Fraud in the

Corporate Context

The FBI Criminal Undercover Operations Review Committee . . . . . . . . . 1

By Joshu a R. Hochberg

Investigating Accounting Frauds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

By Dav id L. Anderso n and Joseph W . St . Denis

Prime Bank/High Yield Investment Schemes . . . . . . . . . . . . . . . . . . . 10

By Joel E. Leising and Michael Mc Garry

Prosecuting Corporations: The Federal Principles and Corporate Compliance

Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

By Philip Urofsky

Ex Parte Contacts with Corporate Employees . . . . . . . . . . . . . . . . . . 26

By Edward I. Hag en

Navigating the Evolving Landscape of Medical Record Privacy . . . . . . . 30

By Ian C. Smith DWaal  Primer for Using Sentencing Guidelines Enhancement for Identity Theft-

Related Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

By Paula J. Desio and Donald A . Purdy, J r.

March 20 02

Volume 50

Number 2

United States

Department of Justice

Executive Office for

United States Attorneys

Office of Legal Education

Washingt on, DC


Kenneth L. Wainstein


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In This Issue


before Congress on securities litigation reform.a

Joseph W . St. De nis is an Assistant Chief

Accountant in the United States Securities and

Exchange Commission’s Division of Enforcement

in W ashin gton, D .C. M r. St. De nis ha s a deg ree in

accounting and an M.B.A. from the University of

Colorado at Boulder. Mr. St. Denis is a licensed

CPA in Colorad o. Before joining the SEC’s

Division of Enforcement, Mr. St. Denis was an

auditor with Coopers & Lybrand and a CFO,

controller and vice president-finance in the hightech


The Securities and Exchange Commission, as a

matter of policy, disclaims any responsibility for

any private publication or speech by its members

or staff. The views expressed herein are those of

the authors and do not necessarily reflect the

views of the Commission or the authors’

colleagues on the staff of the Commission.

Prime Bank/High Yield Investment


Joel E. Leising

Senior Trial Attorney

Fraud Section, Criminal Division

Michael McGarry

Trial Attorney

Fraud Section, Criminal Division

I. Introduction

Ever since Breton Woods and the formation

of the I ntern ationa l Monetary Fund and W orld

Bank in the late 1940's, the major banks in the

world have engaged in trading programs among

them selve s, yield ing retu rns ra nging from 10% to

100% per month, at little or no risk. Only these

banks, and a few select traders authorized by the

Fede ral Re serve , are allowed to partic ipate in

these trading prog rams , whic h are p rincip ally

designed to generate funds for humanitarian and

other worthwhile projects. On occasion, particular

trader s allow individ ual inv estors to partic ipate in

these secret trading programs by pooling the

individual’s funds with funds from other investors

until a certain amount, usually a minimum of

$100 million, is accumulated for a trade.

However, these individuals must enter nondisclo

sure a greem ents w ith the tra ders a nd ag ree to

contribute half of their profits to a designated

charitable cause.

Intere sted? You r inves tmen t advis or nev er told

you about this? Maybe that's because all of what

you have just read is false. Nevertheless,

thousands of people during the past decade have

fallen prey to scams based on similar claims and

lost billions of dollars believing they were

investing in such mythical trading programs.

Despite repeated warnings over the years from

various regulatory agencies and international

organizations that such trading programs do not

exist, these prime bank or high-yield investment

schemes have continued to proliferate and are now

nearing epidem ic levels.

Various agencies or organizations, such as the

Federal Reserve Board, Office of Comptroller of

Currency, Department of Treasury, Securities and

Exchange Commission (SEC), International

Chamber of Commerce, North American

Securities Administrators Association,

International Monetary Fund, and World Bank

have all issue d exp licit war nings to the p ublic

abou t prime bank fraud . Occa siona lly, you will

find copies of these among the items seized during

execution of a search w arrant at a fraudster’s


office. A number of g ood reference m aterials are

publicly-available relating to these schemes,


INSTRUMENTS FRAUD issued by the SEC in 1998.



1996 by the ICC Commercial Crime Bureau, and


by Professor James Byrne of the Institute of

International Banking Law & Practice, George

Mason Un iversity L aw Sc hool.

Prime ban k frau d first a ppea red in th e early

1990 's, wan ed somewhat in th e mid 1990 's in

response to aggressive enforcement actions and

media coverage, then reemerged as a significant

problem in the late 1990's. At present, over one

hundred pending federal criminal investigations

involve prime bank fraud. In addition, the

Securities and Exchange Commission and various

state law enforcement agencies have a number of

active investigations. Moreover, as the problem

has become worldwide, more foreign law

enforcement agencies, particularly in Englishspeaking

countries, have actively investigated and

prosecuted this type of fraud.

