Stock Brokerage Frauds

Most frauds perpetrated are committed by persons who are trusted but are unable to resist temptation. So, trust but do not temp.

Modus Operandi

In most instances, employers or investors are to be blamed for seemingly tempting honest people to embezzle as a result of too much trust given to them. A cashier who has been honest for many years may eventually succumb to temptation and defalcate because nobody checks on him.

Take the case of a former reputable stockbroker who had gained the confident the confidence of the investors and was therefore entrusted with their money to buy and sell stocks for profit. One day, this stockbroker suddenly left the country leaving liabilities totaling P72million with assets worth only P34 million under the name of his brokerage firm, 99 percent of whose capital stocks he owned. The investors could not run after the stockbroker because their government had no extradition treaty with the country where he took refuge. The stockbroker had suffered financial reverses in his speculative dealing in stock commodities and gambling.

Another stockbroker unexpectedly departed for abroad after incurring debts amounting to P30 million. The stockbroker had juggled funds of some companies in which he was a treasurer. The funds were used fraudulently in purchasing stocks for his accounts to sell at a profit. Unfortunately, the stock prices subsequently dropped resulting in huge losses which made restitution impossible. His sudden departure from the country caused dislocation in a number of firms who validly feared that he would never return to pay his debts.

Detection and Prevention

The bankruptcy of the stockbroker surfaced when the investors learned of their sudden departures from the country to escape prosecution. As in almost cases of irregularities, corrective steps are usually taken after losses have been incurred. The huge frauds committed by the stockbrokers prompted the Securities and Exchange Commission to establish measures that would strengthen their control over the activities of the stockbrokers. Some of the control procedures that have been considered are the following: 1. Stockbrokers should be required to deposit in the bank the proceeds from the sales of their clients' certificate of stocks to prevent the use of these funds for their trading operations. It has been observed that sometimes the stockbrokers cannot return the funds to their clients because the money has been used to supplement their operating capital. 2. Stockbrokers should be required to increase their capital to discourage temporary fund borrowings from their clients. Some stockbrokers are so deficient in their capital that they have to incur debts exceeding the debt-equity limit set by the SEC. Some stockbrokers use the street certificates (investors' stocks in possession of the stockbroker) as collaterals for loans without the knowledge of the owners. If and when stocks are to be pledge, the permission of the owners of stocks should first be secured to avoid unauthorized use of said stocks. Since the stock exchange have not been able to successfully weed out erring stockbrokers, the job of policing them should be taken over by the SEC. 3. Investors should be required to demand prompt delivery of their stock certificates to forestall stockbrokers from withholding them for personal gain. Any non-delivery of stocks certificates should be reported immediately to the SEC so that it can be alerted earlier to look into the firm's operations. If an investor sells, he should ask for the payment within the period required by the SEC. A central clearing house an depository of stocks transactions between stockbrokers of all stock exchanges. It will likewise enable the SEC to monitor effectively the floor stocks transactions particularly the street certificates. 4. A first-time investor should thoroughly check the people who run the brokerage firm, their personal backgrounds and resources. This is important because most of the transactions in stock brokerage are by verbal contracts based on the word of honor and honesty of the stockbroker. It is safer to select a brokerage firm controlled by the stockholders so that there will be more people liable to pay in case of losses. 5. The SEC should conduct a more thorough monthly audit insolvency and irregularities. 6. In addition, brokerage firms should be strictly statement audited by a reputable accounting firm to genuinely protect the interests of the investors. To deter embezzlers from running away to sanctuaries from justice, a country should have an extradition treaty with the major countries of the world especially the United States. In so many cases, dishonest stockbrokers have been emboldened to commit huge frauds because they know they can easily take refuge in a place where their country can no longer pursue them.