A Big Threat to Brokerage Firms

These days, frauds and scams are observably rampant. In business, on the Internet, in the bank and any entity where money may be extracted. Brokerage firms and hedge funds never escaped this reality and these firms too are very susceptible to frauds and this fact is considered as a big threat upon the health of the financial market. Hedge funds are currently among the most popular or hottest type of investment prospects in the stock market these days.

This type of investment “have been very prominent in the financial news, attracting a lot of attention from investors, brokerage firms, the Securities and Exchange Commission or SEC” (Evans, Atkinson, and Cho 2005) Brokerage firms on the other hand have investment advisors and stockbrokers which are pack with information needed to be relayed to the investors. In this manner, if they are having plans to defraud and manipulate the information they have, which is a very unethical act, they actually can.

The aforementioned hedge funds and brokerage are very susceptible to fraud caused by unsuitable investments. These unsuitable investments happen when the representative broker of the firm make misrepresentations of the investment to a customer or if this broker agent fall short in disclosing “to the customer all of the material facts about the investment” (Stoneman and Schulz) In short, this is a fraud, which, the common people also identify as a lie.
Fraud is either lying or omitting something and according to the SEC, under Rule 10 (b) (5), employing any scheme, artifice or device defrauding someone or some entity constitute fraud or making untrue statements of material fact making the statement made, in light of the circumstances under which they were made, not misleading is another way to defraud. Moreover, engaging in any act, practice or course of business which operate or would operate as a fraud or deceit upon any person or entity in connection with any purchase or sale of any security.
Even though wealthy investors in the hedge funds consider the occurrence of fraud to be insignificant, it is currently happening “too often to be ignored” (Guarding Against 2005) In fact for the past five years prior March 2005, there were already a total of fifty-one (51) fraudulent hedge fund cases with investor losses of approximately $ 5. 1 billion. One very popular type fraud in hedge funds was invented as early as 1919 called the Ponzi Scheme after Carlo Ponzi who first utilized this method.
With this type fraud, the fund manager maintains the fiction that the fund is performing very well and is generating returns while it encourages new investor to invest and using their investments to pay off those earlier investors at a higher rate rather than investing the amount. On the side of the brokerage firms, they are the ones leaking the information to investors leading to fraud. In fact, the SEC alleged that brokerage firms recruited new investors for hedge funds from their clients (a technique known as “capital introductions.
” (Evans, Atkinson, and Cho 2005) General fraudulent brokerage firm practices include stock marker manipulation to benefit a certain individual or entity; utilizing phony accounts in trading in the stock market; trading without the public’s information; doing trades that are unauthorized; refusing to customers’ sell orders; and falsifying firm’s records. Furthermore, more defined types of brokerage fraud (Brokerage Fraud, 2008) include (1) biased investment advice; (2) unfounded advice; (3) contradictory investment advice; (4) continuing a risk; and (5) conflict of interest.
Each of these five portrays manipulation by the firm, taking its advantage as the advisor in influencing the decision of the customer in an unorthodox manner. As early as 2004 the SEC has been requiring brokerage firms to present relevant information stating the ways on how they help the hedge funds recruit new investors in order to prevent fraudulent fund raising. The SEC is also investigating selected cases to draw information from them and from which hedge funds might have used insider information to their ends and thereby gaining profit.
This is especially true on initial public offerings (IPOs) This is according an article entitled Guarding Against Hedge Fund Fraud issue number 3 of the Trusting the Independent Financial Advisor Journal. The SEC advices the brokerage firm in order for them to stay within the rules and will not be penalized. This advice includes (1) fair dealing; (2) best execution; (3) customer confirmation rule; and (4) disclosure of credit terms. These general rules are embedded in the SEC’s Compliance Guide to the Registration and Regulation of Brokers and Dealers.
Simply stated, the SEC and the American government in general do not want to have another Merrill Lynch, Salomon Smith Barney, Morgan Stanley or Bear Sterns deceiving the public. . Works Cited Evans, Thomas G. , Stan Atkinson, and Charles H. Cho. 2005. Hedge Fund Investing: Current Advice for Financial Advisers and Planners. Journal of Accountancy 199, no. 2: 52+. Morgenson, Gretchen. “Brokerage Firm Is Indicted In Fraud Case. ” The New York Times, July 9, 1999, from <http://query. nytimes. com/gst/fullpage. html? res=9E02E2D8143CF93AA35754C0A96F958260>.
National Legal News “Brokerage Fraud. ” 2008 from <http://www. lawyershop. com/news/practice-areas/criminal-law/white-collar-crimes/securities-fraud/brokerage-fraud/>. Stoneman, Tracy P. and Douglas J. Schulz. 2002. California: Kaplan Business Publishers The Securities and Exchange Commission. “Litigation Briefs. ”2008 from . <http://www. sec. gov/litigation/briefs/homestore_020405. pdf>. Trusting the Independent Financial Advisor Journal. “Guarding Against Hedge Fund Fraud” issue number 3. March 2005, Switzerland: Roland Ray.


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