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SECURITIES / COMMODITIES FRAUD

OBJECTIVE
To reduce the amount of economic loss to investors due to fraud in the investment marketplace, bogus securities, and Internet fraud.

The economic stability of the United States and the soundness of the nation's financial markets are directly related to the integrity of the securities and commodities markets. The trading volume in the United States' securities and commodities markets has grown dramatically over the last decade. This growth has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants. Securities regulators and other prominent groups have estimated that securities and commodities fraud totals approximately $40 billion per year. The fraudulent schemes perpetrated in the securities and commodities markets can ultimately have a devastating impact on the viability and operation of those very markets. 

Securities fraud matters are becoming more complex as the industry develops more complicated investment vehicles in an effort to obtain higher rates of return. In addition, fraudulent securities operators are expanding the scope of their fraud and are looking outside of the United States for new markets and investors to defraud. The securities industry is one of the most critical and influential industries in the country and is highly regulated by the federal government. 

The securities market in the United States is responsible for amassing the nation's wealth and putting it to work in industry, commerce, and business. A study conducted by the New York Stock Exchange (NYSE) in the mid-1990's revealed that approximately 51.4 million individuals owned some type of traded stock, and an additional 200 million individuals owned securities indirectly. In those same financial markets that afford the opportunity for wealth to be obtained, also exists the opportunity for criminal activity. 

Micro-Cap or "Chop stocks" constitute a vast underworld of the securities markets that accounts for a $10 billion a year business. These stocks are increasingly exploited by perpetrators of fraud, including organized crime, as the potential profits are considerable. Micro-Cap fraud typically involves high pressure telephone sales of risky and low-priced stock, generally in start-up companies with little or no track record. Often, their stocks are sold by unregistered brokers who call investors from boiler rooms, using elaborate scripts. Micro-Cap schemes involve violation of the SEC Rule 144 reporting requirements and market manipulation of the stock price, often concealing the fraudulent activities through the use of foreign bank and brokerage accounts. Micro-Cap fraud, though only one segment of the market, can and does cause catastrophic harm to individual investors, and if unchecked, could erode the confidence and overall operation of the securities market. 

Securities offered over the Internet have added an entirely new dimension to securities fraud investigations. Investors are able to research potential investments and invest over the Internet with ease. Investors are electronically linked to a number of services that provide stock and commodity quotations, and critical financial information. Both the low cost of setting up a web page and the anonymity available, have made the Internet especially vulnerable to crime. The Internet has helped democratize the investment process by providing widespread access to the most specialized information, giving the appearance to thousands of investors of having equal access to what was otherwise difficult to obtain data. There is a growing problem with chat rooms and newsletters that provide fraudulent information related to publicly traded stocks. 

The North American Securities Administrators Association (NASAA) has estimated that Internet-related stock fraud is currently the second most common form of investment fraud. That same source estimated that investors lose $10 billion per year (or $1 million per hour) to this type of fraud. The arrival of the Internet as a trading vehicle also may cause tragic harm to individual investors, and if unchecked, could erode the confidence and overall control and operation of the securities market. 

With the globalization of the securities and commodities marketplace, other investment schemes will continue to rise. Those schemes include "Prime Bank" investments, which are fraudulently sold as if from financial instruments of well-known domestic or foreign financial institutions, the World Bank, or a country's central bank. The financial instruments may be sold as notes, letters of credit, debentures, or guarantees. The schemes include false claims of high rates of return, of being "risk free," of the financial instrument being traded on a worldwide secret exchange, and of being issued in formats approved and/or sanctioned by the Federal Reserve, the International Chamber of Commerce (ICC) or other well-known international organizations. 

Other investment schemes involving international entities are related to trading of foreign currency options in the unregulated interbank market. The schemes include claims of high rates of return, of relative safety of principal, and of having worldwide currency exchange opportunities. Solicitations to these investors are often done utilizing boiler room sales tactics, with the scheme often a variation of the Ponzi or pyramid scheme. Little or no currency exchange actually takes place in such schemes. 

With the tremendous increase in trading volume in both securities and commodities, fraud among the licensed brokerage community itself will continue to be a crime problem. The schemes include broker embezzlement of clients' and firms' funds by means of forgery of investor checks, unauthorized transfer of funds or securities, sale of nonexistent securities, acceptance of non-disclosed kickbacks in the sale of investments, along with false and misleading statements in the sale of the investments. Other schemes involve insider trading, defined as trading by persons who possess material nonpublic information about a company whose stock is publicly traded, and manipulation of market prices of stock within the regulated exchanges. Often, foreign banks and brokers are used to execute the insider trades, with kickbacks being paid to individuals who are willing to provide the nonpublic information. The fraudulent schemes perpetrated in the regulated brokerage community directly impacts the faith in and trust of the investing public in the national trading marketplace, which trading marketplace is essential in the securing and transferring of capital for the benefit of the national economy.

The criminal elements in the United States that perpetrate fraudulent schemes involving the investment industry may ultimately disrupt the ability of the current trading institutions, which include both securities and commodities trading, to continue to be successful in maintaining their order and integrity by seriously damaging the confidence and trust of the investing public who rely upon such institutions.

CAPABILITIES
The FBI is recognized as having sole criminal investigative authority in all securities and commodities fraud matters. Critical to the FBI's successful investigation of securities and commodities fraud matters is the continued cooperation with the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), the Commodities and Futures Trading Commission (CFTC), NASAA, and state investigative agencies. The relationship between the FBI and these agencies differ from state to state. 

The FBI continues to investigate securities and commodities fraud utilizing both covert and overt investigative techniques. Changes in the investing marketplace, including the arrival of the Internet as a trading source and globalization of  trading, have made the rise to new investment schemes often much more complex in nature. Such schemes as stock manipulation, kickbacks, false statements, insider trading, and misapplication of funds continue to be addressed by the FBI. At the end of fiscal year 1998, there were 865 open securities fraud cases.

STRATEGY
The FBI will continue to identify and prosecute criminal entities, in particular those subjects in positions of trust, as related to fraud in the securities and commodities industry. 

In identifying such criminal elements, the FBI will focus on the expanded development of cooperating witnesses and liaison contacts, including such intelligence to properly address all securities/commodities concerns, as well as international and Internet securities and commodities fraud matters. In expanding the liaison contacts, the FBI will progress towards intensified development of directed working groups. Such working groups, properly utilizing the expertise of both the private and the public sector, will enhance the knowledge base needed to investigate the frauds and will productively employ shared resources within the working groups (including collection and examination of financial data and records). Most of the existing caseload involving securities/commodities matters has originated from liaison contacts with SEC, NASD, and state agencies. The ability to gather critical information in a more timely manner would be effectively accomplished through the working group forum. Such working groups are critical in the success of market manipulation cases, Micro-Cap stock frauds, Prime Bank instruments, commodities frauds, and investment fraud over the Internet. 

In investigating and prosecuting criminal activities, the FBI will concentrate on proactive undercover investigative techniques to develop solid cases in the identified investment crime areas. Such covert investigations are critical in the prosecutive success of manipulation, insider trading, and foreign currency exchange frauds. 

The more profuse frauds, those involving registered persons and companies in positions of trust, will continue to be investigated most generally on an overt, historic basis. Those investigations are usually less complex and manpower intensive, yet the deterring influence of notable prosecutions can be considerable. Those investment fraud investigations include forgery of client's checks, unauthorized transfer of securities and funds, sale of nonexistent securities as well as false and misleading statements in the sale of securities.

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