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WASHINGTON – Three federal financial regulators – the Securities and Exchange Commission, Office of Thrift Supervision and Federal Deposit Insurance Corporation – have jointly issued a warning to investors in mutual banks which are either demutualizing entirely or otherwise making a stock offering. The joint document warns depositors in mutual banks, who are usually given a preferential chance to participate in the institution’s stock offerings, from allowing non-depositors to participate in the offering through their being depositors. “Eligible depositors who enter into agreements that allow ineligible investors to participate in the initial public offering of a converting mutual bank or savings association may be violating state and federal banking laws,” the agencies said. “Moreover, eligible depositors should be aware that, by entering into such agreements, they may be violating these laws themselves and may be subject to civil enforcement actions or criminal prosecution.” The agencies said that while there are many variations on the scheme, in the typical case, the fraudster will identify and approach a depositor who has non-transferable subscription rights, offering to “loan” the depositor the money required to purchase the maximum number of shares. The regulators noted that converting financial institutions typically require depositors to pay up front and in full for the shares they request at the time they submit their subscription agreements or stock order forms. These amounts can easily be tens or hundreds of thousands of dollars, they said, and many, if not most, cannot afford those amounts on their own. In exchange for funding the purchase, the fraudster typically will require the depositor to either transfer the conversion stock to an account that the perpetrator controls or sell the stock and give the fraudster a majority of the profits. The fraudster will further persuade the depositor to keep secret their arrangement and to submit subscription documents or stock order forms that falsely (or misleadingly) represent to the bank or savings association that the depositor is the true purchaser of the stock, has not transferred his or her subscription rights to any person or entity, and has entered into no agreement regarding the sale or transfer of the stock. But after the conversion occurs, the fraudster typically will determine when to sell the stock and will split any profits with the depositor. In most cases, the perpetrator of the fraud gets well over half the profits, and frequently over 75% of the profits. Mutual depositors who enter into such schemes should be aware that these fraudsters may be violating not only state and federal banking laws, but also the antifraud provisions of the federal securities laws and various federal criminal laws. [email protected]

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