The Justice Department today announced that its intensive three-and-a-half-month effort to crack down on investment fraud has ended, with charges for more than 500 fraudsters. The staggering amount of deception uncovered by "Operation Broken Trust" led to $10.4 billion in investor losses. To give an idea of scope, of course, that's equivalent to about one Madoff. But in a way, these mini-Madoffs are just as bad, if not worse: they often take advantage of less financially savvy, and thus more vulnerable, consumers. There are more than 120,000 victims in these cases. With all the fraud out there, how can trust be restored?
It's worth nothing that these cases are only those with enough evidence to charge people. That means for every case where charges were brought, there were probably several more cases of deception without enough evidence to pursue. Whether a big or small investor, it's only logical to be wary of anyone who seeks to help you manage your money. It won't be easy to restore confidence in investing.
One problem with white collar crime is that it often does pay. The risk is fairly low. You might spend a little time in a country club prison if caught, and lose your illegally obtained fortune. But you could make millions of dollars if you succeed. Because the potential reward for succeeding in a fraud scheme is so great, the punishment needs to match it. We're not talking the death penalty here, but prolonged jail time in a general population prison might be more fitting. Potential fraudsters should be very scared of the consequences they would face if caught.
It's not uncommon for those who participate in a fraud scheme once to do so again in the future. This shouldn't ever be allowed to happen. One way to remedy this might be with a robust lifetime probation system, where all future income is examined each year after release. If these criminals go legit after they serve their time, then that's great. But if they suddenly begin making lots of money again, feds should take note.
Tools for Consumers
Finally, consumers need more resources and tools to identify good, honest investment consultants. Licensing isn't enough. There also needs to be robust and easily accessible information on how to choose an investment manager and warning signs to look for that a financial consultant might be a fraud. The SEC and Justice Department can't possibly catch all of these fraudsters on their own, so diligent consumers should also have the capability and know-how to identify and expose deception.
Fraud poses a serious threat to an economy beyond just the loss of money directly involved. If it becomes too prevalent, then investment will decline as worries mount about finding honest financial consultants. In order for the U.S. to keep its growth rate high going forward, investment must be robust. If fraud continues at such high rates, then it will be very difficult to keep the market strong.