THIS ONE WASN'T MY TYPO STEVE--I SPELL WORSE THAN THAT
FWIW HERE IS THE COMPLETE TEXT.
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Operation Rogue Brokers
Securities and Commodities Fraud
Economic Crimes Unit
Financial Crimes Section, Criminal
Investigative Division
Federal Bureau of Investigation
The securities market in the United States is responsible for amassing the nation's wealth and putting
it to work in industry, commerce, and business. Based upon this success, the United States has a six
trillion dollar Gross National Product (GNP) and easily one of the highest standards of living in the
entire world. Although other nations established financial exchanges long before those established in
America, nowhere has the capital market been so efficient in harnessing the resources of a nation.
Today, publicly owned corporations not only dominate American business, but also constitute a far
greater part of the economy than is the case in other countries.
The stock exchanges of today were not developed for the enrichment of the financial community, but
rather to serve in the generation of funds to be employed in private business ventures. The trading of
securities provides the liquidity that enables both individuals and institutions the ability to cash in their
investments, to pay outstanding liabilities, or reinvest monies in other opportunities with greater
growth potential. Thus, the chief characteristic of the American capital market is the ability of traders
to enter and exit the market freely and without notice.
A study that was conducted by the New York Stock Exchange (NYSE) in the mid - 1990's
revealed that approximately 51.4 million individuals owned some type of traded stock. An additional
200 million individuals owned securities indirectly through retirement plans, insurance policies,
savings banks, mutual funds and other financial instruments. Growth within the investment
marketplace will likely continue to flourish at a dramatic rate due to the new investment vehicles that
are now being offered to include mutual funds and the advent of computerized trading.
The financial markets afford the opportunity for wealth to be obtained, so exists the opportunity for
criminal activity. While the large majority of those participating in the financial marketplace adhere to
rules and regulations that have been established to protect investors, some seek illicit gains by
circumventing the laws and preying on investors, businesses and the government. In addition, as new
instruments and methods are developed to sell and trade securities legally, new and creative means
to abuse those instruments and methods for illegal gain arise. The abuse of new investing and trading
methods (for example, investing via the Internet) will present a continuous challenge to regulatory and
law enforcement agencies who are charged with the responsibility of investigating these complex and
sophisticated matters.
ROGUE BROKERS
Securities Fraud Initiative
Rogue Brokers was initiated based upon discussions that took place during a April 1995 meeting
that was chaired by the Department of Justice. This meeting was attended by representatives from
the Criminal Division - Fraud Section, Department of Justice (DOJ), the National Association of
Securities Dealers (NASD), the Securities and Exchange Commission (SEC), and the Federal
Bureau of Investigation (FBI). Once established, this group developed and initiated an action plan
whereby securities cases focusing primarily on investment brokers and other market participants who
utilized a host of schemes to defraud their clients out of invested monies would be identified and
prosecuted. This national initiative would eventually be named Rogue Brokers.
During the initial phase of this initiative in 1995, the NASD and SEC reviewed their databases and
selected a number of cases whereby they had initiated varying degrees of disciplinary actions against
brokers. After a review of the mentioned cases by regulatory officials, it was determined that much
of the activity orchestrated by these brokers indicated that criminal prosecutive action might be
appropriate. Cases were received and reviewed by the Economic Crimes Unit at FBI Headquarters,
and the DOJ; thereafter, appropriate matters were forwarded to the appropriate FBI field offices
and United States Attorney's offices to ascertain investigative and prosecutive opinions.
Eleven cases were deemed to have prosecutive merit. The DOJ and the FBI continued to monitor
the progress of these eleven cases for inclusion in the Rogue Brokers national takedown whereby
prosecutive action in these cases would be formally announced. On 11/30/95, via a national press
conference, Attorney General (AG) Janet Reno, announced the national takedown of the first phase
of the Rogue Brokers initiative. AG Reno advised during the press conference that the activities
conducted by the subjects targeted in this initiative were considered inhumane and a serious threat to
the investment industry. The Rogue Brokers initiative is considered to be the first coordinated effort
by the federal government to prosecute brokers who cheat their clients. The brokers prosecuted
during the initial phase of this initiative employed a host of schemes to defraud clients to include: the
forgery of investor checks, unauthorized transfer of client funds, the sale of non existent securities,
and the use of false or fictitious account statements.