The purpose of this article is primarily twofold:

fir st, to aler t reade rs to the existen ce of th is

particular type of fraudulent scheme, and second,

to offer some suggestions for investigating a

prime bank scheme.

II. Common characteristics of the scheme

"Prime bank" schemes — "prime bank

instrument" schemes, "high yield trading

prog rams " or "ro ll programs "— a re ess entially

Ponzi schemes, in which the perpetrators claim

exists a secret trading market among the world’s

top ba nks o r "prim e ban ks." Pe rpetra tors cla im to

have unique access to this secret market. The

"top" or "prime" banks purportedly trade some

form of bank security such as bank guarantees,

notes, or debentures. These instruments can

supp osed ly be b ough t at a disc ount a nd so ld at a

premium, yielding greater than market returns

with no risk. In reality, no such market exists.

Furthermore, high-yield "prime bank notes," as

describ ed by th ese per petrators , do not ex ist.

They often claim that there are only a few

"traders" or "master comm itment holders" who are

authorized to trade in these securities and that the

secu rities m ust be traded in large block s, typic ally

million s of do llars or more . Prom oters te ll

poten tial inve stors th at they have specia l acces s to

a tradin g program , and th at by p ooling their

money with that of other investors, they can

particip ate in th e prog ram. P romo ters als o tell

investors that the programs participate in some

humanitarian cause and that they are giving the

investors a special opportunity to participate in the

program, but only if they agree to give a share of

the profits to the cause. They also typically require

investors to execute a "non-disclosure" and "noncircumvention

agreem ent" because , as they are

told, banks and regulatory agencies will deny the

existenc e of these trading p rogram s.

III. Case law involving prime bank schemes

Over the past few years, a number of reported

decisions affirmed convictions of prime bank

schemers. For example, this past summer the

Four th Circ uit affirm ed de fend ants’ c onvic tions in

United S tates v. Bo llin, 264 F.3d 391 (4th C ir.

2001), for conspiracy, wire fraud and money

laundering. As described by the Court of Appeals:

This case arose out of a wide-ranging

investment fraud scheme, carried out by a

network of conspirators, who bilked millions

of dollars from investors across the country.

The investments were programs that promised

enormous profits, supposedly derived from

secret trading in debentures issued by

Europ ean "pr ime" ba nks.

The programs involved supposed trading of

European "prime bank" debentures and

prom ised v ery hig h rates of retu rn with little

or no risk to investo rs. Acc ording to the ...

literature that they distributed, the programs

were available on a limited basis to groups of

investors whose money would be pooled and

delivered to a "prime" bank. The investment

principal was supposedly secured by a bank

guarantee and, therefore, was never at risk.

Millions of dollars in profits were to be

generated within a few months from the

trading of debentures. For example, one

prog ram ... offer ed a p rofit of $73,0 00,00 0 in

ten months, based on an investment of



Id. at 399-400.

In United States v. Polichemi, 201 F.3d 858,

aff’d on rehearing, 219 F.3d 698 (7th Cir. 2000 ),

defendants defrauded nearly thirty investors out of

more than $15 million by marketing "prime bank

instrum ents," w hich th ey de scribe d as m ultimillion-

dollar letters of credit issued by the top

fifty or one-hundred banks in the world. As the

Seventh Circuit explained, defendants

told their victims that they could purchase

these instruments at a discount and then

resell them to other institutions at face

value; the difference in price represented

the pro fits that w ould g o to the defen dants

and their "investors." This was nothing

more than a song and dance: the trades

were fictional; there was no market for the

trading of letters of credit; and nothing

capable of generating profits ever

occurred. Somehow, notwithstanding the

implausibility of "prime bank

instruments" to one familiar with normal

business practice for letters of credit, they

managed to persuade their victims to give

them money to finance the purchase of

phan tom d iscou nted in strum ents. W hile

this did not earn a cent for any of the

investors, it definitely changed the

defendants’own lifestyles.

Id. at 859 -860 . Amo ng tho se con victed in

Polichemi were attorneys, salespeople, an

individual who acted as a reference, and

Polechemi, who claimed to be one of the few

people in the world with a license to trade prime

bank s ecurities.

In a relate d case, United States v. Lauer, 148

F.3d 766 (7th Cir. 1998), Lauer, the administrator

of an e mplo yee p ensio n fun d, plea d guilty to

diverting millions of dollars to the prime bank

scheme prosecuted in the Polichemi case. In

rejecting Lauer’s appeal on the loss calculation for

sente ncing purp oses, th e Sev enth C ircuit up held

the trial court’s use of an intended loss figure,

rather tha n a lowe r actual los s amo unt.

