Securities and Commodities Fraud

The continuing integration of global capital markets has created unprecedented opportunities for U.S. businesses to access capital and investors to diversify their portfolios. Whether through individual brokerage accounts, college savings plans, or retirement accounts, more and more Americans are choosing to invest in the U.S. securities and commodities markets. This growth has led to a corresponding rise in the amount of fraud and misconduct seen in these markets. The creation of complex investment vehicles and the tremendous increase in the amount of money being invested have created greater opportunities for individuals and businesses to perpetrate fraudulent investment schemes.

The following are the most prevalent types of securities and commodities fraud schemes:

Investment fraud: These schemes—sometimes referred to as “high-yield investment fraud”—involve the illegal sale or purported sale of financial instruments. The typical investment fraud schemes are characterized by offers of low- or no-risk investments, guaranteed returns, overly-consistent returns, complex strategies, or unregistered securities. These schemes often seek to victimize affinity groups—such as groups with a common religion or ethnicity—to utilize the common interests to build trust to effectively operate the investment fraud against them. The perpetrators range from professional investment advisers to persons trusted and interacted with daily, such as a neighbor or sports coach. The fraudster’s ability to foster trust makes these schemes so successful. Investors should use scrutiny and gather as much information as possible before entering into any new investment opportunities. Here are some examples of the most common types of investment fraud schemes:

• Ponzi schemes: These schemes involve the payment of purported returns to existing investors from funds contributed by new investors. Ponzi schemes often share common characteristics, such as offering overly consistent returns, unregistered investments, high returns with little or no risk, or secretive or complex strategies.

• Pyramid schemes: In these schemes, as in Ponzi schemes, money collected from new participants is paid to earlier participants. In pyramid schemes, however, participants receive commissions for recruiting new participants into the scheme. Pyramid schemes are frequently disguised as multi-level marketing programs.

• Prime bank investment fraud/trading program fraud: In these schemes, perpetrators claim to have access to a secret trading program endorsed by large financial institutions such as the Federal Reserve Bank, Treasury Department, World Bank, International Monetary Fund, etc. Victims are often drawn into prime bank investment frauds because the criminals use sophisticated terms and legal-looking documents, and also claim that the investments are insured against loss.

• Advance fee fraud: Advance fee schemes require victims to pay upfront fees in the hope of realizing much larger gains. Typically, victims are told that in order to participate in a lucrative investment program or receive the prize from a lottery/sweepstakes, they must first send funds to cover a cost, often disguised as a tax or participation fee. After the first payment, the perpetrator will request additional funds for other “unanticipated” costs.

• Promissory note fraud: These are generally short-term debt instruments issued by little-known or nonexistent companies. The notes typically promise a high rate of return with little or no risk. Fraudsters may use promissory notes in an effort to avoid regulatory scrutiny as they are not a security.
• Commodities fraud: Commodities fraud is the illegal sale or purported sale of raw materials or semi-finished goods that are relatively uniform in nature and are sold on an exchange (e.g., gold, pork bellies, orange juice, and coffee). The perpetrators of commodities fraud entice investors through false claims and high-pressure sales tactics. Often in these frauds, the perpetrators create artificial account statements that reflect purported investments when, in reality, no such investments have been made. Instead, the money has been diverted for the perpetrators’ use. Additionally, they may trade excessively merely to generate commissions for themselves (known as “churning”). Two common types of commodities fraud include investments in the foreign currency exchange (Forex) and into precious metals (e.g., gold and silver).

• Broker embezzlement: These schemes involve illicit and unauthorized actions by brokers to steal directly from their clients. Such schemes may be facilitated by the forging of client documents, doctoring of account statements, unauthorized trading/funds transfer activities, or other conduct in breach of the broker’s fiduciary responsibilities to the victim client.
• Market manipulation: These “pump and dump” schemes are based on the manipulation of lower-volume stocks on small over-the-counter markets. The basic goal of market manipulation frauds is to artificially inflate the price of the penny stocks so that the conspirators can sell their shares at a large profit. The “pump” involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings. Many of these schemes use boiler room methods where brokers—who are bribed by the conspirators—use high pressure sale tactics to increase the number of investors and, as a result, raise the price of the stock. Once the target price is achieved, the perpetrators “dump” their shares at a huge profit and leave innocent investors to foot the bill.

The FBI anticipates that the variety of securities and commodities fraud schemes will continue to grow as investors remain susceptible to the uncertainty of the global economy. To investigate and help prevent fraudulent activity in the financial markets, the Bureau continues to work closely with various governmental and private entities. For example:

• FBI field offices operate task forces and working groups with other law enforcement and regulatory agencies, including, the Securities and Exchange Commission, U.S. Attorney’s Offices, Commodity Futures Trading Commission, Financial Industry Regulatory Authority, U.S. Postal Inspection Service, and the Internal Revenue Service;
• And nationally, the FBI participates in several working groups and task forces such as the Financial Fraud Enforcement Task Force, which coordinates the efforts of the Department of Justice at all levels of government to disrupt and dismantle significant large-scale criminal enterprises.