America’s business environment is unique. The combination of a strong judiciary; well-established corporate, governance and bankruptcy laws; freedom of contract; entities designed to limit liability; and healthy private equity markets make the United States the envy of the world. Nowhere else in the world can a great disruptive idea become a unicorn in less than a year. This is the reason that America has been at the forefront in creating new markets, from artificial intelligence and cryptocurrencies to personal computing and the World Wide Web. America is also at the forefront of creating efficient indirect investment pooling vehicles, where investor’s money is managed and used by professionals to secure a return to them, like REITs, ETFs, Mutual Funds, Closed-End Funds, Hedge Funds, and Venture Capital.
Sometimes the options can feel overwhelming. For some, the overwhelming feeling is the fear of missing out on the next big thing, but it is also easy for a prospective investor to get lost in the overabundance of information. Today’s complex business environment and options mean that investors are well advised to do their due diligence research before letting others manage their hard-earned money. When stepping outside your immediate circle, it becomes increasingly difficult to separate good investment opportunities from poor ones or even fraudulent ones.
But what can you do when you have invested your money and start having doubts about the people you trusted with it? If you invested in unregistered securities, the law imposes criminal penalties on issuers who raise money through fraud and gives you the right to demand your investment back. For those investors whose money is already gone, the IRS provides a mechanism to alleviate some of the losses.
SEC Rule 10b-5
SEC Rule 10b-5 (17 CFR 240.10b-5) makes it illegal for the issuer of securities, through any act or omission, to deceive or defraud in connection with the purchase or sale of securities.
§ 240.10b-5 Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
(Sec. 10; 48 Stat. 891; 15 U.S.C. 78j)
Rule 10b-5 is designed to protect the investment public from the myriad of ways that a seller of securities can defraud investors.
Help for Victims of Ponzi Investment Schemes
The IRS allows taxpayers to receive limited relief for losses from a theft and provides a safe harbor provision in Rev. Proc. 2009-20. This revenue procedure permits taxpayers who choose to use the safe harbor to deduct either 75% or 95% of the loss in the discovery year. Section 4.04 of Rev. Proc. 2009-20 defines the discovery year as the year in which the indictment, information, or complaint establishing the qualified loss is filed.
At DLG we work with investors to help them conduct due diligence, negotiate, and structure their participation in investment opportunities. We also help investors who believe they have been the victims of fraud involving securities to evaluate the securities transactions and, if warranted, to bring civil suits to recover their investments. We also work with regulators and prosecutors to establish the qualified loss.