Regulators typically have a very well defined scope of operations – the country within their government’s national borders. If an issue extends across a national border, then the regulator is outside of his jurisdiction. In order to address its issue, the regulator is obliged to request the assistance and cooperation of the domestic regulator in question. More often than not, the other regulator already has its hands full and may or may not be able to comply with a reasonable request. Such is the life and limit of a regulator’s reach, facts that are well known and used to advantage by the criminals within our midst.
The UK and the U.S.A., however, have always had good relations in the regulatory arena, but even with a past history of above average cooperation, the advent of cyber warfare and the explosion of cross-border related fraud have forced regulators to step up their games, as well. In order to get more out of limited resources, both the FCA and CFTC have decided that together they can both be more effective than apart.
What is the history behind regulatory cooperation agreements?
In order to put the world on notice to know that more will be accomplished with less in their back-offices, these two regulators recently signed a new “Memorandum of Understanding” (MOU) that, among other things, enhanced “cooperation and the exchange of information in the supervision and oversight of certain regulated firms that operate on a cross-border basis in the US and in the UK.”
Both agencies have many similar agreements with other regulators. If you look at the CFTC website, for example, it has a dozen outstanding agreements with countries like the UK, France, Germany, and Japan, to name a few, along with a general “Boca Declaration” that was executed in 1996. This cooperative arrangement includes 26 signatories that were prepared to cooperate on matters in the futures markets across the planet, but much has changed in the last two decades.
As is typical with government agencies, they have a difficult time keeping pace with the rate of change in financial markets. This issue can apply to other areas, as well. It is always a “catch as catch can” challenge, but it appears that this revised MOU is an attempt to send a warning over the press wires that a war is coming. The significant changes in the MOU have to do with alerting one another when a “covered entity”, a paraphrase of the legalese, is attempting to register in the other market to do business. The MOU even gets specific that either the FCA or CFTC may conduct onsite visits in the opposing jurisdiction, if deemed necessary and only after prior notification and approval.
Cost sharing is nothing new in the corporate world, but, when public agencies make a big deal about it, then it is new news. The beauty of the concept is that it actually frees up resources that can then be applied against more pressing matters on the home front. One of the biggest problems facing regulators these days is the constant solicitation of citizens in their home countries by investment related firms that reside outside of the country and have never applied for a license or any other form of authorization to do business in country. These issues have plagued the binary options industry, and one can only surmise that the regulators are trying to send a message to the market.
For the past year, nearly every major regulatory agency in a developed country has established a “Black List” of unauthorized firms caught crossing the line. This newer MOU would allow regulators to get a quicker jump on their respective targets. After a rash of updates focused on guilty binary option brokers, regulators have begun to shift their attentions to a newer problem. If you peruse a few of these regulatory websites, then you will see that binary option brokers are not the only targets of late. There has actually been a new wave of fraud hitting the shores recently, based upon published regulatory alerts, and this wave comes from fraudulent investment advisory firms.
Beware of nefarious investment advisory firms and what they are selling!
As the FCA states on its website, “It can be tricky to know how to find a financial adviser, especially if you want to use one for the first time.” This “trickiness”, if you will, is all the criminal establishment needs as a backdrop for plying its many schemes and clever subterfuges. Investing in any market can be a complicated exercise, requiring years of training and experience to get it right, and, for this reason, many of us prefer another route – choose an “expert” that will do it right for us for only a small cut of the profits.
While the binary option industry has come under attack by the press, regulators, and possibly even the local dogcatcher, fraudsters have been secretly shifting their focus onto other areas, while law enforcement officials were looking the other way. But, as luck would have it, complaints have been rising in the area of investment advisory services, and, where there are complaints, investigations soon take place, which soon lead to incarcerations. Yes, the wheels of justice can grind very slowly, but these recent arrests indicate the latest tactics that are being employed by fraudsters.
To get a sense of this latest crime wave in progress, here is a brief recap of related actions taken by regulatory officials in just the past few months or so:
FCA – London: The FCA, perhaps after gaining necessary information through cooperation with the CFTC, warned investors that the firm of Clayton & Fisher Advisors out of New York City “has been providing financial services or products in the UK without our authorisation.” This investment advisory group had been targeting UK residents, but has not sought the proper credentials to do so. As the FCA notes, “Some firms act without our authorisation and some knowingly run investment scams.”