In anoth er recen t case, S.E.C. v. Lauer, 52

F.3d 667, 670 (7th Cir. 1995), Chief Judge Posner


Prime Bank Instruments do not exist. So

even if [a co -sche mer] had s ucce eded in

raising mon ey fro m ad ditiona l inves tors, it

would not have pooled their money to buy

Prime Bank Instruments. It would either

have pocketed all of the money, or, if what

its masterminds had in mind was a Ponzi

scheme, have pocketed most of the money

and paid the rest to the investors to fool

them into thinking they were making

money and should therefore invest more

(or tell their friends to invest).

In United States v. Richards, 204 F.3d 177

(5th C ir. 200 0), the Fifth C ircuit up held

defendants’ convictions for conspiracy, wire fraud,

mail fraud and interstate transportation of stolen

property. At trial, the government presented the

follow ing ev idenc e desc ribing how defen dants

induced participants to invest in a "roll program":

Poten tial inve stors w ere told that the ir

money would be pooled with that of other

inves tors an d use d to bu y letters of cre dit.

The letters of credit would be "rolled"--

sold, re purc hase d, and resold -- to

European banks frequently and repeatedly.

Each "roll" w ould g enera te a larg e prof it

to be d istribute d am ong th e inve stors, in

proportion to their investment. The

inves tors w ere told that the ir fund s wou ld

be safe at all times, held either in an

account at a nationally-known brokerage

firm or invested with a "prime" or "top

50" international bank. Investors were also

told that they would receive at least the

return of their initial inv estme nt, with

interest, and would likely make substantial

profit. In fact, the defendants took the

invested funds for their own use, bought

no lette rs of c redit, an d, exc ept for a sma ll

payment to one participant, returned no

money to the investors.

Id. at 185.

In United States v. Rude, 88 F.3d 1538, 1548

(9th C ir. 199 6), de fend ants w ere ch arged with

engaging in a prime bank scheme. In affirming

their convictions, the Court of Appeals found,

among other things, that the government had

proved beyon d a reasonable doub t "that the very


notion of a ‘prime bank note’ was fictitious," and

cited other evidence that the term "prime bank"

was not used in the financial industry "and was

commonly associated with fraud schem es." Id. at


In Stokes v. United States, No. 97-1627, 2001

WL 29997, at *1 (S.D.N.Y. Jan. 9, 200 1),

defendant was co nvicted of conspiracy, wire

fraud , mon ey lau nder ing an d inters tate

transportation of fraudulently obtained money.

Defendant claimed that "through various personal

conn ection s in the b ankin g indu stry, he could

purchase and sell 'prime bank guarantees' or

letters of credit and make a substantial profit in a

short pe riod of tim e, with no risk to the in vestor."

As is typical in these kinds of cases, the defendant

attempted, unsuccessfully, to portray himself as a

victim, as someone unwittingly conned by coconspirators

to carry out the fraud.

A number of other criminal cases involving

prime b ank sch emes have a lso been reported . See

e.g., United States v. Wonderly, 70 F.3 d 102 0 (8th

Cir. 19 95); United States v. Hand, No. 95-8007,

1995 W L 743841 (10 th Cir. Dec. 15, 1995);

United States v. Aggarwal, 17 F.3d 737 (5th Cir.

1994 ); Unite d State s v. Gr avatt, No. 90-6572,

1991 W L 278979 (6th C ir. Dec. 27, 1991);

United States v. Lewis, 786 F.2d 1278 (5th Cir.

1986 ). The re are also a number of re porte d civil

cases b rough t by the S.E .C. See, e.g. S.E.C. v.

Milan C apital Gr oup, In c., No. 00 Civ. 108

(DLC), 2000 WL 1682761 (S.D.N.Y. Nov. 9,

2000 ); S.E.C. v . Kenton Capital, L td., 69 F.

Supp .2d 1 (D.D.C. 19 98); S .E.C. v . Infinity

Group., 993 F . Supp. 3 24 (E.D . Pa. 199 8), aff'd,

212 F .3d 18 0 (3d Cir. 20 00); S.E.C. v. Deyon, 977

F. Sup p. 510 (D. M e 199 7); S.E.C. v. Bremont,

954 F. Supp. 726 (S.D.N.Y. 1997).

Assis tant U. S. Atto rney Mich ael Schwartz in

Houston prepared an excellent memorandum

titled "United States’ Memorandum of Law

Concerning Fraudulent High-Yield or

International ‘Prime Bank’ Financial Instrument

Schemes," a copy of which can be obtained from

either h im or th e Frau d Sec tion. A ppro priately

modified versions of this memorandum can not

only be used to educate your trial judge on the

legality of such schemes, but also excerpted for

use in search warrant affidavits.

