Sometimes governments do things with the right intentions, but if the rules are not enforced the rules seem to be head scratchers – why would the government do such a thing? The example is for wealthy foreigners to invest in a company for $500,000 in return for creating jobs a EB-5 Visa can be issued. The government is encouraging investment in the economy which is a good thing.
In an article by Reuters, a California couple Charles Liu and Xin Wang was raising funds to build a cancer treatment center that has never been built. Maybe the extra funds were for the couple to spend to ensure they did not get cancer, the deal was fraud. They convinced 50 people to put down $500,000 were caught and sued.
The SEC has a practice of forcing defendants to surrender profits obtained through fraud as part of its enforcement of investor protection laws in federal courts. As an investor this is a good thing, if you are frauded, you want your money back.
The couple sued all the way to the Supreme Court arguing Congress never gave the SEC authority to seek disgorgement. The Supreme Court partially agreed by limiting the scope of what can be sought through disgorgement to no more than the net profits of the conduct at issue. The court also decided that disgorgement generally must go to investors.
It is a shame the Supreme Court went to net profits, as an investor who have been defrauded you are not interest in net profits. You are interested in receiving your money back or the the returns you were offered at the beginning. In this case, the fraudsters were arguing they should not have to pay back as much money. Generally the only way to deal with fraudsters is to take all their money and then they do not have the lifestyle to spend other people’s money.
Linking to dividend paying stocks, eventually all government programs move into the grey area as fraud becomes the first objective. One way to stay away from fraud is to ensure most of your money is protected by being in profitable stocks which pay dividends and have done so for the past 5 years plus. Fraud typically can only be concealed for a couple years, eventually its shows up in the financials, the cash flow drops and the company is on a life line before Chapter 11 is needed. Trying to preserve your capital is a good thing, take time and patience to make your decisions.
There are more questions than answers, till the next time – to raising questions.