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W Financial Group, LLC et al: SEC Press Release

From the SEC Press Release:

On June 5, 2008, the Securities and Exchange Commission obtained an order freezing assets and granting other emergency relief in a pending action in Dallas federal court involving what the Commission contends is a fraudulent offering of securities, known as Secured Debt Obligations ("SDOs"), by W Financial Group, LLC. ("W Financial").

The district court entered orders freezing the defendants' assets, requiring an accounting and repatriation of assets, and ordered defendants to preserve documents and submit to expedited discovery.

The Court scheduled a preliminary injunction hearing for June 25, 2008, at which time the Court will consider the Commission's request to appoint a receiver to marshal and conserve assets for the benefit of defrauded investors.

The Commission's Complaint, filed on March 21, 2008, alleges that the defendants, directly and through sales agents, raised at least $17.9 million from at least 182 investors between September 2006 and February 2007.

According to the Complaint, W Financial investors, primary senior citizens and retirees, were lured into purchasing SDOs through a series of misrepresentations and omissions that portrayed SDOs to be as safe as FDIC-backed certificates of deposit.

The Complaint further alleges that the defendants misappropriated and misused the majority of W Financial investor funds, spending millions of dollars, for example, to purchase and operate high-risk business enterprises such as a retail electric power provider and a custom home-building company."

Generally, I write about the failure of disclosure laws to have the desired effect for consumers of franchises, distributors, or other income generating opportunities.

Disclosure laws continue to model a rational human being who can calculate risks when given the right information and make decisions accordingly.

Fifty years of experiments, from cognitive dissonance, through to framing, and behavioral economics have failed to shake the regulators' faith in the due diligence model.

However, in this particular case, I would point out that one interesting fact: people who are defrauded in securities cases, generally, are unable to discern the link between return and risk. Efficient markets make it more likely that high returns are associated with higher risks.

If you don't know how to calculate or anticipate these higher risks, you should not be investing, what looks to be in this case, about $100,000 per person.

Buy Joel Greenblatt's book on slow and steady investing instead.

You will have a lot more fun, and not lose money.

Every two months, you will have an easy decision to make.

Over the long run, which Joel claims could be as long as 4 years, you will make more than had you simply left your money in an index.

This is a phantom dream worth pursuing.

At worst, for several years the market will outpace you. At best, you will end up looking like a genius.

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Full post as published by Misleading Advertising Law on June 17, 2008 (boomark / email).