IV. First steps

While the particular facts presented in each

case w ill obvio usly d ictate w hich s teps y ou sh ould

first take in investigating a prime bank or high

yield investment program (HYIP) scheme, we

have found the following to be generally very

usefu l:

Check subject’s background: Chec k to

see if the subject has a criminal record, or

if his name appears anywhere in FBI

indices. Check with other agencies as

well, since these types of investigations

are handled not only by the FBI, but also

by Customs, Secret Service, IRS-CID, or

the Postal Inspection Service. Many prime

bank scammers are career cons who have

been previously convicted of fraud. Prime

bank scam mers also se em to opera te

within an extensive network, using each

other to brok er or s olicit inv estme nts in

particular HYIP schemes, to backstop

some fraudulent claim, or to help create a

"plausible deniability" defense. Therefore,

your subje ct ma y hav e bee n interv iewed in

the past by an agent in another matter and

made statem ents th at cou ld pro ve us eful in

your case. I f you are fo rtuna te, you will

find that an agent expressly put your

subject on notice in the past as to the

fraudulent nature of prime bank trading

prog rams . Such notice wou ld sub stantially

aid yo ur eff orts in e stablish ing probab le

caus e for a searc h wa rrant a nd ge nerally in

prov ing the subje ct’s fra udule nt inten t.

Contact the Securities and Exchange

Commission: The S EC a ctively

investigates and prosecutes prime bank

fraud as securities fraud. Your subject may

be, or has been, involved in a SEC

inves tigation . If so, th is wou ld also help

build probable cause for an eventual

search warrant, and pro ve intent at trial. If

the SE C has not inv estiga ted yo ur sub ject,

you should consider asking them to do so.

Contact either your regional SEC office or

Brian Ochs, Assistant Director, Division

of En forcement, SEC at (202 ) 942 -474 0 in

Washington , D.C. (See Tips below).


Contact Jim Kramer-W ilt and Bill

Kerr: Jim K rame r-Wilt is an atto rney in

the Treasury Department’s Bureau of

Public Debt and has taken a very active

role in attempting to expose and combat

prime bank fraud. He has compiled an

extensive database on known and

susp ected prime bank scam mers and w ill

readily share with you the database, as

well as other u seful m aterials . In all

likelihood he will have, or can get, some

background information about your

subject. He may be reached at (304) 480-

8690. Bill Kerr, with the Enforcement and

Compliance Division, Office of the

Comptroller of Currency, may also

provide some valuable information about

your subject, particularly if a bank has

filed a Suspicious Activity Report (SAR)

with the OCC, or has otherwise made an

informal inquiry to the OCC or Federal

Reserve about a particular financial

transa ction o r inves tmen t. His number is

(202) 874-4450.

Locate subject’s bank accounts and/or

assets: These cases typically involve

millions of dollars of victims’ funds, and

are of ten dire cted a t wealth y indiv iduals

or institutions, with minimum investment

levels (e.g., $25,000) and representations

that "trades" can not be entered until $100

million has been pooled. Although

offsh ore ac coun ts are fr eque ntly us ed in

these schemes, surprisingly enough, you

will often find that the subject still has

large sums on deposit in accounts at

Unite d State s ban ks un der his contro l.

This may be because he has not yet

transferred the funds offshore, or perhaps

because, as part of his scheme, the funds

are being maintained in an alleged trust

account so he can as sume the persona of a

well fin ance d inve stmen t man ager w ith

the ba nk em ploye es. At a ny rate , to loca te

the ac coun ts is imp ortan t, in ord er to

determine the scope and nature of the

fraud , as we ll as pre pare f or ultim ate

seizure of the funds. A subject’s account

can usually be identified by asking a

victim for the wiring instructions that he

received from the subject. Accounts can

also be located through other means,

including mail drops, trash runs, the

clearing process of a victim’s check, and

grand jury subpoenas. Of course, the

likelihood that the subject has used more

than one account is high. In determining

whether to s eize th e acc ount, in form ally

conta ct the fin ancia l institutio n’s se curity

office r to get a roug h idea of how mu ch is

in the a ccou nt.

Consider initiating a proactive

approach: The m ost diff icult element to

prove in a prime bank case, as with most

investmen t fraud s, is frau dulen t intent.

The most com mon defense is, "I didn’t

know those trading prog rams didn’ t exist.

