Recently the Securities and Exchange Commission (SEC) sued David W. Schamens for operating a Ponzi scheme. According to the SEC, Schamens told his victims that he would invest their funds in a pooled investment vehicle that would invest in pre-selected stocks that would then be “auto-traded” by a proprietary algorithm. If that sounds confusing to you, it is also confusing to me and brings back memories of Bernie Madoff blaming his victims when he said that if anyone actually looked into what he said he was doing, they would realize it was impossible.
According to the SEC, Schamens didn’t invest any of the money given to him by his victims, but rather used most of it for his own personal use and the rest he used to pay earlier investors to make the investment appear to be legitimate which is the hallmark of a Ponzi scheme.
Schamens also acted as both an investment advisor and the custodian of the investments which allowed him to prepare fictitious monthly statements he provided to his victims indicating huge profits.
Making the matter worse is that this is not the first time that Schamens has been charged with misconduct by the SEC. As a result of misconduct in 1992 he was barred from acting as an investment advisor.
Before investing with anyone, you should investigate the person offering to sell you the investment with the Securities and Exchange Commission’s Central Registration Depository. This will tell you if the broker is licensed and if there have been disciplinary procedures against him or her. Anyone who looked into David Schamens’ record would have learned that he had been barred from the securities industry.
You can also check with your own state’s securities regulation office for similar information. Many investment advisers will not be required to register with the SEC, but are required to register with your individual state’s securities regulators. You can find your state’s agency by going to the website of the North American Securities Administrators Association. You should also check with the Financial Industry Regulatory Authority (FINRA) for information about the particular investment adviser you may be considering.
Most importantly, you should never invest in something that you do not completely understand. This was a mistake that many of Bernie Madoff’s victims made. You also may want to check out the SEC’s investor education website at www.investor.gov. Scammers can be very convincing and it may sound like they are offering a great opportunity for you to make a lot of money, but you must be careful that the person making the money is not the scam artist taking yours. Trading algorithms are complicated and you should not get involved with them unless you truly understand how the particular one being touted actually works.
Finally, having the same person advise the investment and control the investment such as was the case with Schamens is a common thread among Ponzi schemers because it enables them to falsify documents to make the investment look profitable. Generally, for additional security it is desirable to have a separate broker-dealer act as custodian for investments chosen by your investment adviser.
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