Government officials have always been vigilant in informing the public about their successes in apprehending criminals in the foreign exchange arena. Not a month goes by that we do not hear of another unscrupulous fund manager that has bilked his clients of their hard-earned capital to fund his lavish lifestyle. These cases take years to move through our legal system, starting from arrest to final prosecution and incarceration. Each stage is worthy of a new press release, a form of deterrent in its own right.
We smile when we see the amount of fines and judgments assessed, but a recent article in the Wall Street Journal has revealed that the actual fines collected by the courts fall far below the much-ballyhooed figures in the press. If lucky, as much as 20% may reach government coffers, and nearly $100 billion in recent fines over the past year remain on the books. The sad truth is that investors rarely see a recovery, since most of the prosecuted firms have little in the way of assets to pay both fines and investor losses.
Why are forex fraud prosecutions and recoveries so difficult?
According to one leading law firm that is acquainted with the situation, the “Commodities Futures Trading Commission (“CFTC”) is the federal watch-dog tasked with regulating the futures and commodities markets. The CFTC, along with the SEC, oversee the National Futures Association (“NFA”), a self-regulated federal entity that regulates the futures and commodities markets. None of these U.S. organizations have the investigative ability or manpower to closely monitor the industry and no international body regulates this global commerce.“
Obviously, a lack of resources on the front end is an incentive, rather than a deterrent, for the criminal element in our society to prey on their victims. The foreign exchange arena is complex with high risk, but the potential for high reward also exists, the necessary prerequisites for an experienced scam artist. Forex fraud also tends to be a bit different than other forms of white-collar crime involving stocks where price manipulation, insider trading, and mismanagement rule. In the forex world, evidence must be gathered to prove an intent to defraud. A wild and reckless fund manager, also known as a “rogue trader”, does not fit this definition. Incompetence is not a crime.
What path does law enforcement take when forex is involved?
Foreign exchange is related to currency, and, therefore, it is a national and not a state issue. Typically, a complaint will be filed with the CFTC, which then passes it along to the FBI. Depending on the amount of the crime, the FBI will decide either to pursue it on its own or pass it down to the state level for prosecution. The wire and mail fraud statutes rule the day at the federal level.
The case will be dismissed at the state level if it is determined that a crazy rogue trader made a few wild bets and lost big time. For the state to indict, according to attorneys, the defendant’s intent is the determining factor. Was he “a con-man who made material misrepresentations to investors with the intent to permanently deprive them of their money rather than the intent to get them a return on their investment? These cases can be charged as conspiracies to defraud, which occurs when two or more persons conspire . . . cheat and defraud any person of any property, by means which are in themselves criminal, or to obtain money or property by false pretenses or by false promises with fraudulent intent not to perform those promises.”
Defendants will not be sitting idly by on their hands in most cases. Their attorneys will file all kind of motions to stall and deflect prosecutors. More than likely, they will have formed a complex web of corporations to shield their criminal activities from a direct attack, but, as the attorneys warn again, “officers, directors and managers of corporations are criminally liable for the crimes they personally commit, authorize, or ratify on behalf of the business entity.” The so-called corporate veil of protection does not work when fraud is involved.
For prosecutors to get the upper hand in these cases, the crooks have to have crossed the line earlier on in the process, possibly claiming outrageous returns with little or no risk. If it is a simple case of theft in that the broker took your deposit and disappeared, then theft is easier to prove, especially in a domestic case, if the criminal is apprehended. If the theft occurs, however, in a foreign jurisdiction, then you might as well kiss your money goodbye. Enforcing your legal rights overseas is a useless exercise in futility, often costing multiples of your losses without any hope of return.
As a final word on this topic, we refer once again to the professional attorneys that deal in this sector of the jurist prudence: “The real battleground in these cases almost inevitably concerns the evidence of the defendant’s promises, projected returns, and clarity (or lack thereof) regarding the commission structure with the named victims. Evidence of misrepresentations, combined with sometimes devastating losses to victims, can make taking these cases to trial a risky proposition for the defense.”
What about actual recoveries of lost investor funds? After legal costs, fines, and penalties, there is usually very little else remaining, unless in some rare instance there are assets in abundance after arrest. As always, be skeptical of any outrageous claims, and remember that if it sounds too good to be true, then it most likely is a scam. Due diligence before and after choosing a forex business partner is your only protection. Be sure to abide by your intuition, put your greed aside, and choose wisely, never giving a foothold to any scam artist at the outset.
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