securities laws are difficult to understand and fraudsters usually move out of state in the meantime.

Michael Kent Zedlitz

In June, a Garfield man was issued a cease-and-desist order by the Arkansas Securities Department to stop brokering securities trade without a license. About 20 investors, most of them Christian ministries, gave Michael Kent Zedlitz $490,000 over 13 months, of which he used $274,000 for his own personal use and lost $191,000 in online trading.

In 2003, Zedlitz told a man who had a local ministry that he combined prayer and a computer program to help him make $2,000 a day trading in the stock market, according to the order.

The order said Zedlitz told one investor “he would kneel before his computer, put his hands on his computer and pray to God for wisdom, guidance, clarity and alertness to know when to buy and when to sell.” The man bought the sales pitch from Zedlitz and invested $3,700 on behalf of his ministry, even though he told the investor that he refused to have any kind of written contract because he didn’t want to guarantee any returns in writing.

Fortress and G.T. Funds

Another cease-and-desist order was issued by the ASD in March against a Bentonville man, Leroy Hoback, and his company Fortress Foundation Inc. Also named in the order was O. Bruce Mikell. Fortress, G.T. Funds Inc. Raymond M. Streig, William E. Schwerdtfeger, Gloria N. Streig, and Ra’Nic Streig Schwerdtfege.

Hoback and Mikell, co-owner of the company, started FFI in 2003 to trade foreign currencies. Mikell contacted Raymond Streig, president of G.T. Funds in the Houston area, to discuss trading foreign currencies for FFI.

From about October 2003 to October 2004, FFI collected $351,800 from 32 investors through seminars held at a Rogers motel. The money was then wired to G.T. Funds, where the four officers named in the order used 65 percent, $228,670, for personal uses. The other 35 percent has not been accounted for and ASD said it was possible that it had been traded.

During the investment time, G.T. Funds was only giving FFI verbal statements regarding the investments. G.T. Funds would verbally tell their accountant who would then send out statements to investors. FFI finally became suspicious of G.T. Funds and subsequently stopped using it for trading of foreign currency.

FFI was incorporated in Belize, and a second FFI was incorporated in Nevada without Hoback or Mikell ever having been to either place. Only the Belizean corporation was registered with in Arkansas.

First Financial Advisors

A consent order is different from a cease-and-desist order where the parties agree to the penalties from the ASD but can either deny or admit allegations from the department, said Johnson. A consent order is only given when the ASD feels as though those named in the order were mostly legitimate and that a penalty of suspension would be necessary to cease operation.

First Financial Advisors Inc., First Financial Brokerage Services Inc., Tommy Lee Ruff, owner of First Advisors and a registered agent with First Brokerage, and Carla Lea Chastain, representative for First Advisors and a registered broker for First Brokerage, entered a consent agreement with the ASD in May, but denied allegations made that they broke the Arkansas Securities Act.

According to the consent order, from January 2000 to December 2003, First Advisors “lost $6,419,738, or over 80 percent of their value, during the four year period through the investments and trading pattern effected by Chastain and Ruff.”

Ruff and Chastain had about 300 clients but only “actively managed” two portfolios, mutual funds and variable annuity. Every client was treated the same regarding investments without ever having his or her investment objectives being taken into consideration.

Ruff’s registration as an investment adviser and agent was revoked. Chastain’s registration as an investment adviser was revoked and her registration as an agent was suspended for 180 days.

Top 10 Scams in 2005

1. Ponzi Schemes — Scamers pay early investors with money raised from later investors. The only people who make money are the promoters.

2. Unlicensed Individuals Selling Securities — Anyone selling securities without a valid license should be a red alert.

3. Unregistered Investment Products — Con artists bypass stringent state registration requirements to pitch viatical settlements (the early sale of a life insurance policy), pay telephone and ATM leasing contracts and other investment contracts with the promise of “limited or no risk.”

4. Promissory Notes — Empty promises can leave these notes worth less than the paper on which they are printed.

5. Senior Investment Fraud — Because they have built a lifetime of savings, seniors continue to face investment fraud by con artists peddling unsecured promissory notes, viatical settlements and other investments that are either fraudulent or unsuitable for them.

6. High-yield Investments — Con artists lure investors with promises of triple-digit returns through access to “risk free guaranteed high yield instruments” or something equally deceptive.

7. Internet Fraud — Stock promoters use online “boiler rooms,” instant messaging, and fake Web sites to lure investors into schemes.

8. Affinity Fraud — Con artists are increasingly targeting religious, ethnic, cultural and professional groups.

9. Variable Annuity Sales Practices — Senior investors, in particular, should beware of the high surrender fees and steep sales commissions agents often earn when they move investors into variable annuities.

10. Oil and Gas Scams — With oil prices at record levels, regulators warn that con artists may renew schemes promising quick profits in oil and gas ventures.

Source: North American Securities Administrators Association