I believed Mr. X when he told me they

did." Therefore, it is important at the start

of an in vestig ation to plan h ow to

overcome this defense. The FBI has

developed a number of different proactive

appr oach es that h ave p rove n suc cessf ul in

estab lishing the req uisite inte nt that w ill

substantially assist you in prosecuting

your case. Indeed, in most instances, the

defendant will enter a plea after being

confronted with such evidence. For one

successful prosecution resulting from a

sting operation, see United States v.

Klisser, 190 F.3 d 34 (2 d Cir. 19 99).

Execute search and seizure warran ts:

As so on as you h ave b een a ble to

determine the nature and scope of the

fraud, you should consider applying for

search and seiz ure wa rrants.

Victim questionnaires: Many of these

cases involve hundreds, if not thousands,

of potential victims. Questionnaires sent

out to victims have proven to be an

excellent way to quickly collect evidence,

including witness statements and

documents, which you can then review for

possible in-depth interviews later.

Obviously, this should be done only once

the existence of the investigation becomes

public. Questionnaires are also a good

way to gauge the degree of cooperation

you can expect to receive from victims,


who oftentimes in these Ponzi type

schemes do not feel "victimized". (See

Section VII below).

V. Pssst... here are a few good "tips"

Identifying the existence of a prime bank

investment scheme is clearly easier than

determ ining th e scop e of the schem e, or try ing to

explain to a jury precisely what is meant by (or

supposedly meant by) such terms as "prime bank

discounted negotiable debenture" or "World Bank

high-yield humanitarian trading program." The

following tips will hopefully help you build and

prove a case.

Keep it sim ple: Once you determine the

target or targets, focus your investigative

efforts on building the strongest case

against them without trying to uncover

every transaction or proving every illegal

act they may have committed. First, as a

practical matter, you simply can not

include every transaction. These schemes

are often quite broad in scope and can

often meld into other investment schemes.

Stay focused on the heart of the case you

are de velop ing. A ttemp ting to b e allinclusive

can be a waste of time and

resources. By focusing on the key

transactions, you can present a case that

the average juror will understand. Second,

you need not include eac h and every

victim. More than likely, the majority of

the scheme can be proven through a

handful of victims. Use your best

witnesses. Often these are people who

retained investment contracts they

executed with the targets or who

remember specific misrepresentations.

The details regarding the other victims

can be saved for the sentencing phase.

Third, you need not endeavor to disprove

the m yriad of mis repre senta tions m ade to

the victims. Prime bank schemes are often

based on a series of misrepresentations

that seem, at least to the investors at the

time, to have some basis in reality. You

are better off focusing on the material

misrepresentations that establish the

nature of the scheme than disproving each

of the various ancillary

misrepresentations. Proving that the

subject did not invest investor funds, but

instea d spe nt for h is pers onal b enefit, is

easier than disproving a tale about the

World Bank, the IMF, or the yield on

prime bank notes from an emerging

nation. In short, do not argue on the

defendant’s terms. Just show that the

defendant did not invest the money as


Get a financial analyst assigned to the

matter: Reac hing o ut and utilizing the full

range of tools available to a prosecutor

can go a long way towards turning an

investigation into a prosecutable case.

Having an FBI Financial Analyst (FA)

assigned early in the investigation can

help in a number of ways. First, an FA can

review the pages and pages of bank

records and determine how the subject

transf erred , conc ealed and e ventu ally

spent the victim’s invested funds. Second,

in many of these cases, che cks and wire

transfers go back and forth between the

accounts of targets, investor-victims, and

brokers who bring victims into the

scheme. A thorough review by an FA can

help determine who’s who. Further, an

early r eview will mo st likely u nearth

additional victims, either because they

sent funds into a target’s account or

beca use th ey rec eived lulling payments

from the target's accounts. Interviews of

these witnesses may yield additional

counts of fraud and money laundering

pursuant to 18 U.S.C. §§ 1956 (lulling

payments) and 1957 (spending of

proceeds from a "specified unlawful

activity"). Third, the FA will generally be

able to identify additio nal ba nk ac coun ts

into which the subject is secreting

proceeds. Such information will provide

additional accounts to subpoena, including

foreign accounts of which you may not

have known. Identifying the foreign

accounts as early as possible is important

because of the time involved in attempting

to obtain that information.

Get M LATs out e arly: If you anticip ate


needing evidence from abroad, you

should contact the Office of International

Affairs (OIA) in Washington, D.C. at

(202) 514-0000 to initiate the steps

necessary to obtain such information. The

United States has Mutual Legal

Assistance Treaties (MLAT) with many

nations, establishing a framework for

obtaining evidence from another country.

