Market Overview

Fraud Epidemic a Battle for Regulators


By Neil Behrmann

Global regulators are uncovering an epidemic of financial frauds in the US, Europe and Asia.

So much so, that investors need to be on high alert to protect their savings from scams. It may sound alarmist, but independent auditors or lawyers should carry out spot checks on their clients' financial advisors, accountants and bankers.

The wrong-doing and corruption is widespread. They range from hedge fund, broker and banker market manipulation and fraud to Ponzi schemes, insider trading, money laundering, boiler room scams and bribery.

Frauds tend to remain hidden during market booms, but when losses mount investors begin to ask questions. It is thus hardly surprising that a growing number of frauds worth multi-billions, have surfaced since the 2008 market crash. Warren Buffett's aphorism, “It's only when the tide goes out that you learn who's been swimming naked,” has become a market cliché for good reason.

The Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and other regulators have radically improved investigations, boosting the number of fines and prosecutions. The good news is that tighter official surveillance acts as a deterrent against scam artists. Despite that, fraudsters continue to find inventive ways to fleece the unwary.

The media and strategists concentrate on the economy and the markets. But Fraud is also a major risk, not only for the unfortunate sucker, but for the whole financial system.

In 1991, I wrote a report in the Wall Street Journal about the copper trading antics of Yasuo Hamanaka of Sumitomo Corporation. Five years later his $2.6 billion fraud caused a copper market crash and the collapse of metals firms. A whistleblower warned the SEC about Madoff years before his Ponzi scheme was discovered. Once again metals dealers fear that the commodity market is in danger following investment and speculation estimated at more than $500 billion. Such is the problem that President Obama has alleged that the oil market is manipulated.

High Frequency Trading ("HFT") is also dominating markets. Joe Saluzzi of Themis Trading, an institutional broker, maintains that these hedge funds are at an unfair advantage. Using computerised algorithms, they trade in nanoseconds ahead of pension funds, other institutions and individuals.

Their trading caused the infamous flash crash in 2010 and they are still blamed for sharp and unexpected stock price gyrations. Markets are becoming so sophisticated that the SEC is under considerable pressure. SEC Chairman Mary L. Schapiro has pleaded for an increase of $1.5 billion in the regulator's budget to cope with “potentially inappropriate or risky industry practices.” In April alone, the SEC:

  • Charged former CalPERS CEO Federico R. Buenrostro and his friend Alfred J.R. Villalobos for an alleged scheme to defraud an investment firm into paying $20 million in fees to Villalobos' firms.
  • Charged and fined Goldman, Sachs & Co.for inadequate policies and procedures relating to research meetings.
  • Charged twin brothers John Hunter and Thomas Edward Hunter, who allegedly defrauded some 75,000 investors via an Internet-based “stock picking robot”. (They were only sixteen when they began touting penny stocks).
  • Charged Professor Gabriel Bitran of MIT's Sloan School of Management, and his son Marco Bitran for hedge fund fraud and fined them $4.8 million.
  • Halted an ongoing Ponzi scheme that targeted members of the Persian-Jewish community in Los Angeles.
  • Charged a former executive at Morgan Stanley with violating the Foreign Corrupt Practices Act (FCPA) and investment advisor securities laws after he allegedly acquired real estate for himself and an influential Chinese official.

The Commodity Futures Trading Commission also carried out 260 fines and other enforcement actions involving fraud, Ponzi schemes, false accounting and market manipulation between 2010 and the end of April this year. James Giddens, the trustee liquidating MF Global, the collapsed futures and securities broker dealer, is considering filing civil suits against directors and other former officers.

They allegedly breached their fiduciary duties as some $1.6 billion of client money that wasn't segregated, has still not been recovered. Illustrating that investors should thoroughly investigate brokers and banks, MF Global, then called Man Financial, was the broker involved in the well publicized Philadelphia Alternative Asset Management (PAAM) hedge fund fraud, seven years ago.

Vigilance has increased on a global scale and British, Swiss, German, French, Italian, Singapore, Hong Kong and other regulators swap vital information with the SEC and CFTC .

Editor's Note: Journalist Neil Behrmann is author of Trader Jack: The Story of Jack Miner, about a teenager caught up in a Russian Mafia and hedge fund fraud (

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Commodities Futures Trading Commission fraud regulatorsPsychology Topics Economics Markets General


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