Enforcement Section
Enforcement Section Overview
The Enforcement Section of the Massachusetts Securities Division (the
“Division”) enforces the Commonwealth’s securities laws.
These laws are codified in chapter 110A of the Massachusetts General Laws.
Chapter 110A is also known as the Massachusetts Securities Act (the “Act”).
The Enforcement Section enforces the Act, which was enacted to protect
investors by prohibiting unlicensed and/or fraudulent activity. The Act
mandates that when a person offers or sells a security in the Commonwealth
that person cannot engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any person.
In order to meet this mandate, securities offered or sold in the Commonwealth
must be registered or exempt from registration with the Division, persons
or entities transacting business in securities in the Commonwealth must
be registered with the Division as broker-dealers or agents unless otherwise
excluded, and persons or entities transacting business as investment advisors
in the Commonwealth must be registered with the Division unless otherwise
excluded.
Pursuant to §407 of the Act, the Enforcement Section may conduct
public or private investigations within or outside the Commonwealth concerning
violations or potential violations of the Act. When warranted, the Enforcement
Section brings administrative proceedings to prevent future infractions
and seeks redress for prior violations of the Act. If the Secretary of
the Commonwealth determines after notice and opportunity for hearing that
any person violated the Act, the Secretary of the Commonwealth may order
that person to cease and desist from the unlawful acts or practices and
take other action including the imposition of an administrative fine,
disgorgement, or rescission. In addition, under certain circumstances
the Secretary of the Commonwealth may censure, deny, suspend, or revoke
the registration of any broker-dealer, investment advisor, agent, or representative,
or take any other appropriate action including the imposition of an administrative
fine and/or costs of the investigation.
The Enforcement Section investigates consumer complaints that can usually
be placed in one of four categories:
Unregistered Fraudulent Activity – This type of activity
occurs when the person or security offered and/or sold is not registered
with the Division and the person who is offered and/or purchases the security
is not informed of this fact.
Churning/Excessive Trading – Churning is a synonym for overtrading,
and simply refers to the excessive rate of turnover in a controlled account
for the purpose of increasing the amount of commissions received by the
agent of a broker-dealer.
Unsuitable Recommendation – An unsuitable recommendation
is one which, in light of the customer’s disclosed objectives and
background, is inappropriate for the agent of the broker-dealer or the
representative of the investment adviser to purchase or advise to purchase
in a customer account.
Unauthorized Trading – An unauthorized trade occurs when
an agent of a broker-dealer fails to contact the client and to confirm
a trade prior to its execution in a non-discretionary account.
Referrals for criminal prosecution are made by the Enforcement Section to local, state, and federal law enforcement agencies.
Internet Securities Fraud
Market Manipulation
Pump and Dump Schemes: These types of schemes are short quick
manipulations of the price of the stock. Generally, the individual(s)
buy thinly traded stocks and then transmit an optimistic message about
the stock, which causes investors to buy the stock, thus driving the price
up. No disclosure is made about the ownership interest that the individual
has in the particular stock. The individual(s) then sell the stock for
significant gains. The messages can be transmitted in a variety of ways:
through official looking email; messages posted on bulletin boards; or
as part of an investment advice web page.
Dump and Dis Schemes: This is the Pump and Dump scheme in the
reverse. The individual(s) short sell a stock and then transmit a negative
message to investors causing those investors to sell which drives the
price of the stock down. No disclosure is made of the negative position
that the individual has in the stock. The individual(s) then buy the lower
valued stock to fill their earlier sell orders and make a profit on the
difference.
Insider Trading: Individual(s) who are the recipients of non-public
information use that information to trade ahead of the release of that
information and take profits after the release of that information.
Issuer Fraud
Unregistered Offerings: Purported issuers of securities offer
and/or sell securities through the web to investors without being registered
or exempt from federal and state securities laws.
Scam Pre-IPOs: These purported issuers offer and/or sell shares
of their company through the Internet to investors based on the premise
that they are going public in a very short time. Obviously this is an
exploitation of the ordinary investors eagerness to join in the IPOs that
have become commonplace financial news. Some of these companies don’t
exist or are marginally successful and are not financially ready to go
public.
Scam Private Placements: Purported issuer(s) offer and sell shares
of their company through the Internet with the usual promise of great
returns and generally with the aid of slick promotional materials. However,
the company turns out to be nonexistent and the issuer has usually spent
the investors' money for their personal benefit.
Prime Bank Schemes: Purported sellers offer and/or sell interests
in some type of prime bank instrument. Generally, the investors are told
that they should place their money into the prime banks of Europe in a
type of program generally available only to the very wealthy, but because
there is a shortage for this particular program, it is being offered to
them for a smaller minimum investment. High-pressure sales tactics induce
the investors to make a quick decision. Prime bank instruments do not
exist and generally the sellers divert the money for their personal benefit.
Unregistered Broker-Dealers and Investment Advisors
Generally, in connection with one of the enumerated scams, these individuals
offer and/or sell and/or give advice about securities to investors over
the Internet without being registered to do so.
Tips for Online Investors
Ten Warning Signs:
- Large payments over a short period of time.
• Sign of Pyramid or Ponzi scheme.
- Lack of information
• If little information is given, and you find out nothing by contacting the company, you should be skeptical. Legitimate companies should not ask you to keep secrets, and should not keep secrets from you.
- Zero-risk investments
• All investments carry some risk.
- Extremely high rates of return
• If it seems impossible then it probably is.
- Matrix programs
• Sign of a Pyramid or Ponzi scheme. Legitimate matrix programs will have an actual product for sale, but make sure it is not grossly overvalued.
- Gifting programs
• Sign of Pyramid or Ponzi scheme
- Chat room or bulletin board investment opportunities
• Scam artists love bulletin boards because they can easily post false information. Advertising the fraudulent opportunities is free.
- Message board touters
• Be skeptical of any information (positive or negative) posted on securities message boards.
- “Good Samaritan” emails
• If the deal were so good, why would they tell you?
- Urgency to invest
• Stable companies would not insist that you sign up for something immediately.
Contact the Division if you have any questions concerning the legitimacy of an Internet investment opportunity.