1300 W. Washington Street

Phoenix, AZ 85007-2996

 

 

Main: (602) 542-4242

Email: SecuritiesDiv@azcc.gov

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in Brief

Investor Alert: The Gamification of DIY Smartphone Investing Apps

The Arizona Corporation Commission is warning novice investors about the risks of self-directed, smartphone investing apps.

While “do-it-yourself” investing apps often provide cost-effective, convenience with instant access to trading at an investor’s fingertips, some are presented like a video game that attract young investors who are not made aware of the risk of financial loss. This “gamification” of investing encourages unsophisticated investors to take risks they don’t understand. Recently these apps are marketing on college campuses and other locations designed to reach new investors. These apps can be habit-forming, and investors can get in over their heads quickly. These ramifications can be costly.

Investing apps are easy to download and easy to use. The game-like nature of the apps is appealing to young investors. Some investing apps use text messaging and flashy notifications of “hot stocks” that entice inexperienced investors to buy and sell on emotion and not on objective information.  Instead of building a portfolio that is aligned with specific investment objectives, time frame and risk tolerance, some newer investors buy on impulse where investors end up with a portfolio that does not match their needs.

Because of the game-like nature of the apps, unsophisticated investors are encouraged to invest in risky investments by trading more frequently and faster than is prudent. Sometimes, holding on to investments for a long time can earn more money than quickly buying and selling. Some apps are structured in a way that make tracking a portfolio difficult, which sometimes leads an inexperienced investor to a very risky portfolio.

Young, unsophisticated investors may be at risk of taking on day trading or investing in meme stocks and cryptocurrencies to their detriment. Nothing is wrong with using these apps if done responsibly from the start. Understand that the apps are not games but a way to save for your financial future. Educate yourself on how the apps work and the trading that the investor is doing. Watch not only what you are earning but also what you are losing. Set limits on what you can afford to lose.

Although investing apps may try to determine an investors’ risk tolerance with a questionnaire and an algorithm, a major concern is that some investing smartphone applications are not providing sufficient information to allow investors to make knowledgeable choices.

Before using an investing app, the Corporation Commission’s Securities Division recommends reflecting on these questions:  

  • Does the investing app encourage the investor to build a portfolio based on financial goals while considering a certain level of risk tolerance? Risk only the money you can afford to lose. When you invest, you should always keep track of your investments and ensure your portfolio meets your long- and short-term needs. Invest prudently.

  • Are you comfortable with the level of cyber and data security? Read the terms of service and understand how the company will protect your financial data. With any online application, there’s a risk of being hacked. The investing app should never ask an investor to disclose personal information or credentials in an email. Check consumer reviews and internet searches for information about protection of data.

 

  • What is the app’s customer service policy? If you have an issue with your account or the app, you’ll want to be sure that you have access to the company, particularly during busy times. Often it takes access to a person who can help you fix the problem. Some investing apps only offer automated responses that may not be useful in resolving an issue. Be sure you are comfortable with the level of service the app provides and read customer reviews. 
  • Does the investing app provide information on the risks of margin trading before granting access to borrowed funds to invest? Margin loans increase an investor’s level of market risk since the amount of financial loss is not limited to the amount of an investment  portfolio when the price of investment declines and payment on the loan is required.  

  • Does the app use hype and animation to push a certain investment? Resist the pressure created by social media, chat platforms, and buy/sell indicators influenced by online chatter and anonymous sources who insist they know best. Research and understand the investment products you are considering before you invest. Do a search about the company and management and check with regulators for any potential disciplinary history. 

    To ask and check before you invest, contact the Investigator on Duty at 602-542-0662 or by email at SecuritiesDiv@azcc.gov. To learn more about online investing platforms and the risks of various investment products, visit the Investor Resource section of www.azcc.gov/azinvestor.

August 7, 2019
Idaho Man and his Company Sold Unregistered Promissory Notes

The Corporation Commission ordered Roland B. Woolsey of Idaho and his affiliated company, Skytrace, Inc., to pay $142,500 in restitution and $10,000 in administrative penalties for offering and selling unregistered promissory notes. Woolsey and Skytrace, Inc. were seeking to raise $10 million in order to market a web-based inventory application but are not registered to offer or sell securities in Arizona.

In settling this matter, the respondents neither admit nor deny the Commission’s findings, but agree to the entry of the consent order. All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21055A-18-0309.

