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White-collar crime has a new watchdog: Indiana securities commissioner aims to educate investors, enforce law

October 22, 2007

Madison native Chris Naylor on Oct. 5 became Indiana's securities commissioner. He was appointed by Indiana Secretary of State Todd Rokita to succeed O. Wayne Davis, who now is a semi-retired legal consultant. Naylor, former county prosecutor in two southern Indiana counties, sat down with IBJ to talk about his goals as the state's top securities cop. The following is an edited version of that interview.

IBJ: What's your office's focus?

NAYLOR: There are two large areas: investor protection and investor education. Investor protection revolves around our enforcement of the Indiana Securities Act and the Indiana Loan Brokers Act. It is from those two acts that the Securities Division draws its legislative powers.

Investor education is such a strong component of [all] the work that we do, and we promote that through indianainvestmentwatch.com.

We really have two tracks. We have an administrative track of enforcement, which is handled within the securities division, actionable by the revocation or suspension of licenses, as well as civil penalties.

The second track is the criminal track. That is where [our] prosecution assistance unit develops cases that are initiated either by direct complaints filed with our office, through our Web site, or by referrals from other state agencies, the state police or other law enforcement agencies. At that point, we work the cases up and then we work with the local prosecutors in the counties where the offense occurred.

IBJ: Is it tricky to work with local prosecutors? You don't want to overstep your bounds into their investigations.

NAYLOR: I think that's where my experience is extremely helpful. Having been in the shoes of local prosecutors, we have complete respect that, for each individual investigation, the local prosecutor ultimately has the final call.

We really want to work to be the best resource we can possibly be in order to get that case prosecuted. There really is very little concern in the way of territorial overstepping, simply because we're on the same team to get a case prosecuted and help victims.

IBJ: Where do your leads-the idea something is worthy of investigation-originate most of the time?

NAYLOR: There are a variety of sources. Many come from our Web site. We have an online process of filing complaints. If people aren't comfortable with that, we also have complaint forms. A lot of calls come directly to our office. We also get referrals from other state agencies and referrals from the state police on a regular basis.

IBJ: When should investors suspect they're victims of fraud? It might not be immediately clear. When deals go sour, they might think, "I just lost money in the market."

NAYLOR: With respect to security offenses, signs that there may be fraud involved would be guaranteed promises of returns. Another factor would be the promise of little or no risk involved, [or] unrealistic returns, say 50 percent return on your money within 90 days or a short period of time.

The use of high-pressure sales tactics would be another factor, [or] products that are pushed that are inordinately complicated, where it's so complicated that the investor is really taking a leap of faith by pursuing that investment.

With respect to mortgage offenses, one sign would be the request by a broker to falsify income. That is a clear sign that there may be fraud involved. Or even to leave the income blank and, "I'll take care of that, don't worry about that right now." Over-inflated appraisals on residential real estate are another sign that there might be fraud involved. Another thing to look at would be the particular property and to find out if that property has changed hands multiple times over a short period of time.

Again, this is why we think here at the Securities Division of the Secretary of State's Office that investor education is so important. No investment, whether it be residential property or stocks, is completely safe.

Just as you want to diversify your assets or your investments, you also want to diversify your sources of information about investment products. We really encourage investors to do their homework.

IBJ: Why is your office, as an independent entity, necessary when we have a Securities and Exchange Commission? What do you do that it can't, or maybe just doesn't?

NAYLOR: Well, we have concurrent jurisdiction on most occasions. I don't view it as duplicative because it's part of a strong regulatory system. There are certain investigations and cases that for whatever reason the SEC would not handle or that the FBI would not be involved in where we would want to take it up, and probably vice versa as well. We're partners in establishing a strong regulatory system.

IBJ: What areas would you like to move into that are new for the Securities Division?

NAYLOR: A couple of areas. First, with respect to mortgage brokers, we will be creating new loan broker field examiners, which will enable us to take a more proactive approach to our loan broker investigations. The loan broker field examiners will allow us to conduct more random audits, rather than just be a complaint-based regulatory scheme.

The other area deals with investor education. We really can't stress that enough. One component that Secretary Rokita is excited about and we'd be excited to support would be to establish investor education within a school curriculum, within the K-12 setting. It really is never too early for kids to learn about the value of personal savings and the importance of investing wisely.

IBJ: What general advice would you give so folks can avoid investment fraud and the need to interact with your office?

NAYLOR: We are talking about very important life decisions. Oftentimes, in people's busy lives, they simply don't take the time to thoroughly investigate these decisions. There are many resources out there people can [use to] educate themselves.

I wouldn't hesitate to hire an investment adviser or consult with an accountant to get a diversity of sources. These matters are just too important to leave to chance.
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