SEC – Los Angeles, California: Broidy Wealth Advisors, a California based investment advisory service, allegedly stole over $1.4 million from its clients. Marc D. Broidy and his firm have been accused of “fraudulently overbilling clients and stealing assets from their trusts to pay such personal expenses as his home mortgage, overseas trips, and leases on two Mercedes-Benz vehicles. Broidy also misled advisory clients about some investments they made in privately-held companies when he didn’t inform them he was affiliated with those companies.” As in similar schemes in the past, client reports were altered to hide what was actually going on behind the scenes.
CFTC – Palos Verdes, California: In this case, a Joseph Dufresne and his accomplices set up shop as SchoolofTrade.com and proceeded “with fraudulently marketing commodity futures trading strategies and systems.” The trick here was that Dufresne portrayed himself to be a highly successful, professional trader, having won many prestigious awards for his excellence. All of these portrayals were fabricated and untrue. Claims of hundreds of thousands in profits were also untrue. The real “sucker punch” was delivered by the firm’s “Live Trade Room”, where prospective clients were duped into believing what were supposed to be profitable trades made by the firm’s traders in real time. Not! Before these crooks were caught, they had already taken in $2.7 million.
ASIC – New South Wales, Australia: ASIC charged a Mr Nakhl, of Illawong, NSW, “of engaging in dishonest conduct with investor funds.” Nakhl had followed the conman’s playbook to the letter by misleading clients about investment strategies, potential returns, and levels of risk, while absconding with funds for personal expenses and attempting to conceal his crimes with doctored client investment reports.
CFTC – New York: The CFTC closed down the firm of Advanced Trading Workshop, Inc. (ATW), which also went by the name of Sniper Scalping, Inc. This group also used the ruse of a “Real Time Trade Room” to lure in its victims. Potential clients were given the opportunity to peer “over the shoulder of a very experienced professional trader to see how it is done.” This “master trader” was supposed to be conducting trades in the futures market, supposedly an experienced professional, a ”fantastic talent at the absolute top of this trading game not just in our country but in the world.” Unfortunately, everything was simulated and fake. Nothing was online real time. Clients would then pay up to $7,500 for six months of access to the trades of this highly talented individual.
CFTC – New York: Would you jump for joy for the opportunity to participate in a forex trading fund that produced a whopping 2,675% return over only 21 months? Would it help to convince you if it were further disclosed that out of 444 trades, only 2 of those trades were losers? Such were the claims on a website operated by a Jamal Y. Vance and his firm, All City Investments, LLC. Complaints have been filed in court to recover lost funds, but Vance has skipped town, his last known address being Orlando, Florida.
SEC – Los Angeles, California: Beware of anyone proclaiming to be a “stock trading whiz kid”, a “math whiz”, and an “untutored prodigy of stock investing.” The accused, Manuel E. Jesus and his newsletter company Wealthpire Inc., enticed customers to pay for his alert service, but the CFTC is now asking him to pay back $1.5 million. Although his IQ was touted as being off the charts, this character never made a stock pick in his life. The newsletter employed another individual to provide picks, which were never consummated by the firm, but advertising materials claimed that their recommendations had “yielded huge past returns higher than 1,400%.”
Cross-border financial fraud schemes are difficult to prosecute under the law, but cooperative arrangements between regulatory agencies are helping to provide relief from this growing problem, especially in the investment advisory services arena. If you are or planning to rely upon the experience of a reputed expert, you need to perform a higher level of due diligence to protect yourself. There are a number of regulatory databases in every market that are devoted to registering, authorizing, and monitoring the performance of independent investment advisors in your country of origin.
Be wary of slick marketing materials that make exorbitant claims regarding returns or the expertise of so called “whiz kids”. If you are invited to view a trader online and in real time, make sure that you can actually validate on another computer the market action that you are being asked to believe. Seeing is not necessarily believing, when the latest technology is used for duping purposes. Stay skeptical!