White-Collar Crimes Could Jump As Market Woes Continue - Report
January 21 2009 - 8:51AM
Dow Jones News
The number of white-collar crimes could jump significantly this
year as economic and financial-market turmoil lead many to deviate
from moral and proper activities to keep up a revenue stream or
make a quick buck, a new study says.
"It's a different world out there, and fraudsters know it," New
York-based risk consultancy Kroll Inc. says in its Global Fraud
Report, set to be released Wednesday.
Kroll warns, among other things, about an unscrupulous form of
short-selling in which brokers and traders form "loosely organized
cartels" to start negative rumors about companies whose shares they
are betting against. Such actions could become more prominent,
especially in countries with lax regulations, as stock markets
continue to reel from the credit crunch and economic crisis.
Kroll specifically tells investors to be wary of emerging
markets, where "undeclared" risks may be present. And the report
tells financial companies to prepare for a coming "storm" of
fraud-related lawsuits by investors seeking to blame someone for
their shrinking portfolios.
The global market downturn has already revealed some of the
fraud and other crimes that took place during the boom years -
including the alleged $50 billion Ponzi scheme undertaken by Bernie
Madoff. A handful of other schemes involving smaller, though not
insignificant, amounts of money have come to light in recent
weeks.
But the ongoing bear market may be even more rife with
fraud.
"The tumble in global stock prices has changed the fraud
environment, with fraudsters now pursuing scams intended to exploit
the new realities," said Niren Shah, one of the authors of the
Kroll report.
Despite all the fraud that has come to light in recent months,
Kroll warns that people will always be vulnerable to "false-hope
schemes."
Richard Abbey, managing director in Kroll's Business
Intelligence and Investigations practice, said comprehensive due
diligence is essential for managing exposure to threats in the
current environment. "Companies should not think that they are
safer in certain country markets - this is a global concern that
spans all industries," he said.
Particular caution may be warranted when investing in
emerging-market countries, which have so far avoided the economic
recession that has hit the U.S. and Europe. Kroll warns in its
report that anti-corruption legislation, even where it exists in
certain countries, may be breached.
"Emerging economies, with possibilities for real growth, may
well provide highly attractive investment opportunities in the near
term compared to those of the developed world," says Matteo
Bigazzi, another author of the report. "Without due diligence and
sensible risk management, however, the dangers could outweigh the
possible gains."
Lurking in both developed and emerging economies alike, the
Kroll report warned, are specific scams involving short-selling, a
legitimate trading strategy in which investors profit when prices
decline. The strategy turns illegal, however, if fraudsters begin
to spread false rumors about a company to weaken its share
price.
"Invented bad news is spread about the company to bring down the
price," the report states. "Cellphone and text message and
Internet-based instant message, rather than blogs and emails, are
used...since it is more difficult to identify who sent the
former."
Blake Coppotelli, senior managing director in the New York
office of Kroll's Business Intelligence and Investigations
division, said fraud is likely to continue to ramp up in 2009 and
beyond.
"Essentially, you can just pick a type of fraud, you'll see it
rise," he said. "Just pick an industry, and within that industry
you'll see that the fraud most commonly associated with that
industry is going to increase."
Kroll is a unit of Marsh & McLennan Cos. (MMC).
-By Dan Molinski, Dow Jones Newswires; 201-938-2245;
dan.molinski@dowjones.com
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