Investment issues: Funding illegal acts

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Investment issues: Funding illegal acts

When you make an investment, you need to understand the underlying philosophy of the business, and the underlying business model. When crime is central to the business model, your liability as an investor, under the legal concept of “aiding and abetting,” can vastly exceed your investment. A case in point: Bertelsmann is a large family-controlled German entertainment conglomerate that has vast and diverse holdings. Some years ago they made an investment in Napster, the infamous and now failed, enjoined, and shutdown, online music firm that allowed free transmission, use, and copying of music. Bertelsmann is being sued by a number of music industry giants for a total of 17 billion dollars.

The suit alleges that the Bertelsmann investment allowed Napster to last longer than it would have without the investment, and thus the music giants lost 17 billion dollars in extra revenue they believe they would have made had Napster died an earlier, un-funded, death. This despite the fact that at least 6 others sprung up to fill the void left by Napster when the courts shut them down.

The liability for this investment far exceeds the investment itself. The theory is that the investment allowed a company to continue to commit illegal acts, thus increasing the loss of the affected parties. A decision in favor of the music groups would set an interesting trend: that shareholders – investors of any sort – can be held liable for funding the mal-appropriate behavior of a corporation. Therefore, as an investor, you could eventually be found legally responsible for the consequences of your investment, if your investment prolongs the life of a company committing illegal acts, with or without your knowledge. Napster had a dubious business plan, with no safeguards against the violation of domestic and international intellectual property laws. It was a flawed business plan that should not have attracted investors. It was a question of philosophy, of piratical behavior, hoping for, repeat, hoping for an acceptable-use interpretation on the intellectual property issue called sampling. It didn’t work.

Stock Transfer Agent Fraud

Stock Transfer companies act as the agent of the Secretary of a company, usually a publicly traded company, for the issuance and registration of the company’s shares on the company’s register of shareholders. The Transfer Agent receives orders from the Secretary to issue new shares, and receives shares from current shareholders that have been sold or transferred, to be reregistered in the names(s) of the new shareholder(s).

The Transfer Agent has in its possession blank stock certificates of the client companies. Some few transfer agents have, in the past, taken the liberty to issue shares of their client companies (company’s they didn’t think would make it) in the names of friends, relatives, shell companies, et cetera, and then sell those shares in the market place and reap the reward of essentially printing corporate money.

The reason they chose companies that might not survive is that if the companies folded, no one would ever learn of their criminal acts. The companies are closed, the market no longer trades the shares, and the company, and the shares, all go into the dustbin of failed companies. One recent incident of this sort took place with a company that was growing quickly but was having some internal problems. The transfer agent, RTT Transfers, had issued a few shares not listed on the company’s books, and sold them. The scheme unraveled when the company decided to switch stock transfer agents, and move the account to U.S. Stock Transfer. It was during this transfer that the unauthorized issuance of the shares was discovered. It is estimated that the principals of the stock transfer company pocketed about 16 million dollars. At least that is what they pleaded guilty to doing!

How do you avoid this kind or theft? Take inventory! The corporate secretary should, on a periodic basis, compare the number of shares issued and outstanding with the inventory of pre-printed stock certificates. This will insure that all certificates are accounted for, and that there is no discrepancy between the shares issued and the pre-printed shares in the inventory of the transfer agent.

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