To The Moon

Bull markets are often associated with a permissive social culture that can lead to brazen investment business practices resulting in institutionalized securities fraud.

Few investors take notice of lapses in integrity as long as everyone is making money and the markets continue to rise. When the punch bowl is removed, then the hangover that follows can reveal institutionalized securities fraud.

Examples include:

Accounting Fraud: Enron, WorldCom, and other big name corporations defrauded millions of investors through “creative” accounting and inadequate disclosure during the late 1990’s bull market. Under normal conditions, an entire regulatory and oversight system exists to catch these problems, but during great bull markets, the scrutiny of regulators and auditors produces insufficient results.

Unethical Mutual Fund Practices: Late-trading and front-running are two privileges that were granted by many mutual funds during the late 1990’s to insiders and large institutions. This gives them an unfair advantage while betraying their fiduciary responsibility to individual shareholders. The total cost of this fraud to Main Street investors will never be known.

Analyst Research Conflicts: A long history of investment fraud can be found in brokerage firms co-mingling investment banking to institutions with investment sales to individuals under one roof. Individual investor recommendations by in-house analysts are often tainted by lucrative investment banking relationships.

You wouldn’t trust medical advice from your doctor if he was biased by sales commission kickbacks from drug companies, so why would you make the same mistake with your investment advice?

Unfortunately, many investors aren’t even aware of the biases inherent in the investment advice they receive.

“Honesty: the most important thing in life. Unless you really know how to fake it, you'll never make it.”– Bernard Rosenberg

For example, Merrill Lynch settled with the New York Attorney General’s office for $100 million for this misleading practice (without admitting any wrongdoing, of course). Other big name brokerage firms ran into similar conflict of interest charges.

The fundamental problem causing institutional securities fraud is the greed and easy-money character of major bull markets that can result in a promiscuous business culture.

In the search to maximize bottom line profits, there’s always the risk that one bad apple will place expediency in front of integrity, resulting in fraud.

Just because an institution is large and reputable doesn't make securities fraud impossible.

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