SEC Warns of Fraud After Hurricane


Superstorm Sandy tore hundreds of neighborhoods apart and left massive destruction in parts of New York City. And just as people are slowly recovering, possible frauds might add to the mess.stock-investment-scam

Various security agencies and law professionals have issued warnings of possible investment scams related to Hurricane Sandy.  The U.S. Securities and Exchange Commission, or SEC, warned people who have recently received lump sum insurance payouts to be extra careful. The North American Securities Administrators Association, or NASAA, issued a similar alert.

“Unfortunately, we know from experience that disasters bring out the worst in people, especially those seeking to profit from the misfortunes of others,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner in the issued warning. “Potential investors should be very cautious if approached with unsolicited Sandy-related investment offers.”

Abshure is right. Looking back to the aftermath of Hurricane Katrina in 2005, the SEC brought enforcement actions upon multiple companies involved in disaster related scams.

One such firm was Home Solutions of America, Inc., a Dallas and New Orleans-based hurricane restoration company, which issued a series of false press releases promoting robust financial gains following Katrina and other weather-related disasters. The reports inflated the company’s stock price and recorded millions of dollars in bogus revenue, according to the SEC action report.

Executives of the company, without admitting or denying the allegations, settled on multiple deals worth of hundreds of thousands of dollars with the SEC.

Another firm that played the same trick was HydroFlo, Inc., a chemical manufacturing company.  The SEC charged the company with making profits from defrauding investors with “materially misleading” statements about its water treating statements in multiple press releases right after Katrina in 2005.

“All of these false press releases had the effect of increasing trading volume in, and the price of, HydroFlo’s common stock,” the SEC filing said. The former CEO of the company, Dennis Mast, consented to pay $100,000 in civil penalty.

Investment frauds like these, in which companies take advantage of the stock price spread from releasing fake information, are just one among many kinds of frauds related to disasters.

Other kinds of scams could include soliciting donations for fake charities, scams from non-existent contractors, and even emails containing fake information from a third party about legitimate companies without them knowing.

Technology and the development of social media have made the spread of such scamming information easier and more believable. Just a decade ago, scammers had to make cold phone calls in order to sell their phony pitches.

In recent years, especially with the development of crowd-sourced websites for funding, which collect small inputs of money from a large amount of people, people can easily fall for promotions from, for example, a fake charity.

Luckily, the usage of technology is a two-way street. Investors can utilize all kinds of resources and databases to verify the qualifications of possible investments. The SEC suggests investors verify if the company is licensed and whether the promoted investments are registered with the SEC or a state.

“There’s always a risk that a few people will try to use a story to perpetuate some fraud,” warned Itamar Drechsler, associate professor at NYU Stern Business School.

With these possible investment scams and insurance frauds in mind, investors should take precautions while rebuilding after the superstorm.




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