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Bank Demutualization - Frauds to Watch Out For

The unique ability for ordinary individuals to participate in a mutual-to-stock conversion (also known as demutualization) of a bank or savings association creates opportunities for abuse and attracts many fraudsters. The following article will introduce you to the most common schemes depositors will encounter and will give you some tips and advices on how to avoid them.

Offering a Loan to Purchase Shares

Many fraudsters contact depositors with non-transferable subscription rights and offer to lend them the money needed to buy the maximum number of shares. Many depositors cannot afford on their own the large sums that are required up front and view this offer as a good deal.

In exchange for the funding, fraudsters would typically want you to:

  1. sell the conversion stock and transfer them the majority of the profits, or
  2. transfer the stock to an account that is under the fraudster's control.

The depositor will be also required to submit subscription documents or stock order forms that will state falsely or misleadingly that the depositor is the true buyer of the conversion stock, has not entered into an agreement regarding the sale or transfer of the stock, and has not transferred the subscription rights to anyone else.

After the conversion takes place, fraudsters usually decide when to sell the stock and often get well over half the profits.

Bank Demutualization: Tips for Investors

If you consider participating in a bank demutualization you should bear in mind the following advices:

  • Know and follow the rules.

    Depositors should wait for the completion of the financial institution's conversion before they can sell or transfer, or enter into agreements to sell or transfer, their priority subscription rights, or the conversion stock itself. This is required by law.

    Additionally, the prospectus and stock order forms may contain broader restrictions so read these documents carefully. In case the stock order forms do not comply with the law or the wording of the prospectus, financial institutions have the right to reject them.

  • Avoid offers to take loans to participate in the conversion.

    If someone offers you money as a loan in order to participate in a mutual bank conversion, think carefully before you accept it. The loan agreement may leave you with the inability to prove that you have no agreements for the sale or transfer of the stock and that you are the actual purchaser of the stock and holder of the subscription rights.

  • Be very wary of opportunists and fraudsters.

    Opportunists may claim that they are lawyers, professional investors, or any other story that serves to impress you and convince you that they have experience with mutual company conversion transactions. Just don't take any promises in good faith when someone proposes you a deal and stands to profit from it.

    Also, be extremely wary when someone tries to belittle the warnings and restrictions in the prospectus or stock order form. Fraudsters may try to convince you that their offer is legitimate, there is no risk at all, or that everyone enters into such transactions, but the truth is that fraudsters lie. If you have any doubts about a proposed arrangement, always ask the bank or savings association whether it is legitimate.

  • Acquire the needed information from trusted sources.

    If you want to find out more about the mutual company conversion transaction, just ask the particular bank or savings association. The financial institution may also provide useful resources on their website so check it out.

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