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Bank and financial institution fraud cases have garnered much attention. With a near collapse of the U.S. financial system that was recently thwarted, members of Congress and the public are looking for ways to strengthen the regulatory system in order to prevent a financial meltdown from ever happening again. In 1999 the passage of the Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act), weaker regulatory controls were set in place to monitor the activities of certain financial institutions. This led to a run up in speculative investment products that were beyond the risk comprehension of the public and the instrument’s creators. This led to a near collapse of the stock market before Congress and the U.S. Treasury provided a much needed stimulus to failing banks and other financial institutions in October 2008. Here is a look at a few of the more recent infamous fraud cases will help underscore the importance of financial regulation and government oversight.
Lincoln Savings and Loan Association
In 1984, financier Charles H. Keating, Jr. purchased the Lincoln Savings Loan Association of Irvine, California. He grew the institution’s assets 5 times from 1.1 to nearly 5.5 billion dollars over the course of 5 years. Much of this tremendous growth was due in part to the loose regulatory environment for savings and loan associations. When Lincoln’s parent company, American Continental, went bankrupt in 1989, it was discovered that assets from Lincoln were fraudulently siphoned off to keep American Continental afloat. When the smoke cleared, investors lost more than $200 million in assets (a record for the time) and Keating spent 4-1/2 years in jail. The Federal government created the Resolution Trust Corporation in 1990 to deal with failing savings and loans across the country.
Stanford Financial Group
Robert Allen Stanford was a financier who was charged in February 2009 with committing $8 billion in fraud against investors of certificates of deposit offered through offshore banks located in St Croix, U.S. Virgin Islands and Antigua. Stanford used the banks as cover against Federal securities and banking laws but in actuality operated a Ponzi scheme.
A Ponzi scheme is a way to swindle money from investors by using money from new investors to pay returns to older ones. As long as new investors are attracted, there exists a ready pool of money to payoff investors. As soon as new investors stop coming in, the scheme collapses with those at the bottom losing the most. It is also referred to as a pyramid scheme.
Bernard L. Madoff Investment Securities LLC (BLMIS)
The largest Ponzi scheme in history was created by Bernard Madoff, a former non-executive chairperson of the NASDAQ stock exchange. He committed $65 billion in fraud against investors in his securities firm. It is estimated that the fraud took place over 4 decades and involved everyday investors to the Hollywood elite. Several charitable foundations that invested with BLMIS went bankrupt because of the fraud.
Madoff was convicted and sentenced on June 29, 2009 to 150 years in prison. He is currently serving his sentence at the Federal Detention Center in Butner, North Carolina.
Fraud committed by banks and financial institutions threaten the integrity of our financial system. There is a great need for strong regulatory controls and oversight as a way to protect the public interest and eliminate cases such as those discussed above.
