Pat Huddleston - The Vigilant Investor: A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments

A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments

Pat Huddleston

Bulk discounts available. For details visit:
www.amacombooks.org/go/specialsales
Or contact special sales:
Phone: 800-250-5308
E-mail: specialsls@amanet.org
View all the AMACOM titles at: www.amacombooks.org

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Library of Congress Cataloging-in-Publication Data

Huddleston, Pat.

The vigilant investor : a former SEC enforcer reveals how to fraud-proof your investments / Pat Huddleston.1st ed.

p. cm.

Includes index.

ISBN-13: 978-0-8144-1750-8

ISBN-10: 0-8144-1750-7

1. Investments. 2. Securities fraud. 3. Swindlers and swindlingPrevention. I. Title.
HG4521.H846 2011

332.6dc23

2011019827

2012 Pat Huddleston II
All rights reserved.
Printed in the United States of America.

This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019.

About AMA
American Management Association ( www.amanet.org ) is a world leader in talent development, advancing the skills of individuals to drive business success. Our mission is to support the goals of individuals and organizations through a complete range of products and services, including classroom and virtual seminars, webcasts, webinars, podcasts, conferences, corporate and government solutions, business books, and research. AMAs approach to improving performance combines experiential learninglearning through doingwith opportunities for ongoing professional growth at every step of ones career journey.

Printing number

10 9 8 7 6 5 4 3 2 1

I describe in the Introduction the moment that the idea for an investor protection company came to me. All Ive done since is to follow where that idea led. All credit for the good weve done and that this book will do belongs to God. Hes blessed our efforts mostly through the people hes put in our path; people like Wendy Keller, my literary agent, and Bob Nirkind, my editor at AMACOM, both of whom were, by turns, gracious and firm with this rookie author. At Investors Watchdog, Lauren Bowman and Rosey Sumrall have been diligent fact checkers, as has Cherie Eason, my senior legal assistant and right arm in law practice. I am forever indebted to my former colleagues in the Atlanta office of the SEC. They made me a fraud hunter and infused a spirit of public service that stuck when I returned to private law practice. My brothers and sisters at North Metro Church have been a constant source of encouragement. It is a long path to publication, and Id never have been able to envision the end clearly enough to begin the journey without lessons in possibility, determination, and hard work from my parents, Mike and Bettie, and unwavering love and support from my brothers, Porter and Matthew. Porter, the true writer in the family, gave invaluable guidance over the many months that we worked to find an agent and craft a winning proposal. All love and thanks to my wife Carol, our family MVP, who bore the strain of the effort with grace while giving our sons, Mike and Ben, love, support, and guidance. Finally, thanks to every victim of investment fraud who is brave enough to throw off misplaced guilt and shame to seek justice.

To the memory of
Bettie Beck Huddleston,
my loving Mom.
All glory to God.

In July 2006, I closed the door of my law office after saying good-bye to a 70-year-old man who had lost his life savings to a Ponzi scheme. This retireea family patriarch who had saved for decades in hopes of paying for his grandchildrens college educationshad come to me because he knew that I had been an Enforcement Branch Chief at the U.S. Securities and Exchange Commission (SEC). He wanted me to help him get his nest egg back, but I couldnt. The confidence man who had taken it had no liability insurance, and he had never worked for a brokerage firm that could have detected and prevented the scam. The con man had spent this senior citizens nest egg, and many others, on homes, cars, expensive vacations, and phony distribution payments to earlier investors. I could have won this prospective client a multimillion-dollar civil judgmentincluding punitive damages and attorneys feesbut we would never have collected a dime.

In more than two decades of protecting investors, both as an SEC enforcer and as an attorney for investors, Id had conversations like this one with hundreds of investors, from institutions to blue-collar retirees. Its never fun, especially with seniors, who cannot rebuild their nest eggs through several more decades of work. Usually they try to remain stoic, but you can see them deflate and their minds wander to the painful practical implications of the bad news. The blood drains from their faces as they try to reconcile their image of themselves as smart and competent with the reality that a stranger has already spent the money that it took them decades to earn and save. Sometimes they shed tears of shame and humiliation, feeling more guilt in that moment than the people who defrauded them will feel in their entire lives.

I expected nothing more from the rest of the afternoon than Id experienced all of the other times Id given this kind of bad news: a lingering sadness. But this day was different. As I turned away from the door, a thought exploded into my head with lightning-strike power; I actually felt a physical impact. How long are you going to keep having these conversations before you do something to protect these people? In that moment, Investors Watchdog, LLC, was born.

We began by building a database to hold information on stockbrokers, investment advisers, and scam artists nationwide. We added thousands of customer complaints that had been expunged from stockbrokers official regulatory rap sheetsnot because the brokers were exonerated, but because the brokers made this a condition of settlement with their victims. We gathered information on actions against the horde of unregistered salespeople who operate off the regulatory grid. We put it all in the IW database.

Within days of launching Investors Watchdog, we saved a church in Arizona from losing its entire building fund to a con man who was operating under an assumed name. Since 2006, Investors Watchdog has investigated unregistered investments on three continents, including supposed luxury resorts on the Red Sea; investments in renovated hotels in the United Kingdom; private banks in Geneva, Switzerland; and oil and gas projects in Texas. Weve also investigated stockbrokers that the Financial Industry Regulatory Authority (FINRA) rates as perfectly clean but who have been the subject of so many customer complaints that no investor would ever use them if he knew the truth.

Shortly after opening Investors Watchdog, I received my first assignment as a court-appointed receiver in an SEC fraud case, cleaning up the mess from the collapse of an investment scam in South Carolina. Ive cleaned up that kind of mess in three SEC cases as of this writing (one involving an international hedge fund fraud), and two more for the Federal Trade Commission. That work has taken me all over the United States and beyond, closing down fraudulent operations, recovering assets from overseas, and pursuing litigation (against people who received investors funds or who contributed to the scam) to generate a fund from which to repay investors. Sometimes weve been able to pay back more than half of what was lost. Other times, weve been able to return only nickels on the dollar. Although our receivership work always produces far more for investors than it costs, we cannot make the victims whole. We can neither unscramble their nest eggs nor fully assuage the feelings of humiliation and misplaced guilt that grip them in the wake of their financial loss.