UNITY ONE, Inc. has conducted investigations worldwide for a variety of clients including banking institutions and private placement groups. Again and again, we attempt to advise our clients of the correct process and procedures for working with other financial groups – The correct way to background and the correct way to work with clients. However, time and time again, they believe they “know something” or “know someone” we don’t and continue to engage beyond our sound assessment.
So we decided to pull the writings of a third party group to help educate our clients. The following is an excerpt from the writings of:
Joel E. Leising – a Senior Trial Attorney in the Fraud Section of the Criminal Division. He has investigated and prosecuted a number of prime bank cases in the past. He is a member of the Steering Committee of the Combating Prime Bank and Hi-Yield Investment Fraud Seminar of George Mason University Law School, and has been a speaker at the Seminar’s annual meetings.
Michael McGarry – a trial attorney in the Fraud Section of the Criminal Division since 2000. His casework includes matters involving “Prime Bank” or “High Yield Instrument” investment schemes. Prior to joining the Department, Mr. McGarry worked in private practice in the New York office of Fried Frank Harris Shriver & Jacobson for five years where he worked on large white collar criminal and regulator matters. Mr. McGarry has written articles published in newspapers and journals on money laundering regulation and procurement fraud.
Since the formation of the International Monetary Fund and World Bank in the late 1940’s, the major banks in the world have engaged in trading programs among themselves, yielding returns ranging from 10% to 100% per month, at little or no risk.
Only these banks, and a few select traders authorized by the Federal Reserve , are allowed to participate in these trading programs, which are principally designed to generate funds for humanitarian and other worthwhile projects.
On occasion, particular traders allow individual investors to participate in these secret trading programs by pooling the individual’s funds with funds from other investors until a certain amount, usually a minimum of $100 million, is accumulated for a trade.
However, these individuals must enter nondisclosure agreements with the traders and agree to contribute half of their profits to a designated charitable cause.
Interested? Your investment advisor never told you about this?
Maybe that’s because all of what you have just read is false.
Nevertheless, thousands of people during the past decade have fallen prey to scams based on similar claims and lost billions of dollars believing they were investing in such mythical trading programs.
Despite repeated warnings over the years from various regulatory agencies and international organizations that such trading programs do not exist, these prime bank or high-yield investment schemes have continued to proliferate and are now nearing epidemic levels.
Various agencies or organizations, such as the Federal Reserve Board, Office of Comptroller of Currency, Department of Treasury, Securities and Exchange Commission (SEC), International Chamber of Commerce, North American Securities Administrators Association, International Monetary Fund, and World Bank have all issued explicit warnings to the public about prime bank fraud .
Occasionally, you will find copies of these among the items seized during execution of a search warrant at a fraudster’s office. A number of good reference materials are publicly-available relating to these schemes, including PRIME BANK AND RELATED FINANCIAL INSTRUMENTS FRAUD issued by the SEC in 1998.
Two others are PRIME BANK INSTRUMENT FRAUDS II (THE FRAUD OF THE CENTURY), prepared in 1996 by the ICC Commercial Crime Bureau, and THE MYTH OF PRIME BANK INVESTMENT SCAMS, by Professor James Byrne of the Institute of International Banking Law & Practice, George Mason University Law School.
Prime bank fraud first appeared in the early 1990’s, waned somewhat in the mid 1990’s in response to aggressive enforcement actions and media coverage, then reemerged as a significant problem in the late 1990’s. At present, over one hundred pending federal criminal investigations involve prime bank fraud. In addition, the Securities and Exchange Commission and various state law enforcement agencies have a number of active investigations.
Moreover, as the problem has become worldwide, more foreign law enforcement agencies, particularly in English speaking countries, have actively investigated and prosecuted this type of fraud.