For those countries with which we have

no MLAT in force, OIA can advise you

on the appro priate m eans by w hich to

obtain the requested information. OIA

will provide you with a format-request for

your particu lar cou ntry, w hich y ou w ill

need to complete and return to OIA.

MLATs can b e used to obta in

authenticated foreign documents and

testimony abroad, execute search

warra nts, and s eize fun ds.

Get started soon:

Once OIA has forwarded your request on

to the foreign country, the requested

evidence can take months to arrive. As

discussed above, ban k security officers

can often tell you if an account is active

and if th ere ar e fund s in the a ccou nt.

Obtaining this information through

inform al cha nnels can h elp de termin e if

you need to wait for a response to an

MLAT request. In the meantime, you may

receive the collateral benefit of

enco urag ing the foreig n auth orities to

open their own investigation, which may

later provide you with an invaluable level

of cooperation.

Don’t go it alone: Coor dinatin g with

other agen cies ca n sav e time a nd eff ort.

While you must be mindful of the nondisclosure

obligations of Rule 6(e),

working with the SEC, IRS, NASD, and

other federal and state regulatory agencies

can save a great deal of time. These

agencies and regulators may have

investigations underway and may have

collected useful information about your

targets as well as potential victims. Often

victim s com plain to the SE C or th eir

particu lar state regula tor, an d, as a r esult,

civil enforcement actions may already be

underway. W orking with the regulators

and o ther ar ms of law e nforcement is

always preferable to working at cross

purposes. Additionally, civil cases may

already be in the works. Not knowing the

full sco pe of th e scam , victim s often retain

lawyers to pursue civil claims for breach

of contact. These civil attorneys can also

be a useful source of information. Finally,

requesting information from FinCEN and

the IR S ma y also prov e to be usefu l.

Helpful websites: A number of websites

can be consulted in investigating a prime

bank schem e. Two of the mo st useful are

the Treasury Dep artment’s

www.treasurys and the SEC’s

divisio ns/en force /prime bank .shtm l, both

of which list numerous other very helpful


Don’t reinvent anything: More than

likely, the target is operating in a similar,

if not identical, manner to that of a

number of other prime bank scammers.

Consulting with other prosecutors who

have handled these types of cases may

save you time and effort. Furthermore,

these prose cutor s can p rovid e you with

materials such as sample indictments and

search warrant affidavits. The Fraud

Section, Criminal Division, in Washington

D.C., (202) 514-7045, also has some

guidan ce ma terials.

VI. Countering defenses - "It wasn’t me"

Echo ing the lyrics o f a rec ent reg gae-p op hit,

when caught red-handed, even on camera,

defend ants will of ten claim simply "I t wasn’ t me."

The participants and funds of a particular prime

bank schemes are often intertwined with other

schemes. For the target or targets to send funds

back and forth to other brokers or "traders" who

are running similar scheme s either in this country

or offshore is not uncommon. Those brokers or

traders often return the favor. The precise reason

for the se inter ming led tran sactio ns is no t entirely

clear, b ut it doe s mak e tracin g fun ds more dif ficult

and sometimes gives defendants a built-in defense.


Defendants m ay claim that they sent an investor’s

money to Mr. X on the Isle of Man, and thus, like

everyo ne else, w ere foo led by M r. X, i.e., "it

wasn’t me."

On March 15, 2001, in a case prosecuted by

AUSA Linda M. Betzer of the Northern District

of Ohio and Fraud Section Trial Attorney Glen G.

McGorty of the U.S. Department of Justice,

defendants Geoffrey P. Benson, Susan L. Benson

and Geoffrey J. O’Connor were found guilty of

twenty-one counts including conspiracy, mail and

wire fraud, and tax evasion. Th e defendants were

the former operators of The Infinity Group

Company ("TIGC "), whic h collecte d over $ 26.6

million from over 4,400 victim investors across

the country over a one and one-half year period.

Through their Financial Resources newsletter, the

defendants prom ised investors up to 181% return

on their money, depending on the principal

invested. The defendants claimed successful

investment experience and business associations

with individuals providing access to prime bank

programs "ordinarily unavailable to the individual

investor." The defendants promised the victims

that their money would be pooled to purchase

"prime bank instruments" in the European market

with high guaranteed rates of return.

