Quatloos! > Investment
Fraud > HYIP & Bank
Debentures > HYIP > Fictitious
Financial Instruments
I appreciate the opportunity to provide the Committee with the views of the
Securities and Exchange Commission ("SEC" or "the Commission")
concerning frauds involving fictitious financial instruments and to answer
any questions you may have on this subject.
I. "Prime Bank" Schemes
In recent years, investors throughout the world have been defrauded in a variety
of schemes involving fictitious financial instruments. Generally, the promoters
associated with these frauds tell investors that these financial instruments
are issued by a so-called "prime bank" or "top 100 world bank," which
they represent to be some well-known domestic or foreign financial institution,
the World Bank, or a country's central bank. The financial instruments are
variously described as notes, letters of credit, debentures, or guarantees.
To give the scheme an air of legitimacy, the promoters distribute documents
that appear complex, sophisticated and official.
The sellers frequently tell potential investors that they have some special
access to programs which otherwise would be reserved for top financiers on
Wall Street, or in London, Geneva or other world financial centers. Investors
are told that those who purchase "prime bank" instruments at a discount
can sell the instruments shortly thereafter at an enormous premium. The minimum
investment can be as high as $10,000,000, either by an individual or a group
of individuals who pool their smaller investments. The sellers often represent
to potential investors that the market for these instruments is secret and
that the institutions involved or regulatory agencies will deny the existence
of the program if asked. Investors are also told that potential annual profits
of 100% or more are possible with little risk. Some "prime bank" offerings
include the opportunity to invest in a "roll program" in which transactions
purportedly occur monthly, or even weekly, and trading profits are reinvested.
II. The Commission Has Been Aggressive
in
Combatting "Prime Bank" Fraud
From the first indication that these instruments began to circulate in our
markets, the Commission has responded with a series of investigations and prosecutions.
The Commission has also issued a number of warnings and investor alerts.-[1]-
As early as 1992, the Commission brought an emergency injunctive action to
halt the fraudulent sale of over $3.4 million in non-existent "prime bank" notes.
In that case, the Commission alleged that investors were told that their money
would be used to trade in Swiss bank instruments.-[2]- In October 1993, the
Commission issued an Investor Alert warning the public about fraudulent offerings
of "prime bank" instruments.-[3]- This alert advised the investing
public that there was no known legitimate use of any financial instrument called
a "Prime Bank" note, guarantee, letter of credit, debenture, or similar
type of financial instrument otherwise associated with the moniker "prime
bank." The Investor Alert warned that many of the schemes appeared to
involve overly complex loan funding mechanisms which, in the eyes of an unsophisticated
investor, may make a questionable investment appear worthwhile. The Commission
also reminded investors, broker-dealers, and investment advisors of a basic
rule for avoiding securities fraud: "If it looks too good to be true,
it probably is."
In March 1994, the Division of Enforcement issued another alert to warn of
an ongoing $600 million "prime bank" fraud involving securities purportedly
issued by Banka Bohemia A.S., a bank located in Prague, Czech Republic.-[4]-
Banka Bohemia had issued a notice to U.S. banks that the securities were being
offered by unnamed persons and were not authorized by the bank. The Division
of Enforcement again warned the investment community to be extremely cautious
when dealing with any instrument that involves purported "prime bank" securities.
Despite the alerts by the Commission and other agencies, investors have continued
to be caught up in fraudulent schemes involving prime bank instruments. The
Commission has devoted significant resources towards combatting this wave of
fraud. Since 1992, the Commission has brought more than 40 enforcement actions
involving various "prime bank" scams.
In addition to individuals, the victims of these frauds have included charitable
organizations, municipalities, and other institutional investors. For example,
the National Council of Churches of Christ ("NCCC"), a not-for-profit
charitable organization, paid $7.98 million to purchase $13.2 million face
value of "prime bank guarantees" purportedly issued by Banka Bohemia.
We alleged, however, that those guarantees were worthless.-[5]- The Chicago
Housing Authority's Benefit Plan invested at least $12.5 million in a purported "Roll
Program," which was designed to pool investor funds to purchase and trade "Prime
Bank Instruments," but which we allege was nothing more than a scam to
defraud investors.-[6]-
In most cases, investors put their money into an investment pool with the
expectation that the pooled money would be used to purchase "prime bank" securities.