“Prime bank” schemes — “prime bank instrument” schemes, “high yield trading programs ” or “roll programs “— are essentially Ponzi schemes, in which the perpetrators claim exists a secret trading market among the world’s top banks or “prime banks.” Perpetrators claim to have unique access to this secret market. The “top” or “prime” banks purportedly trade some form of bank security such as bank guarantees, notes, or debentures. These instruments can supposedly be bought at a discount and sold at a premium, yielding greater than market returns with no risk. In reality, no such market exists. Furthermore, high-yield “prime bank notes,” as described by these perpetrators , do not exist.
They often claim that there are only a few “traders” or “master commitment holders” who are authorized to trade in these securities and that the securities must be traded in large blocks, typically millions of dollars or more. Promoters tell potential investors that they have special access to a trading program , and that by pooling their money with that of other investors, they can participate in the program. Promoters also tell investors that the programs participate in some humanitarian cause and that they are giving the investors a special opportunity to participate in the program, but only if they agree to give a share of the profits to the cause. They also typically require investors to execute a “non-disclosure” and “noncircumvention agreement” because, as they are told, banks and regulatory agencies will deny the existence of these trading programs.
Case law involving prime bank schemes
Over the past few years, a number of reported decisions affirmed convictions of prime bank schemers.
For example, this past summer the Fourth Circuit affirmed defendants’ convictions in United States v. Bollin, 264 F.3d 391 (4th Cir. 2001), for conspiracy, wire fraud and money laundering.
As described by the Court of Appeals:
This case arose out of a wide-ranging investment fraud scheme, carried out by a network of conspirators, who bilked millions of dollars from investors across the country.
The investments were programs that promised enormous profits, supposedly derived from secret trading in debentures issued by European “prime” banks.
The programs involved supposed trading of European “prime bank” debentures and promised very high rates of return with little or no risk to investors. According to the …literature that they distributed, the programs were available on a limited basis to groups of investors whose money would be pooled and delivered to a “prime” bank.
The investment principal was supposedly secured by a bank guarantee and, therefore, was never at risk. Millions of dollars in profits were to be generated within a few months from the trading of debentures. For example, one program … offered a profit of $73,000,000 in ten months, based on an investment of $400,000. Id. at 399-400.
In United States v. Polichemi, 201 F.3d 858 aff’d on rehearing, 219 F.3d 698 (7th Cir. 2000), defendants defrauded nearly thirty investors out of more than $15 million by marketing “prime bank instruments,” which they described as multimillion-dollar letters of credit issued by the top fifty or one-hundred banks in the world. As the Seventh Circuit explained, defendants told their victims that they could purchase these instruments at a discount and then resell them to other institutions at face value; the difference in price represented the profits that would go to the defendants and their “investors.”
This was nothing more than a song and dance: the trades were fictional; there was no market for the trading of letters of credit; and nothing capable of generating profits ever occurred.
Somehow, notwithstanding the implausibility of “prime bank instruments” to one familiar with normal business practice for letters of credit, they managed to persuade their victims to give them money to finance the purchase of phantom discounted instruments.
While this did not earn a cent for any of the investors, it definitely changed the defendants’ own lifestyles. Id. at 859 -860.
Among those convicted in Polichemi were attorneys, salespeople, an individual who acted as a reference, and Polechemi, who claimed to be one of the few people in the world with a license to trade prime bank securities.
In a related case, United States v. Lauer, 148 F.3d 766 (7th Cir. 1998), Lauer, the administrator of an employee pension fund, plead guilty to diverting millions of dollars to the prime bank scheme prosecuted in the Polichemi case. In rejecting Lauer’s appeal on the loss calculation for sentencing purposes, the Seventh Circuit up held the trial court’s use of an intended loss figure, rather than a lower actual loss amount.
In another recent case, S.E.C. v. Lauer, 52 F.3d 667, 670 (7th Cir. 1995), Chief Judge Posner declared Prime Bank Instruments do not exist. So even if [a co -schemer] had succeeded in raising money from additional investors, it would not have pooled their money to buy Prime Bank Instruments. It would either have pocketed all of the money, or, if what its masterminds had in mind was a Ponzi scheme, have pocketed most of the money and paid the rest to the investors to fool them into thinking they were making money and should therefore invest more (or tell their friends to invest).
