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Prosecuting investment fraud is good; preventing it is even better

By Michelle Singletary
Washington Post Staff Writer
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."

Pardon my skepticism, but I doubt any criminal was shaken by the big announcement. Despite all the law enforcement efforts, proactive protection is sadly still up to investors.

Holder was right when he said investors have to be alert to all kinds of financial fraud and take appropriate action to protect themselves.

One of the biggest ways to do this is to check out a promoter's claims. Sadly, fraudsters know and rely on the fact that many of their victims never bother to do any investigation before they invest. In some cases, a quick check to see whether someone is licensed to sell securities in your state will undercover a con. If someone says your investment will be low-risk but with a high return, run. That's a huge red flag that you are about to be scammed.

This spring, the Financial Fraud Enforcement Task Force launched StopFraud.gov. But have you even heard about the site?

StopFraud.gov is a roundup of resources from a wide range of federal agencies with anti-fraud tips for consumers. There's also a link for people to report fraudulent activity from identity theft to mortgage scams to retirement schemes.

While the Web site is okay, more money and personnel need to be funneled into holding workshops for investors where they live and socialize. Advertise more. After all, that's how the promoters reach people. For example, many fraudsters targeting seniors promote their retirement schemes by offering a free lunch or dinner. We should be using some of the same tactics to reach people before the con artists do.

Although criminal prosecution is crucial, busting the scammers after the fact just isn't enough. The victims are still left with their losses.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible.

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