Beware the scam artist – in a market near you

FRAUDSTERS seem to be finding new and inventive ways to fleece the unwary. So much so that regulators in the US, Europe and Asia are hard pressed in their efforts to cope with frauds that have grown in value from mere millions to many billions of dollars.

Banks and investors need to be on alert to protect themselves from scams that could damage their balance sheets, pensions and savings. Latest targets are the banks which US lawmakers say are not active enough in preventing money laundering. But money laundering running into billions, involving South and Central American drug barons, the Russian and Italian mafia, corrupt Libyan officials and crooked business people in China and elsewhere, is just one problem.

In the West, Ponzi schemes, hedge fund and investment bank market manipulation and fraud, insider trading, boiler room scams and bribery is widespread. Exposures involving hundreds of billions of dollars are the direct result of the 2008-09 market crash. Think of the Bernie Madoff mega fraud. Warren Buffett’s quote: “It’s only when the tide goes out that you learn who’s been swimming naked”, is now a cliché for good reason.

Madoff & Other Fraudsters

Estimates of Bernie Madoff’s takings from his Ponzi scheme range from US$15 billion to US$60 billion and only a small amount has so far been recovered. Amaranth, a US hedge fund lost US$6.5 billion in natural gas trading and the gallery of rogue traders include former Barings trader Nick Leeson who was jailed for losing US$1.4 billion in Singapore, Yasuo Hamanaka of Sumitomo Corp who caused a US$2.6 billion copper collapse and, more recently, Societe Generale trader Jerome Kerviel was jailed for a 4.9 billion euro (S$8 billion) fraud. Kweku Adoboli, a former UBS trader, accused of causing a record UK unauthorised trading loss of US$2.3 billion has pleaded not guilty to fraud and his case continues.

Tighter official surveillance does act as a deterrent. But there are fraudsters and rogue traders who are so smart that they manage to discover new loopholes as soon as old ones are plugged.

 Most of the time global media attention is concentrated on the economy, corporate earnings, the European crisis and US-led sanctions against Iran. Unless a major scandal surfaces, they ignore another serious systemic risk – notably large scale fraud. It doesn’t only hit individuals. It can seriously damage the financial system.

The global commodity market, for one, is in danger, following hyped up large scale sales to investors in the past few years. Several metals dealers and analysts contend that huge copper and other metal stockpiles have been built up in China. Claims of metals and energy shortfalls are myths, they say. A gentle commodity price decline would help the global economy, but a major bust and slump could damage banks and cause a mining and equity slump.

High Frequency Trading Dangers

Another potential problem relates to the Wild West antics of High Frequency Trading hedge funds that dominate equity market dealings. The funds trade in nanoseconds – causing sharp and unexpected gyrations. They buy and sell on the New York Stock Exchange, Nasdaq and other leading US and global exchanges and are also operating in so called “dark pool” unofficial exchanges. Joe Saluzzi of Themis Trading, a US institutional broker, warns that the so-called “flash crash” in 2010 when Wall Street suddenly collapsed, could be repeated if exchange computer systems cannot cope with the speed and volume of trading.

US Securities and Exchange Commission chair Mary L Schapiro has urgently requested an increase in the regulators already mega budget of US$1.5 billion a year. The SEC, which has 3,800 professionals, disclosed that 1,078 investigations, including 273 criminal, were referred to Federal, State and US and global authorities in 2010 and 2011.

The extent of unethical, selfish and unprincipled behaviour of once admired corporate leaders is seriously depressing. Last month, the SEC charged a former chief executive officer of CalPERS, a US$235 billion pension. The CEO Federico R Buenrostro and his friend Alfred J R Villalobos allegedly defrauded an investment firm into paying US$20 million in fees to Villalobos’ firms. Several firms from China listed in US exchanges have been charged with market manipulation and insider trading. Lawmakers await in interest while MF Global liquidators attempt to recover US$1.6 billion of client money that was supposed to be segregated. The former CEO ultimately responsible for the bankruptcy and lack of controls was Jon Corzine, previously New Jersey Governor and US Senator.

Be warned: the blacklists of the SEC, US Commodity Futures Trading Commission and UK Financial Services Authority are overflowing with scam artists – and you could be the next target.

 © Copyright Neil Behrmann see also

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