In United States v. Richards, 204 F.3d 177 (5th Cir. 2000), the Fifth Circuit up held defendants’ convictions for conspiracy, wire fraud, mail fraud and interstate transportation of stolen property. At trial, the government presented the following evidence describing how defendants induced participants to invest in a “roll program”:
Potential investors were told that their money would be pooled with that of other investors and used to buy letters of credit. The letters of credit would be “rolled”– sold, repurchased, and resold – to European banks frequently and repeatedly.
Each “roll” would generate a large profit to be distributed among the investors, in proportion to their investment. The investors were told that their funds would be safe at all times, held either in an account at a nationally-known brokerage firm or invested with a “prime” or “top 50″ international bank. Investors were also told that they would receive at least the return of their initial investment, with interest, and would likely make substantial profit. In fact, the defendants took the invested funds for their own use, bought no letters of credit, and, except for a small payment to one participant, returned no money to the investors. Id. at 185.
In United States v. Rude, 88 F.3d 1538, 1548 (9th Cir. 199 6), defendants were charged with engaging in a prime bank scheme. In affirming their convictions, the Court of Appeals found,
among other things, that the government had proved beyond a reasonable doubt “that the very notion of a ‘prime bank note’ was fictitious,” and cited other evidence that the term “prime bank” was not used in the financial industry “and was commonly associated with fraud schemes.” Id. at 1545.
In Stokes v. United States, No. 97-1627, 2001 WL 29997, at *1 (S.D.N.Y. Jan. 9, 2001), defendant was convicted of conspiracy, wire fraud , money laundering and interstate transportation of fraudulently obtained money.
Defendant claimed that “through various personal connections in the banking industry, he could purchase and sell ‘prime bank guarantees’ or letters of credit and make a substantial profit in a short period of time, with no risk to the investor.”
As is typical in these kinds of cases, the defendant attempted, unsuccessfully, to portray himself as a victim, as someone unwittingly conned by coconspirators to carry out the fraud.
A number of other criminal cases involving prime bank schemes have a so been reported . See e.g., United States v. Wonderly, 70 F.3 d 102 0 (8th Cir. 1995); United States v. Hand, No. 95-8007, 1995 W L 743841 (10th Cir. Dec. 15, 1995); United States v. Aggarwal, 17 F.3d 737 (5th Cir. 1994 ); United States v. Gravatt, No. 90-6572, 1991 W L 278979 (6th Cir. Dec. 27, 1991); United States v. Lewis, 786 F.2d 1278 (5th Cir. 1986 ).
There are also a number of reported civil cases brought by the S.E.C. See, e.g. S.E.C. v. Milan Capital Group, Inc., No.00 Civ.108 (DLC), 2000 WL 1682761 (S.D.N.Y. Nov. 9, 2000 ); S.E.C. v . Kenton Capital, L td., 69 F. Supp .2d 1 (D.D.C. 19 98); S.E.C. v. Infinity Group., 993 F . Supp. 3 24 (E.D . Pa. 199 8), aff’d, 212 F .3d 18 0 (3d Cir. 20 00); S.E.C. v. Deyon, 977 F. Sup p. 510 (D. M e 199 7); S.E.C. v. Bremont, 954 F. Supp. 726 (S.D.N.Y. 1997).
Assistant U. S. Attorney Michael Schwartz in Houston prepared an excellent memorandum titled “United States’ Memorandum of Law Concerning Fraudulent High-Yield or International ‘Prime Bank’ Financial Instrument Schemes,” a copy of which can be obtained from either him or the Fraud Section. Appropriately modified versions of this memorandum can not only be used to educate your trial judge on the legality of such schemes, but also excerpted for use in search warrant affidavits.