July 11, 2019
Commission Finds Phoenix Man Defrauded Hispanic Christians with Promissory Notes

The Corporation Commission ordered Jaime A. Verdugo of Phoenix to pay $381,954 in restitution and a $20,000 administrative penalty for committing securities fraud. The Commission found Mr. Verdugo was not registered to offer or sell securities in Arizona when he solicited multiple promissory note investors, most of whom were from Hispanic Christian communities. The Commission found Jaime A. Verdugo told investors, on behalf of Verdugo Enterprises, LLC, that their money was going to purchase home decor products to fulfill online orders.However, the Commission found Mr. Verdugo mislead investors by stating their money was safe while knowing at least eight prior investors did not receive any investment returns. Also, the Commission found Jaime A. Verdugo failed to inform investors about the company’s unwritten policy to limit payouts to $6,000 every two weeks, which is contrary to the explicit terms of the promissory notes.

All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21064A-18-0402.

June 11, 2019
Commissioners sanction Laveen man for unlawful sale of securities

The Corporation Commission ordered Carlton Lamont Fox of Laveen, Arizona, and his affiliated company to pay $15,200 in restitution and a $5,000 administrative penalty for participating in the unlawful offer and sale of unregistered securities while not being registered as an Arizona securities salesman or dealer. The Commission found at least 17 investors were promised a return on their initial investment within 3-6 months, funding either the purchase of leads for prospective businesses that were interested in credit card reader terminals or for the purchase of the terminals that would be subsequently sold to interested businesses. The Commission found that Fox and his affiliated company, Fox First Services, LLC, participated in the unlawful sale of securities as an unregistered salesperson or dealer. Further, the Commission found that none of the investors received a full return of their original investment, and that Fox used some of the money to pay telemarketers for their work in soliciting investor funds. In settling this matter, respondents neither admitted nor denied the Commission findings, but agreed to the entry of the Commission's consent order.

All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21059A-18-0345.

June 11, 2019
Commissioners order more than $2 million in restitution to restore investors

Arizona resident Adam W. Child agreed to pay $2,014,592 in restitution and a $25,000 administrative penalty for selling promissory notes and LLC membership interests to investors. The Corporation Commission found that Child offered and sold notes and membership interests to at least 17 investors of Titan Funding Group I, LLC and Titan Capital Real Estate Fund I, LLC. The Commission found the investor funds were pooled to lend money to real estate developers who were to purchase and "flip" residential properties. However, the Commission found that Mr. Child violated the Securities Act's antifraud provisions when he failed to disclose to investors a previous judgment against him, that he had declared bankruptcy and that his prior mortgage-lending business had its license revoked.

In settling this matter, the respondent agreed to the entry of the consent order and admitted to the Commission's findings only for purposes of the administrative proceeding. All documents relating to this agenda item can be found in the Corporation Commission's online docket at https://edocket.azcc.gov and entering docket number S-21054A-18-0301.

May 15, 2019 
Densco Investment Corporation Investors to Receive Additional Restitution 

Last week, investors of DenSco Investment Corporation were awarded a second monetary distribution for losses incurred as a result of their investment in a fraudulent company. On May 10, 2018, Maricopa County Superior Court approved the receiver’s motion to provide a second distribution in the amount of $2.5 million to DenSco Investment Corporation investors. This comes on the heels of a decision by the court in December 2017 where the receiver’s first motion was approved and $4.5 million was distributed to investors.

DenSco Investment Corporation was a real estate investment firm based in Chandler, Arizona that ceased doing business in 2016. The company was obtaining loans against hundreds of properties that were never actually purchased. As a result of this fraud, action was brought against the company by the Arizona Corporation Commission for violations of the Arizona Securities Act. Due to the death of the sole owner of the corporation, a receiver was appointed by the court in 2016. A receiver is a person appointed by the court to take possession and charge of designated assets or property and to administer them in accordance with court directives.

To date, DenSco Investment Corporation investors have been awarded roughly $7 million in distributions approved by the court. The receiver continues to recover assets and claims on behalf of the receivership and believes that more funds will be available for distribution at a later date.

                                                                     

 

Arizona Corporation Commission

1200 W. Washington Street

Phoenix, AZ 85007

 

Corporations Division

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Phoenix, AZ 85007

 

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Tucson, AZ 85701