In reality, the defendants sold no product and

offered no service. They had no investment

expe rience , nor d id they have any s ucce ss with

"prime bank investm ent" programs in Eu rope. In

typica l Ponz i/pyra mid sc heme fash ion, the y paid

some investors in TIGC’s "Asset Enhancement

Program" with money collected from new

investors, but the great majority of victims never

received any money back from TIGC. In 1997 the

State of Ohio, Department of Commerce, Division

of Securities, and the federal Securities and

Exchange Commission halted the TIGC

operations, resulting in a court-ordered injunction

of TIGC’s sales activities. Of the $26 million

collected by the defendants, a court-appointed

trustee and forensic accountant collected almost

$12 m illion in a ssets, w hich w as sub sequ ently

return ed to th e victim s. The allege d inve stmen ts

yielded no profits for the investors for over a year

and a half, though TIGC allegedly sent

approximately $11 million out of the $26 million

to "investment programs" run by Geoffrey

Benson’s associates located around the world.

Thou gh the defen dants did no t testify a t trial,

their attorneys argued through government

witne sses a nd ex hibits th at the $11 m illion sen t to

these prog rams was e viden ce tha t the de fend ants

believed the money they solicited from the

investors was being invested in the prime bank

prog rams they promo ted in th e new sletters . This

defense attempted to convince the jury that the

defendants were themselves victimized by

Bens on’s a ssocia tes and that the y we re actin g in

good faith in operating TIGC’s Asset

Enha ncem ent Pr ogram. To refute this argument,

the go vernment dem onstra ted tha t the on ly asse ts

the defendants enhanc ed were their own. A s part

of its case, the government called several exp ert

witnesses, including an expert on international

banking, who testified that the prime bank

instruments and programs promoted by the

defendants do not exist. The government

highlighted the fact that only part of the received

funds were invested, while the balance was placed

in off- shore bank acco unts o r used by de fend ants

to purchase an eighty-six acre plot of lakefront

property, build a multi-million dollar home, and

pay for many personal expenses. The

government’s fraud case focused on the

misrepresentations contained in the Financial

Resources newsletters. In these monthly mailings,

the de fend ants n ot only lured in vesto rs with

guarantees of high returns, but also lulled them by

claiming successful investments and even starting

a grant program us ing the "profits" of the trust’s

investments abroad. Over the period of the Asset

Enhancement Program, TIGC’s alleged $11

million investments yielded no profits — a clear

inconsistency with what TIGC told its investors.

The governm ent succeeded in conv incing the jury

to focus on these lies and to understand that TIGC

never intended any monies sent to its business

associates to return a profit, but rather only to be

hidden from a ny futur e investig ating auth ority.

The jury found that the defendants were not

victim s as the y claim ed, bu t were guilty o n all

charg ed co unts. G eoffr ey Be nson was u ltimate ly

sente nced to 360 mon ths' inc arcer ation, w hile

Susan Benso n and Geoffrey O'Connor eac h were


sentenced to 121 m onths' incarceration. All were

ordered, jointly and severally, to pay $12,975,341

in restitution. All of the sentences reflected

guideline enhancements for a fraud loss of over

$20 million, more than minimal planning, mass

marketing, violation of a judicial order, use of

sophisticated means, and obstruction. Geoffrey

Benson's sentence also reflected enhancements for

his leadership role, an offense affecting a financial

institutio n, and abus e of a p osition of trus t.

Defeating this defense and proving intent can

be accomplished in a number of ways. First, one

of the proactive approaches discussed above can

be used. After a target is put on notice by the

government that prime bank trading programs do

not exist and that claims to the contrary would be

false, s ubse quen t involvement by th e targe t wou ld

not surv ive the "I too was du ped de fense."

Seco nd, circumstantial e viden ce ca n be u sed to

establish intent. In most cases, an analysis by the

FA will be able to show that a majority of

investors’ money did not go directly to the socalled

"bigge r fish," b ut instead w ent to a ccou nts

controlled by the target(s). Moreover, the amount

of money sent to these other traders/brokers, the

so-called "bigger fish," rarely coincides with the

amounts in veste d. The lulling payments se nt to

other investors as interest also demonstrate intent

since the fraudster misrepresents the true source of

funds, i.e., fellow investors. Intent can also be

circumstantially proven through evidence of the

defendant’s conscious avoidance of various

indicia of fraud or red flags associated with prime

bank schemes. Third, experts can help show that

the representations made to investor/victims were

false o n their f ace a nd tha t the ling o use d to

induce investors was made from whole cloth.

United States v. Robinson, No. 98 CR 167 OLC,

2000 W L 65239 (S.D .N.Y. Jan. 26, 2000),

contains a discussion of the use of an expert in a

prime b ank ca se.