Based upon the results of the first phase of the Rogue Brokers, plans were implemented to develop
Phase II of this initiative. Representatives from the Economic Crimes Unit utilized Securities and
Commodities Working Group meetings that are held on a quarterly basis to promote the awareness
of this ongoing national securities fraud initiative to regulatory groups and other market professionals.
Subsequently, several broker-embezzlement cases being pursued by the FBI were identified for
inclusion in Phase II of Rogue Brokers. Exhibit # 1, depicts the number of cases and the various
groups identified as participating in the fraud schemes being addressed by Rogue Brokers. Phase II
of the Rogue Brokers initiative will consist of 13 cases from eleven FBI field offices, which are New
York City, New York; Philadelphia, Pennsylvania; Cincinnati, Ohio; Memphis, Tennessee; Tampa,
Florida; Miami, Florida; St. Louis, Missouri; Milwaukee, Wisconsin; Houston, Texas; Denver,
Colorado; and Los Angeles, California.
Phase II of the Rogue Brokers initiative has been essential in forging a continuous working
relationship between the FBI, the DOJ and several industry regulatory groups in addressing the
crime problem identified during the initial phase of this initiative.
REGULATORY GROUPS
The following industry regulatory groups were instrumental in the development and furtherance of the
Rogue Brokers initiative:
National Association of Securities Dealers Regulatory (NASDR) - The NASDR is registered
with the SEC as a national securities association under the Securities Exchange Act of 1934. The
NASDR is the only association so registered. It is charged with the responsibility for regulating both
the National Association of Securities Dealers Automated Quotation System (NASDAQ), which is
the second largest securities market in the United States and the third largest in the world, and the
over-the-counter securities market. This task encompasses both regulation of NASDR member
broker-dealer firms and the regulation and operation of the NASDAQ system.
The NASDR has approximately 5,300 broker-dealer members employing approximately 460,000
registered sales persons and principals. Some 5,000 securities issued by 4,300 companies are
quoted in the NASDAQ system and 500 NASD members serve as market makers in those
securities. The scope of the NASDR's regulatory jurisdiction extends to all such members and their
registered persons. Final NASDR disciplinary actions can be appealed to the SEC and then to the
United States Courts of Appeals.
Securities and Exchange Commission (SEC) - The SEC is an independent regulatory agency,
which was established in 1934 to administer and enforce the federal securities laws. The
Commission consists of five members: a chairman and four commissioners. The commissioners are
appointed by the President.
The SEC regulates the nation's securities markets, and securities professionals including stock
brokers, investment companies and investment advisers. The SEC oversees the private
self-regulatory organizations such as the New York Stock Exchange and the National Association of
Securities Dealers. The SEC staff and the self-regulatory organizations conduct a system of
inspections of broker-dealers and other regulated entities to ensure compliance with securities laws
and the commission's regulations.
The Division of Enforcement at the SEC and the regional offices administer all enforcement actions.
The Division of Enforcement and the Regional offices detect and investigate potential violations of the
federal securities laws. The SEC may then authorize the staff to institute a variety of actions including
civil action for an injunction and ancillary relief, an administrating proceeding or make a formal
referral to the DOJ for criminal prosecution.
STOCKBROKERS RESPONSIBILITY TO THEIR CUSTOMERS
Fair Dealings - A stockbroker has a fundamental responsibility for fair dealing. The rules and
regulations of the securities industry require a stockbroker to treat his customer in a fair manner
characterized by high standards of honesty and integrity. Besides being governed by securities laws
and commercial regulations, stockbrokers are subject to the rules of self-regulatory organizations
such as the National Association of Securities Dealers (NASD). THE NASD Rules of Fair Practice
impose the following standard upon members of the securities industry. "A member, in the conduct
of his business, shall observe high standards of commercial honor and just and equitable principles of
trade."
Duty of Loyalty - Since stockbrokers are compensated through commissions on the transactions
which they execute, there is some inherent tension between the broker's interests and the interests of
the customer. It is the broker's responsibility to always place the interests of the customer first. The
broker's obligations and duty to the customer must be paramount, and for a broker conducting
himself properly this will not be a conflict.
