Statement by Herbert A. Biern, Deputy Associate Director, Division of Banking, Supervision and Regulation, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 17, 1996 - prime bank financial instrument fraud - Statements to the Congress - Transcript

Federal Reserve Bulletin, Sept, 1996

Calls and letters to the Federal Reserve regarding "prime bank" scams began to slow in late 1995 and early 1996 but, unfortunately, began again in recent months. The new inquiries have focused on the role of the Federal Reserve itself If, with callers asking whether the Federal Reserve registers agents in certain European countries, licenses traders on secret "prime bank" exchanges, clears the transfers of "prime bank" securities, or oversees investment plans comprising "prime bank" instruments.

The Federal Reserve responded with a new advisory, released on June 11, 1996, to dispel any misconceptions that the Federal Reserve plays a role in "prime bank"-related investments. The recent advisory is also included with my statement.

The Effect of "Prime Bank" Schemes

The Federal Reserve is not aware that banking organizations supervised by the Board or any other federal banking agency have engaged, or otherwise knowingly participated, in any illegal "prime bank"-related conduct. We know of no domestic bank that has suffered losses from "investments" in "prime bank" financial instruments or from any other enterprise involving such instruments. Most "prime bank" scams entail multimillion dollar investments, and as such we are not aware of losses to individual, as opposed to institutional, investors. Some well-known organizations, however, have suffered large losses because of their investments in phony " prime bank" financial instruments.

In criminal matters involving "prime bank" schemes, U.S. Attorney's Offices have prosecuted and won cases under existing criminal statutes, and the SEC has been able to freeze accounts of wrong-doers and obtain other injunctive relief.

LEGISLATION

The committee has asked the Federal Reserve to comment on the need for additional legislation addressing misconduct by fraudsters selling these instruments. The Board generally defers to the law enforcement community and to the securities regulators regarding legislative proposals such as S.1009, the "Financial Instruments Anti-Fraud Act of 1995" proposed by Senator D'Amato. It is our view, however, that continuing successful prosecution of these cases is crucial in sending a message to potential "prime bank" fraudsters. Thus, new statutory authority enhancing law enforcement's ability to prosecute wrongdoers may prove useful.

I am happy to address any questions you may have about the Federal Reserve's efforts to address the problems associated with these illegal financial schemes.

(1.) The attachment to this statement is available from Publications Services., Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551.