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Operation Broken Trust?

December 6, 2010

Eric Holder

U.S. Attorney General Eric Holder announced a giant sweep of scammers today during a noon press conference at the Department of Justice. More than 500 people have been charged in various Ponzi schemes, mortgage frauds, securities frauds, and the like during the past three and a half months as “Operation Broken Trust” fanned out across the land. Maryland U.S. Attorney Rod Rosenstein’s office issued two press releases ahead of the announcement on Friday, updating two recent fraud cases they’re prosecuting.  But the cases presented were already in the pipeline before the “sweep” began, Rosenstein confirms.

“When the department announces sweep, what we do is we elevate the priority of those cases that fall into that category… you wind up getting more resources devoted to those cases and you push them more quickly,” Rosenstein says. The department then publicizes those results “so you can get that deterrent value from those cases.”

Here’s a link to Holder’s prepared remarks, which he stuck to, except for repeating the word “staggering” where he spoke about the $8 billion those criminally charged allegedly stole. Sample quotes:

Operation Broken Trust is the first national operation in history to target the many different types of investment fraud schemes that prey directly on the investing public.

In fact, many of the scam artists we’ve identified were preying on their own neighbors—and on the most vulnerable members of their communities.  Several of those prosecuted during this operation solicited victim investors from their own churches. One man in Texas allegedly targeted his fellow parishioners, asking them to invest with him and claiming that his success in foreign exchange trading was “a blessing from God.”

In Ohio, a former police officer operating a Ponzi scheme solicited investments from active and retired police officers and firefighters.

That fits the description of police officer Raymond Thomas, who allegedly stole $889,000 from about 25 trusting investors. Holder’s statement continues:

Many of the criminals we’ve identified used investor funds to support lavish lifestyles. One man operating an $880 million Ponzi scheme in Florida duped investors from across the country—and used the money to buy floor seats at professional basketball games and to make payments on his personal yacht, his beach house, and his Mercedes.

Holder’s statement doesn’t say it, but that would be Nevin K. Shapiro, the former owner of Capitol Investments USA, Inc., who pleaded guilty in September, according to this Business Week article.

None of which is bad. These kinds of low-level scams present a major challenge to small investors and teach everyone paying attention a habit of cynicism. But consider the original purpose of the Financial Fraud Enforcement Task Force, announced just last November with President Obama’s Executive Order 13519:

“This task force’s mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening,” Attorney General Eric Holder said. “We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.”

Forgive me if I got the wrong idea—I thought you were going after the big fish. Shapiro and Thomas might be bad guys, and I’m sure glad they’re caught, but guys who steal $1 million from their buddies by claiming they have a “system” to beat the market are a dime a dozen. Even major mortgage scams like “Metropolitan Grape Vine” (one of the Maryland cases) ought to be routine collars. And that particular investigation was well underway by 2007, two years before Obama’s task force existed, if this Maryland Attorney General press release is any indication.

So today’s announcement appears to be a public relations ploy, in which every fraud case available is mustered in an effort to show that the administration is doing something about the fraud.

And I’m not the only one who expected bigger things from this task force. As The Washington Post put it when the thing was announced:

Created by executive order, the Financial Fraud Enforcement Task Force targets fraud related to mortgage lending and modification, securities law, stimulus spending, and the government’s bailout of the financial sector.

Still waiting on those bailout prosecutions.

We might wait quite a while. The current task force replaced an earlier Corporate Fraud Task Force, established by then President George W. Bush in the wake of the Enron and Worldcom accounting frauds. Don’t recall that task force? Like this one, they had a press conference a year after they started, in 2003. Securities and Exchange Commission Chairman William Donaldson did a little horn-blowing. With some 350 convictions, “including 25 CEOs,” that earlier Task Force was off to a swimming start, said Donaldson, who would later come to be known as one of the more active and forward-thinking SEC chairmen in recent history. Stock markets were rising in 2003, and Donaldson took credit even for that:

“When you’re talking about confidence in a regulatory agency, and in my case the SEC, I think that our actions speak pretty loudly in terms of what we’ve done,” he said. “I think there’s a building confidence that the cop is on the beat.”

Confidence. Now that’s what’s needed.

“I hope we’ve seen the worst of it,” Donaldson said, in July of 2003. “From here on out, the country and the nation, the business community is well informed of the risks” of committing corporate fraud.

Aaaand Holder, earlier today:

With this operation, the task force is sending two messages.  A message to the public: be alert for these frauds, take appropriate measures to protect yourself, and report such schemes to proper authorities when they occur.  And a second message to anyone operating or attempting to operate an investment scam: we will use every tool at our disposal to find you, to stop you, and to bring you to justice.  Cheating investors out of their earnings and savings is no longer a safe business plan.

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