Forensic Investigation: Avoiding “Boiler Room Fraud”
Six Sky Capital executives surrendered to law enforcement officials in New York on July 8 2009 and were charged with a $140 million stock manipulation fraud. And all this in the shadow of the mind-boggling Bernard Madoff debacle. This shows yet again how careful you need to be. Clearly, none of the investors hoodwinked by the scheme availed themselves of the sophisticated skills in forensic accounting and computer forensics that can now protect you from such calamities. The Financial Times report on the case on July 9 provides a chilling account of just how happy-go-lucky some investors are. In this day and age, there’s simply no excuse for not taking appropriate precautions.
The manipulation strategy involved was allegedly devised in a way that led investors to buy shares in the belief that those shares were in demand. In reality, there was no such demand. The aim was simply to control the market and boost the price of the stock. Sky Capital’s boiler-room tactics and those of its brokers undercut the level of honesty and fair play that the US Securities and Exchange Commission was seeking to maintain.
According to the criminal indictment, the six executives, including Sky’s founder and chief executive, allegedly persuaded investors to buy shares through private placements in two related companies – Sky Capital Holdings and Sky Capital Enterprises, which traded on the Alternative Investment Market of the London Stock Exchange. As The Financial Times points out, not only were US investors drawn into this web, but British investors were too. The funds thus procured were supposedly used for private purposes as well as for commissions paid to brokers that were camouflaged as special bonuses or loans.
It is said that the chief executive of Sky Capital maintained a lavish lifestyle, which involved frequent first-class trips to London to market the placements to potential investors. The SEC claims that these visits also entailed luxury hotel accommodation and top restaurants, as well as adult entertainment. “This firm and these brokers,” the SEC’s acting regional director in New York said, “went to great lengths to repeatedly lie to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares.”
The old rule that, if it sounds too good to be true it probably isn’t true, should have loomed large here. If it had, any investor could have called in a specialist team capable of applying the latest skills that combine computer forensics, deep-level forensic accounting and other fraud investigation methods. The result would have been flashing red lights that warned investors what they were getting themselves into.
According to the SEC allegations, Sky Capital enforced a “no net sales” policy that essentially prevented investors from selling their stocks. A specialist team would have recognised that as a sizeable blip on their radar screen first up. They would have quickly highlighted the fact that when the London Stock Exchange suspended trading in those stocks in 2006, the investments no longer had any value.
The Sky case displays the same brazenness that Bernie Madoff had in spades. We’re still reeling from the giveaway signs that hardly anybody noticed with him. What you’ll outlay on a professional team that can ensure this doesn’t happen to you, is miniscule compared to the loss that others less careful will suffer.
