Investment Fraud: How One California Law Group Exposed a Criminal Syndicate

Fraud and scams come in many forms and are indiscriminate in their target. In a report issued by the Federal Trade Commission (FTC) earlier this year, data shows that consumers lost nearly $9 billion to fraud in 2022.

But this is nothing new. Names like Bernie Madoff and Charles Ponzi have become synonymous with modern-day fraud cases. Fraud (and scams) date back to 300 BC and have only become more sophisticated through time and on the backs of technological advancements.

With sophistication in scam and fraud architecture, criminals (cyber, white collar, or otherwise) have turned their attention to investment scams. In the same FTC report, consumers reported losing nearly $4 billion, accounting for more than any other category investigated, which more than doubled from the previous year.

Case Study: Investment Fraud in the Nevada Cannabis Industry

Foley Bezek Behle & Curtis, LLP

, recently won a complex multi-tiered investment scheme case. In a recent verdict, California law group Foley Bezek Behle & Curtis, LLP, landed a $56.4 million trial result in a derivative action filed by two investors in a cannabis-related business in Las Vegas, Nevada.

Roger N. Behle, Jr., Partner at Foley Bezek Behle & Curtis, LLP, and 30-year veteran litigator of cases on the federal and state level, said, “What appears to be an uptick in scams is often just the result of increased public exposure of the scams. Many scams go on for months or years before being exposed.”

Identifying real investment opportunities from fake ones is essential to protecting capital from fraud. Investment scams can be disguised as legitimate investments, and it can be difficult to distinguish between a good opportunity and a scam.

In Behle’s case exposing a cannabis-related investment scheme, he demonstrates just one example of how investment fraud can penetrate even savvy investors.

“Our case involved investing in a cannabis business to grow, process, and sell cannabis in Nevada. Rather than investing directly in the cannabis business, the defendants told the investors to deposit their money into one of the defendants’ other businesses because (they claimed) the cannabis business could not have its own bank account (it did have its own bank account).”

Behle explains that once the money went into the defendants’ other businesses, the defendants freely used it to build and sell several of their other companies for nearly $100,000,000. In this case, the investors were never told that their money had been used in this fashion, nor were they given a share of the enormous profits that the defendants reaped from the sale of the other businesses.

But it wasn’t easy, and the scheme included a myriad of bank accounts and shell companies to deter evidence and paper trails.

“The case involved a web of more than 20 companies, all of which the defendants owned, managed, or controlled. In one instance, the defendants used one of their other companies to loan money to the investors at exorbitant rates and with hidden fees. The defendants didn’t disclose this conflict to the investors, nor did they tell them about the loan terms. The defendants also freely moved the investors’ money between and among more than 20 companies the defendants controlled, putting it at risk and never telling the investors where their money had gone,” said Behle.

Many state and federal laws are designed to protect investors, with a common, underlying theme of disclosure. Before being asked to invest, a promoter must disclose enough information about the investment (and its risks) for the investor to make an informed decision. But, despite such robust laws, scammers are still out in force trying to dupe the unwary investor. The rule remains: Investors must be vigilant and ask many questions.

“Our clients were (by design) kept in the dark about how defendants used the money. It was not until after the defendants sold the businesses that our clients started asking questions. The deeper we dug, the more we found. It was not until the trial that the full scope of the defendants’ investment scheme was revealed,” added Behle.

Look for Red Flags

Investment fraud can come in many forms, so knowing the warning signs of a potential scam is essential. Common red flags include:

• Unsolicited offers of “no-risk” investments – Investment scams often promise high returns with no risk, which is too good to be true. Be wary of any offer that seems too good to be true and check online reviews before investing.
• Promises of high returns with little or no risk – High-return investments typically require higher risks and should be cautiously approached. Do your research and ask questions before investing, as fraudsters may use false or exaggerated returns to tempt investors into making bad decisions.
• Pressure to act quickly and keep the investment a secret – Fraudsters will try to pressure you into making an investment speedily or keeping it a secret from friends or family to avoid being caught by authorities or other potential investors who could expose their scheme.
• Requests for sending funds via wire transfer – Fraudsters may request that you send money via wire transfer, as this is difficult to trace and can leave you without any recourse if they take off with your money.
• Claims that the government backs the investment – Many investment scammers will falsely claim that the government guarantees their investments or has unique tax benefits – always double-check these claims against official sources before investing anything!

For Behle’s clients, they had conducted a reasonable level of due diligence.

“Thankfully, our clients had signed a written agreement, and that agreement proved key to exposing the scheme. The agreement required the defendants to disclose to the investors how money was being used and to hold in trust any profits they received. The defendants didn’t do either of those things. They ignored many of the provisions of the agreement,” added Behle.

Some investments, by nature, are risky. The key is for investors to accurately assess risks before deciding to invest. A case like Behle’s reveals that without full disclosure, an investor cannot accurately determine risk. Without full disclosure, investors are left to make an investment decision based on incomplete information. Deciding to take a risk when you know all the facts is one thing.

“Deciding to take a risk you don’t know exists – because you haven’t been told about it – is entirely different,” explained Behle.

Laws to protect investors

Investment scams can be challenging to identify and protect against, but luckily, laws are in place to help investors. The Financial Industry Regulatory Authority (FINRA) is a private corporation regulating the securities industry. It sets brokers’ standards, provides investors with education and resources, and enforces rules that protect investors from fraudulent activity.

The Securities and Exchange Commission (SEC) is a governmental agency that regulates the securities industry. It ensures fair practices in the market, investigates potential fraud, and punishes those who break the law. It also offers educational resources to help investors make informed investment decisions.

The Sarbanes-Oxley Act of 2002 requires public companies to maintain accurate records and disclose any material changes related to their operations. This helps prevent insider trading by requiring companies to keep detailed records of their finances so that any potential fraud can be identified quickly.

The U.S. Patriot Act of 2001 imposes additional regulations on financial institutions, requiring them to conduct customer due diligence and anti-money laundering programs. By following these regulations, financial institutions can better identify suspicious activity before it becomes an issue for customers or shareholders.

More recently, the Secure and Fair Enforcement Regulation Banking Act (SAFER) can help expose potential fraudulent acts, especially in emerging sectors like the cannabis industry.

“One thing that I think the SAFER Act will do is bring many cash-only cannabis businesses out of the shadows and into the light of a regulated, traditional banking relationship,” said Behle. “This should help both cannabis business owners, who are subject to increased risk of crime because they operate largely in cash, as well as investors in such businesses, who will now be able to evaluate the businesses based on actual banking records.”

Today, investors must be vigilant when making any kind of investment. Doing thorough research, understanding the laws in place to protect them, and being aware of fraud are all critical aspects of success. Recognizing unethical sales tactics such as high pressure, false promises of huge returns, manipulative language, hidden fees, and borrowing money without returning can help deter entering into questionable investments.

“Ultimately, investing requires a great deal of knowledge and diligence. Buyer beware is as applicable today as ever,” concludes Behle.

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