Among government officials who have

testified as experts in such cases are James

Kramer-Wilt (Department of Treasury, Bureau of

Public Debt (304) 480-8690); Bill Kerr (Office of

the Comptroller of Curren cy (202) 874-44 50);

Herb Biern and Richard Small (Federal Reserve

Board (202) 452-5235). There are also a number

of priv ate pe rsons who prov ide ex pert tes timon y in

these ca ses, e.g., John Shockey (retired OCC

official (703) 532-0943); Professor James Byrne

(George Mason University Law School (301) 977-

4035); and Arthur Lloyd (retired Citibank senior

counsel (802) 253-4788). In addition, Jennifer

Lester of the International Monetary Fund (202)

623-7130 and Andrew Kircher of the World Bank

(202) 473-6313 may be able to provide assistance.

VII. Dealing with uncooperative victims

Unlike victims of some other crimes, victims

of prime bank schemes often do not know or want

to believe that they have been scammed. Often

fraudsters have told them up front not to believe

the government. Some prime bank

victim /inves tors m ay, at le ast initially , refus e to

coope rate with a gents or prosec utors.

Many victim/in vestors are "true b elievers,"

who have receiv ed "inte rest payments" in a timely

fashion and are often talked into "rolling over" or

"reinvesting" their principal. While much of the

principal has been secreted aw ay by the fraudster,

true be lievers rema in con vince d (or w ant to

remained convinced) that the "high yield prime

bank market" does exist and that their proverbial

ship has come in. This belief, coupled with the

non- disclo sure, s ecret n ature o f the inv estme nt,

prevents them from cooperating with the

investigation, their reasoning being: "why risk

breaching the non-disclosure provision of the

contract by talking to the governmen t when I’m

getting paid?"

Most investors have been told that the

government will deny the existence of the

"programs," and that speaking to an FBI agent or

other government agent will jeopardize the success

of the secret programs, as well as bar them from

any future opportunity to invest in these trading

progra ms.

However, some investors may recognize the

Ponzi scheme but want it to continue for just a few

more payment periods so they can get their money

back. These investors have little interest in seeing

a speedy investigation and wo uld rather be left

alone so that they can get their money o ut before

the roof caves in.

Dealing with each of these types o f investors


can be difficult. However, being forewarned that

you may encounter some of them will allow you

to plan ahead. In our experience, a few low key

meetings or phone calls from the agent will allow

at least the first two categories of witnesses time

to com e to grip s with r eality. If they re main

unco oper ative, s imply mov e on a nd co ncen trate

on counts centered around more helpful witnesses.

VIII. Conclusion

Over the past decade, prime bank schemes

have proven to be an incredibly durable form of

Ponzi scheme by being able to adapt to changing

conditions and obstacles. We can expect the

scheme to continue to m orph into whatever form

necessary in an attempt to lure victims and evade

detection. A vigorous and coordinated effort on

the part of federal and state law enforcement and

regulato ry agen cies is clea rly need ed. ò


ëJoel E. Leising is a Senior Trial Attorney in the

Fraud Section of the Criminal Division. He has

investigated and prosecuted a number of prime

bank cases in the past. He is a member of the

Steering Committee of the Combating Prime Bank

and Hi-Yield Investment Fraud Seminar of George

Mason University Law School, and has been a

speaker at the Seminar’s annual meetings.a

ëMichael McGarry has b een a trial attor ney in

the Fraud Section of the Criminal Division since

2000. His casework includes matters involving

"Prim e Ban k" or "H igh Y ield Ins trume nt"

investment schemes. Prior to joining the

Departme nt, M r. Mc Garr y wo rked in priva te

practice in the New York office of Fried Frank

Harris Shriver & Jacobson for five years where he

worked on large white collar criminal and

regulator matters. Mr. McGarry has written

articles published in newspapers and journals on

money laundering regulation and procurement


Prosecuting Corporations: The

Federal Principles and Corporate

Compliance Programs

Philip Urofsky

Senior Trial Attorney

Fraud Section

Increasingly prosecutors m ust decide whether,

in specific cases, a corporation should be

prose cuted for crim es com mitted by on e of its

officers, employees, or agents. Since 1999, the

Department’s Principles of Federal Prosecution

of Corporations have provided a framework for

making this decision and hav e identified factors

relevant to the determination. In the end, howeve r,

as in every criminal case, the essential question

remains: should this corporation be prosecuted for

this cond uct?

I. Corporate cr iminal liability

Every law student learns early on of the

concept known as the "legal person," i.e.,

corp oratio ns. In la w sch ool, w e are ta ught th at to

have a legal personality means that a corporation

can be served w ith process and sued for tort

damages and in contract disputes, and that the

corporate form protects individual shareholders,

including other legal persons, from liability except

in those limited circumstances in which the

"corporate veil" can be pierced. H owever, there

was little discussion as to what the consequences