For example, in one case, the Commission alleged in its complaint that the
defendants raised more than $3.2 million from 20 investors. The funds were
to be pooled and used to purchase and resell "Prime Bank letters of credit." The
investors were told that institutions like pension funds stood ready to buy "Prime
Bank letters of credit" from large banks, with purchases of over $100
million affording the highest return. The defendants represented to these investors
that regulatory restrictions prevented the banks from selling such instruments
directly to institutional investors, and thus a middle man would be required
to effectuate the transaction at a contractually pre-arranged profit. In this
case, investor monies were to be combined with funds from other investors to
meet the $100 million threshold. We have alleged that no bank instruments,
letters of credit or other investments were purchased on behalf of investors.-[7]-
The promoters in these schemes have demonstrated remarkable audacity, reaching
out to the investing public through advertisements in national newspapers,
such as USA Today and The Wall Street Journal.-[8]- Understandably, these ads
can give the offerings some air of legitimacy. The Internet has provided an
additional forum for promoters to reach the investing public, and we are concerned
with the increased potential for fraudulent offerings through this medium.
In fact, the Commission brought an injunctive action last year against a defendant
who the Commission alleged used the Internet to induce members of the public
to invest with him by, among other things, falsely representing that the initial
investment was guaranteed against loss because a "Prime Bank Guarantee" would
be used as security for the transaction. This defendant also promised to double
investors' funds in as little as four months by buying and selling "Bank
Instruments."-[9]-
III. The Commission Benefits from Cooperation with other Agencies
The Commission has cooperated with various state and federal agencies in its
attempt to put a halt to the "prime bank" scams. For example, in
particular cases, we have provided regulators and other federal and state agencies
with access to our expertise, such as in the areas of securities registration
requirements and the elements of securities fraud, as well as to information
gathered in the course of our investigations.
A number of prime bank securities fraud cases have been prosecuted by the
Commission and federal criminal authorities.-[10]- For example, on March 9,
1994, the Commission filed a civil complaint against North Pacific Investments,
Inc., Stafford Mew, and Morreon Rude alleging that they raised at least $10
million from a non-profit corporation through the sale of prime bank notes.-[11]-
The defendants and two additional individuals were subsequently charged with
wire fraud, money laundering and conspiracy. All defendants were subsequently
convicted. Mew was sentenced to over 19 years in prison and Rude was sentenced
to over 11 years.
In another example, on August 8, 1994, the Commission filed a civil complaint
against Harold Glantz and Peter Block who raised at least $2 million through
a prime bank investment scheme.-[12]- Glantz and two other individuals were
subsequently indicted on charges of wire fraud, money laundering and conspiracy.
On Feb. 23 of this year, a preliminary injunction was entered against Glantz
enjoining him from further violations of the antifraud provisions of the securities
laws. He is currently awaiting trial on criminal charges.
The fact that the "prime bank" instruments at issue in the Commission
cases are fictitious has not been a legal impediment to successful prosecution.
The courts generally have had no problem in finding that the purported notes
are securities and their "sale" involves a fraud.-[13]- For example,
the Seventh Circuit rejected the argument that the fact that "prime bank" instruments
do not exist precluded jurisdiction under the federal securities laws.-[14]-
Thus, the Commission has been able to attack these fraudulent schemes under
the antifraud, registration, and broker-dealer registration provisions of the
federal securities laws.
Although these fraudulent schemes are reachable under the federal securities
laws, criminal prosecution is an important component to law enforcement efforts
against this fraud. The prospect of jail time and substantial fines available
in criminal actions, as well as the publicity that is sometimes associated
with prosecution of white collar crime, provide additional deterrence for these
types of frauds. Senate Bill 1009 criminalizes the production, sale, transportation
or possession of fictitious financial instruments purporting to be those of
the United States, a political subdivision of the U.S., a foreign government
or an organization as defined in 18 U.S.C. § 513(c). Therefore, we believe
that the bill appears to provide an additional measure of deterrence against
those who might sell these instruments.
