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.