Operation Broken Trust Missed “The Big One”

$8 billion is a lot of money, right? Right.

But when is $8 billion NOT a lot of money?

$8 billion is NOT a lot of money when it is compared to $35 billion, $135 billion, or $335 billion. Agreed?

Agreed. Thank you. Let's continue.

Sense on Cents is a huge proponent of exposing and prosecuting financial fraud wherever it occurs. To this end, I was happy to see that the Feds have had their ‘street cleaners' operating overtime the last few months. The results of the Fed's ‘street cleaning', also known as Operation Broken Trust, is a not insignificant collection of 231 cases totaling $8 billion in losses. Well done. In all sincerity, I commend each and every individual involved in this effort. While those arrested deserve due process, they also deserve to be prosecuted to the fullest extent of the law. If guilty, I hope they receive maximum sentences.

Regrettably, though, the street cleaners missed “The Big One.” Which scam is that? A scam which by any measure could reasonably be described by any of those much larger figures referenced above.   

The greatest scam ever perpetrated on Wall Street encompasses the world of auction-rate securities.

Were they dissuaded from even investigating “The Big One”. Really? How so? Let's navigate the FBI's release and see how “The Big One” compares to the frauds exposed via this operation.

Today, the Financial Fraud Enforcement Task Force announced the conclusion of Operation Broken Trust, the largest investment fraud sweep ever conducted in the U.S.

The 231 cases in the operation involved more than 120,000 victims who lost more than $8 billion.

Operation Broken Trust—which included both criminal and civil enforcement actions that occurred from August 16 through December 1, 2010—was unveiled during a Washington, D.C. press conference attended by representatives of the agencies that make up the task force, including U.S. Attorney General Eric Holder and FBI Executive Assistant Director Shawn Henry.

The goal of the operation was two-fold:

1. To root out and expose massive investment fraud scams across the nation;
2. To alert the public about many phony investment scams.

Avoiding Investment Fraud

- Be careful of any investment opportunity that makes exaggerated earnings claims, especially during a short period of time.

- Ask for written information about the investment, such as a prospectus, recent quarterly or annual reports, or an offering memorandum.

- Consult an unbiased third party, like an unconnected broker or licensed financial advisor, before investing.

- Don't be fooled into believing an investment is safe just because someone you know is recommending it. So-called “affinity scams” are one of the favorite methods used to lure people in.

- If you feel you are being pressured into investing, don't do it.

- Be wary of people you meet on social networking sites and in chat rooms, where investment fraud criminals have been known to troll for victims.

All good points for any investor assessing any financial product. In regard to ‘The Big One', the ARS scam touches most if not all these bases. Let's continue.

Operation Broken Trust focused on scams directly targeting individual investors, rather than long-term complex corporate fraud matters. In many instances, these criminals were trusted people within their communities—sometimes neighbors, co-workers, fellow church-goers—who betrayed that trust in order to line their own pockets. And the results were often devastating, with some victims losing their life savings, their homes, their livelihoods.

Oh yeah!! Most definitely, the ARS victims–often senior citizens living on fixed incomes– have suffered these same consequences.

Each of the cases included in the sweep involved individual investors being deceived by individuals presenting “investment opportunities” that were either completely fictitious or not structured as advertised.

BINGO!! ARS could not be more aptly described. Assorted securities regulators and attorneys general have stated as much.

An overwhelming number of the cases were high-yield investment frauds and Ponzi schemes. Others involved commodities fraud, foreign exchange fraud, market manipulation (i.e., “pump-and-dump” schemes”), real estate investment fraud, business opportunity fraud, affinity fraud, and the like.

Yes. ARS were very much akin to a glorified Wall Street engineered Ponzi scheme. Market manipulation? Oh yes, that too. Rampant evidence has shown that the auctions were very much manipulated by the Wall Street dealers.

The FBI has observed a steady increase in investment frauds, in particular Ponzi and market manipulation schemes. Since January 2009, we've opened more than 200 Ponzi cases,  many with $20 million-plus losses. Based on our current caseload, the top five Ponzi scheme hot spots in the country are Los Angeles, New York, Dallas, Salt Lake City, and San Francisco, but keep in mind that these scams can and do happen anywhere.

We've had success in shutting down many and arresting those responsible, due in large part to our focus on partnerships—like our involvement in the Financial Fraud Enforcement Task Force—as well as intelligence-gathering and information-sharing efforts. And we continue to use sophisticated investigative techniques—like undercover operations to court-authorized electronic surveillance—to collect evidence in ongoing cases and to identify and stop criminals before they prey on others.

Congratulations!! If the Feds would like to learn more about this ARS scam, and in the spirit of partnership, perhaps they may care to review Sense on Cents/Auction-Rate Securities. Additionally, the Feds may care to call on SEC chair Mary Schapiro.

The Feds may like to know that during Mary's watch at the Financial Industry Regulatory Authority, the internal FINRA investment portfolio actually liquidated $647 million ARS mere months before the ARS market totally froze. Those details–and many more–are included in the above referenced link or also right here, Sense on Cents/FINRA Sold ARS.

“What's that you say, Mr. Fed? That's a little too close for comfort?” “But what about the ARS victims?”

What about the victims? The FBI generally offers assistance to victims in fraud cases that fall under our jurisdiction (our partner agencies offer similar services). Our field office victim specialists can provide case status information, direct victims to organizations that can help with protecting or rebuilding credit, assist in documenting victims' losses, help cope with stress, and even find government or community-based services for victims—especially the elderly and disabled—if their financial losses are severe.

Who is doing the same for the ARS victims who continue to hold out hope that their remaining ~$135 Billion (that's BILLION with a B) will be recovered and repaid?

In cases with hundreds or even thousands of victims, we can provide information using websites and toll-free phone lines.

ARS victims remain in the tens of thousands. Who do they call?

Reflecting on the importance of collaboration with our law enforcement and private sector partners in combating investment fraud, Executive Assistant Director Henry said, “Together, we are smarter. Together, we are stronger. Together, we will continue to seek out those who look to profit at the expense of the hard-working men and women of the United States of America.”

Great. Clean up all the garbage. Just don't forget “The Big One.”

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.