IV. Conclusion
To the extent that this bill provides criminal authorities with an added weapon
for combatting "prime bank" securities fraud, we support the legislation.
---------FOOTNOTES----------
-[1]- A compilation of investor alerts, administrative proceeding releases
and litigation releases issued by the Commission relating to fraudulent "prime
bank" offerings through February 1996, entitled "Prime Bank Securities
Fraud," is attached hereto (hereinafter referred to as "Attachment").
The staff of the Commission periodically updates this document and makes
it available to other regulators and members of the public.
The Office of the Comptroller of the Currency, the Board of Governors of
the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office
of Thrift Supervision, and the National Credit Union Administration have issued
alerts, as have foreign and international regulators.
-[2]- See Attachment at 26 (citing SEC v. Jedi Group Limited, Civil Action
File No. H-92-934 (S.D. Texas 1992), Litigation Release Nos. 13206 (March 27,
1992), 14692 (October 16, 1995)).
-[3]- See Attachment at 1-2. In that Investor Alert, the Commission noted
that on October 21, 1993, the federal financial institution supervisory agencies
issued an Interagency Advisory to their regulated financial institutions.
-[4]- See Attachment at 3.
-[5]- See Attachment at 63 (citing SEC v. Crawford, Civil Action No. 1:95CV-01435
(TPJ) (D.D.C. 1995), Litigation Release No. 14583 (August 1, 1995)).
-[6]- See Attachment at 45 (citing SEC v. Lauer, 94 CIV 3770 (N.D. Ill. 1994),
Litigation Release No. 14143 (June 30, 1994)).
-[7]- See Attachment 33-36 (citing SEC v. Northstar Investors Trust, C93-1626
(W.D. Wa. 1993), Litigation Release Nos. 13887 (November 23, 1993), 13895 (December
8, 1993), 13905 (December 14, 1993), 14101 (May 25, 1994)).
-[8]- See Attachment at pages 30-32, 56-59 (citing SEC v. Alexander, 93 Civ.
1834 (MP) (S.D.N.Y. 1993), Litigation Release Nos. 13575 (March 22 1993) and
13591 (April 6, 1993) and SEC v. Bankers Alliance Corp., Civil Action No. 95-0428
(PLF) (D.D.C. 1995), Litigation Release Nos. 14427 (March 2, 1995), 14436 (March
14, 1995), 14464 (April 10, 1995), 14495 (May 9, 1995)).
-[9]- See Attachment at 68-70 (citing SEC v. Block, Civil Action No. 95-11748RCL,
(D. Mass. 1995), Litigation Release Nos. 14598 (August 10, 1995), 14638 (September
18, 1995), 14711 (November 2, 1995)).
-[10]- Prime bank fraud can currently be prosecuted under a variety of
federal criminal statutes such as mail fraud (18 U.S.C. 1341), wire fraud
(18 U.S.C. § 1343)
and conspiracy (18 U.S.C. 371).
-[11]- See Attachment at 38-41 (citing SEC v. North Pacific Investments,
Inc., C94-5115 (W.D.Wa. 1994), Litigation Release Nos. 14011 (March 16, 1994),
14035 (March 29, 1994), 14121 (June 9, 1994), 14684 (October 11, 1995) and
U.S. v. Mew, CR 94-5246 FDB (W.D. Wa.), Litigation Release Nos. 14064 (April
24, 1994), 14502 (May 16, 1995), 14555 (July 11, 1995).
-[12]- See Attachment at 53-54 (citing SEC v. Glantz, 94 Civ. 5737 (CSH),
Litigation Release No. 14186 (August 8, 1994).
-[13]- See Attachment at 74-81 (citing SEC v. Lauer, 52 F.3d 667 (7th Cir.
1995) and SEC v. Prime One Partners, Corp., CV 94-3322 SVW (GHKx) (C.D. Cal.
1995).
-[14]- See Attachment at 74-81 (citing SEC v. Lauer, 52 F.3d 667 (7th Cir.
1995).
Testimony of William R. McLucus, 