Obligation of Disclosure - A broker also has a duty to disclose all material information in
connection with an investment recommendation. In general, the broker has an obligation to disclose
all information which may be reasonably relevant to an investor to take into consideration in making
an informed investment decision. In particular, a broker has an obligation to disclose the various risks
and level of risk of an investment recommendation.
Brokers have a duty to be truthful in all communications with customers. Brokers are held to a
standard that their communications should provide a sound basis for evaluating any securities being
recommended. In addition, exaggerated, false or misleading statements are prohibited in a
stockbroker's communication with the public.
Authorization for Trading - A broker may not execute trades in a customer's account unless the
customer has approved and authorized the trade in advance, or has given the broker discretionary
trading authority (the power for the broker to make trading decisions in the account). A broker may
not engage in unauthorized trading. On the other hand, a broker has an obligation to carry out the
instructions of the customer.
Requirement of Suitable Recommendations - Perhaps one of the most important and least
known obligations of a stockbroker is the requirement for all investment recommendations to be
consistent with the customer's financial status, investment objectives, level of understanding and risk
tolerance. According to this suitability rule and the requirement of the "know your customer" rule, a
broker must have reasonable grounds for believing that the recommendation is suitable and
appropriate for that particular customer based upon that customers individual financial situation.
It is the responsibility of the stockbroker to make reasonable efforts to obtain the relevant
information regarding the customer and recommended investments. The "know your customer" rule
requires that the broker obtain a customer profile so that the broker will be able to properly match
the needs of the customer with appropriate investments.
Special Situations - Certain forms of investments pose particular problems, and therefore, brokers
have additional duties in connection with such activity. For example, trading with money borrowed
from the brokerage firm, known as trading on margin, is a carefully regulated activity. Brokers also
have special responsibilities in connection with options trading and private placement limited
partnerships among other forms of investments.
INVESTMENT BROKER ADVISORY
The choice of an investment advisor or stockbroker and brokerage firm should be carefully
considered. Efforts should be undertaken to ensure your selection is experienced and
trustworthy.
An investor should read carefully and understand all documents which are given when an
account is opened on their behalf, especially all documents which an investor is requested to
sign in connection with the opening of an account.
Promptly review all account statements, trade confirmations, prospectuses and
correspondence from the broker or brokerage firm. Trade confirmations typically carry the
inscription that any discrepancy with the trade as reported must be made within a certain
number of days from receipt of the confirmation.
Listen carefully to what a broker says and ask pertinent questions. If what is being promised
sounds too good to be true, you may wish to discuss it further with another investment
advisor. Ensure that a broker explains the financial risks associated with each proposed
investment.
If as an investor, you have a problem with your stockbroker or your investment account
portfolio, consider taking one or more of the following actions:
Write a letter to the broker and the brokerage firm branch office manager, and keep a
copy of your complaint for your records.
Discontinue all trading in the account until the problem has been resolved.
Request a meeting with the branch office manager to discuss the problem and attempt a
resolution.
Talk to other brokers or advisors that have experience regarding your concerns.
Consult with a qualified attorney.
As a last resort, close the account.
If you suspect a crime has occurred, report your concerns to law enforcement.
COMMONLY USED STATUES
Federal securities laws are embodied in seven statutes. Most criminal prosecutions involving
securities violations have been brought pursuant to two of these statutes. The Securities Act of
1933 and the Securities and Exchange Act of 1934. In addition, offenses in which the core
conduct is securities, prosecutors have also utilized the Mail and Wire Fraud statutes as well
as the False Statement statute. It is also important to note that securities fraud is considered a
predicate offense under the RICO statute.
Securities Act of 1933, 17 (a), 15 U.S.C. 77q(a)
Securities and Exchange Act of 1934, 10(b), U.S.C. 78j(b)
Rule 10b-5 17 C.F.R. 240. 106-5
Mail Fraud - Title 18, U.S.C. Section 1341
Wire Fraud - Title 18, U.S.C. Section 1343
False Statements - Title 18, U.S.C. Section 1001
Conspiracy - Title 18, U.S.C. Section 371
Racketeering - Title 18, U.S.C. Section 1956
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