Prosecuting investment fraud is good; preventing it is even better
Wednesday, December 8, 2010; 8:08 PM
Federal and state officials are patting themselves on the back for Operation Broken Trust, a nationwide effort to target investment fraud schemes.
The operation resulted in the filing of 231 criminal cases and 60 civil enforcement actions. Many people got jail time, some as long as 20 years.
Operation Broken Trust was about catching bad guys, but it was also an attempt to prove to the public that it is not just the big-name Wall Street firms and bankers that have snookered investors and consumers.
"Fraud by well-known companies or high-profile executives gets the biggest headlines, but other scams are equally devastating to hardworking families and retirees," said Robert Khuzami, director of the Securities and Exchange Commission's enforcement division. "Victims want justice and don't much care who the fraudster is or how unique the fraud."
I want to feel excited about the announcement. However I can't shake the feeling that more should be done to prevent financial fraud before people lose money.
It's commendable that authorities are nailing some of the scoundrels who swindle people in some of the ugliest ways. One scheme victimized deaf investors. But even after convictions, victims rarely get back much - if any - of their money. By the time law enforcement officials catch up with the criminals, they've spent the money living the high life.
Under Operation Broken Trust, authorities said, the estimated losses in the criminal cases totaled nearly $8.3 billion. In the civil actions, the figure was $2.1 billion. This particular sweep found more than 120,000 victims.
In one Texas case, 7,700 investors were bilked out of more than $485 million in a Ponzi scheme, in which money from new investors is used to pay off earlier investors. In a Minnesota case, promoters defrauded investors out of $3.4 billion over a 10-year period.
President Obama established the federal Financial Fraud Enforcement Task Force, which ran Operation Broken Trust, with the intent of preventing another major financial crisis. Everybody was so pleased with themselves that more than 20 federal agencies, 94 U.S. attorneys' offices plus state and local partners had joined forces to nab people who dared to cheat naive investors.
Khuzami said Operation Broken Trust showed that law enforcement officials are going to pursue fraud wherever it occurs. To prove the point, officials bundled all the cases together to show us they are doing something to protect investors. It all sounds proactive. However, in many cases the fraud didn't just start recently. Some of the scams began well before the latest financial scandals.
Attorney General Eric Holder said the arrests and convictions send a strong message.
"Cheating investors out of their earnings and savings is no longer a safe business plan," he noted. "We will use every tool at our disposal to find you, to stop you, and to bring you to justice."