Unethical Behavior in the Financial Markets

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Reducing the Level of Unethical Behavior in the Financial Markets

By: LaDonna Malone

May 8, 2009

I. Introduction of how we will show how to reduce the unethical behavior

II.SEC Ethics

III.How our economy has affected ethics

IV.Does competition destroy ethical behavior?

V.Ethics in the financial and investment industry

VI.Have we turned a blind eye to unethical behavior?

VII.Does business ethic pay?

VIII.Conclusion

Investment fraud we hear about this constantly. 99 percent of the investment frauds we witnessed came from the Madoff scandal, Stanford Financial Group and others. We thought we had learned our lesson from Enron and Anderson & Anderson about five years ago but it has happened again. This has not only affected the little guy but also big investors that you would not even consider. Where have we gone wrong since it keeps happening over and over? First we are going to look how we can prevent this fraud. Next we will look how we can reduce the fraud. We also are looking how this all comes together and can affect our economy.

When selecting a financial advisor or firm makes sure a third party custodian is used. The investment advisor does not have custody of your assets which means they never directly handle a client’s checks, deposits or withdrawals.

The advisor would open there account at a reputable well know firm as the custodian. That person would have the authority to make investment decisions on your behalf within the parameters that have been set by you and your advisor, but the custodian would be the person who actually would have possession or custody of your assets.

There are four ways you can prevent investment fraud.

Reduced opportunity
“Since the investment advisor does not have custody of your assets they never handle your checks, deposits and withdrawals directly. When the withdrawals are made they must go to one of your other accounts or sent by check to your address of record. Withdrawals that are to go elsewhere require your signature before approval is granted.” Dolan Media Newswire Copyright 2009

Advanced technology to detect signature fraud

“This type of technology means that if an investment advisor, their staff or anyone else attempts to forge your signature, it is likely to be detected immediately.” Dolan Media Newswire Copyright 2009

Insurance:

“Custodians carry large insurance policies. When or if an unauthorized transaction occurs they are responsible for having allowed it to happen and in most cases their insurance will be required to cover this.” Dolan Media Newswire Copyright 2009

Duplicate Statements

“A custodian will send monthly and quarterly statements to you directly. They are required to report all of your account activity directly to you. Your advisor may send your performance reports or account statements that they generate a duplicate reporting system that makes fraud easy to spot. Investment advisors who take custody of your assets themselves and generate their own account statements can report anything on those statements. There is no third party verifying that you really own the assets the advisors say you own. That is how Bernie Mandoff perpetuated his fraud year after year.” Dolan Media Newswire Copyright 2009

The Wall Street Journal reported the following at wjs.com on March 2nd. “The U.S. Securities and Exchange Commission staff is examing the procedures certain investment advisors and brokerage firm have in place for safeguarding assets”.

Before making a new investment or hiring a financial advisor ask the following questions: 1. Who is the custodian of my assets?
2. Why type of fraud detection technology does the custodian have in place? 3. What type of insurance does the custodian provide if fraud occurs? 4. Who generates my account statements?

“SEC now requires that every advisor registered with the SEC to adopt and enforce a code of ethics applicable to...
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