For an education see the U.S. Department of Justice website RE: Market manipulation (a subset of securities and financial frauds). To date the sets of schemes summarized are the Red Sea cases (e.g., Ricci, including a description of the pump-and-dump scheme), the Roland Kaufmann cases (e.g., Neuhaus, including a description of the secret kickback scheme), the Mitchell Stein / Heart Tronics cases (e.g., Stein, including a description of the nominee brokerage accounts), and the George David Gordon, et al. cases (e.g., Gordon, including a description of the pump-and-dump and nominee account schemes). Many of these schemes implicated both domestic and international market participants, and the securities used as bait to obtain the financial funds of investor-victims were significantly less than blue chip.
Among the many takeaways are as follows:
- Financial fraud of a material amount requires full-time dedication by the fraudsters as neither part-timers nor outsourced agents need apply. A real extended commitment and loyalty to the corrupt enterprise is a necessary element. There are lots of paperwork, lots of communication, and lots of business planning.
- Segregation of the corrupt enterprise and its participants requires hundreds, if not thousands, of miles of real estate over which to promote and effectuate the schemes. Buying local is not the mantra. Apparently, the use of foreign and alien venues imparts a certain mystique and specialness to those seeking to profit from others’ work.
- Global reputations are not desirable notwithstanding the expanse of real estate necessary to promote and effectuate the schemes. The less is known about the fraudsters in the nodes of the enterprise (e.g., place of incorporation, place of headquarters) the better. Otherwise, the apparent opportunity would risk becoming so well known that it would likely be exposed as a real fraud. Market participants that are not so well known allow the investor-victims to speculate and convince themselves that they deserve such an exceptional opportunity of which most others are unaware.
- Barriers to entry in the arena of market manipulation do not require the clout of mainstream market participants such as Goldman Sachs to surmount. A little bit of study, a little bit of form filling / registration, and an even littler bit of ethics allow largely unknown market participants to manipulate the prices of securities, especially those issued by entities about which very few others in the mainstream seem to care. Predators enter this arena, finding no shortage of get-rich-quick predispositions among the misunderstanding class of investor-victims vulnerable to the schemes noted above.
Whatever due diligence was deployed by the investor-victims was clearly ineffective. However, even enhanced due diligence provided by commercial service providers may not prevent an eager, soon-to-be investor-victim from misapplication of the orthodox principle of ‘increased risk accompanies investments promoting an above market rate of return.’ To assume some risk is to demonstrate courage in the face of uncertain market conditions, and this may be what animates the investor-victims in the above types of schemes. It is somehow ballsy to invest where others fear to tread, I guess.