finra

Richard G. Ketchum
Chairman and Chief Executive Officer

Research Center on the Prevention of Financial Fraud

Washington, DC
Thursday, November 3, 2011

As prepared for delivery.

Opening
Good morning, everyone. I'm Rick Ketchum, Chairman and CEO of FINRA, the Financial Industry Regulatory Authority, and Chairman of the FINRA Investor Education Foundation.

On behalf of the Research Center on the Prevention of Financial Fraud, I'm pleased to welcome you to our inaugural conference on The State and Future of Financial Fraud.

The Research Center is a joint project of the Stanford Center on Longevity and FINRA's Investor Education Foundation. And its primary purpose is to collect, direct and disseminate research that gets to the root causes of financial fraud and how to detect and prevent it.

Launched this past summer, the Center has already assembled a robust archive of research on financial fraud from a wide range of fields: psychology, marketing, sociology, economics and more. Each of these different disciplines offers a unique perspective on both the problem and potential solutions, and each can inform the effort to fight financial fraud. But only if practitioners and researchers alike are aware of what the other is doing.

And so that's why we've convened this conference. To create that bridge. To open a dialogue—a two-way discussion—that links theory and knowledge with practicable, evidence-based solutions.

We bring together policymakers, researchers, practitioners, law enforcement and others to discuss how we can better share research to support our fight against financial fraud.

Unfortunately, most of us here in this room are all too familiar with the damaging effects of financial fraud. From Ponzi schemes to online phishing scams to schemes that capitalize on the news or people's social circles—fraud criminals are using a number of ever-changing tactics to swindle Americans out of billions of dollars each year.

For those of us who are regulators or in law enforcement, our job is to keep up with these fraudsters—stopping them before they harm investors, or if that's not possible, catching and punishing them when they do. But in order to do that well, we need to make sure we're working together and, most importantly, sharing information that can help us all in our respective efforts.

That's where this Research Center comes in. The goal of the FINRA Foundation's partnership with Stanford is to deliver practical, cutting-edge research that can be used in the day-to-day business of preventing and detecting fraud.

This conference is an important first step to bringing together the academics who produce that research and those of us who need it in our fight against fraud.

Those on the frontlines of fighting fraud will learn how lessons from the lab can be applied on the streets. And those engaged in research will hear first-hand accounts from law enforcement officials and victim advocates. By sharing and learning from one another, this conference will be a catalyst for improving fraud prevention programs and policies.

Background
I'd like to talk to you for a few moments about how the Center came to be. It literally grew out of a perfect storm of interests—shared by an expert group of practitioners, policy-makers and researchers who gathered in 2009 at Stanford's Center on Longevity. With a growing body of research showing that America's rapidly aging population is a target of fraudsters, the group recognized the need to tackle the problem of consumer financial fraud.

The group also identified three urgent initiatives necessary to enhance fraud prevention. First was consolidating the growing body of relevant research on fraud—including research from AARP and the FINRA Foundation on victim profiling, behaviors and persuasion tactics. Second was communicating the research to policymakers, practitioners and advocacy groups that might act upon the findings. And third was providing funding to expand research.

Following that initial meeting, the FINRA Foundation worked with Professor Laura Carstensen, whom you'll meet later today, and her team at Stanford to map out the design of the Center, leveraging available resources to make it a reality. We recruited an impressive advisory council to guide the work of the Center, including senior Stanford faculty across psychology, economics and business as well as officials from the FINRA Foundation, the Securities and Exchange Commission, the National Association of Attorneys General, AARP and other public sector organizations.

I'm delighted that many of these experts are here with us today. They have voluntarily taken on the task of establishing research priorities and setting the Center's agenda—which is no mean feat. And several actively helped the Stanford team create the Center's website and research clearinghouse.

As a result of that work, I'm happy to be standing in front of you with the Center now a reality. Our goal is to take what we talk about here and turn it into action that can arm and protect consumers. The value that we see coming out of the Center complements the array of research-based initiatives that the FINRA Foundation has implemented to protect Americans from fraud.

It was Foundation-funded research, for example, that shattered the stereotypes of senior investment fraud victims when it was unveiled in July 2006. Not only did the research debunk the typical fraud victim profile—victims were often financially knowledgeable men—it also showed that influence tactics used by fraudsters were sophisticated and highly effective. You'll be hearing more about this and similar research later in the program. These findings forced regulators and senior advocates alike to rethink what was needed to equip older investors with tools and information that would be effective in stopping fraudsters.

Using this research, the Foundation mounted an investor protection campaign designed to reduce the incidence of investment fraud among investors ages 55 and over. What started as a two-city pilot in 2008 is now a national campaign. We're pursuing our vision by working with national, state and grassroots partners to conduct further research, develop evidence-based tools and resources and conduct outreach to consumers most at risk of investment fraud. The FINRA Foundation team will tell you more about that effort later today. The Fraud Research Center, in fact, is one element of that campaign.

Taking Action
The ultimate goal of the Center—and all of us here—is to better understand how and why financial fraud happens, to give consumers the tools they need to prevent fraud and to enhance fraud detection and protection programs. This conference marks the beginning of a unique and ongoing conversation to help achieve that goal.

After the frauds that came to light in 2009, FINRA had to refocus on fraud and enhance our procedures to detect it.

Let me talk a little about the work we have done to heighten our focus on fraud detection and prevention. We recognized the need to quickly escalate issues when there are indications of fraud or widespread customer harm.

In October 2009, we established FINRA's Office of Fraud Detection and Market Intelligence. This unit provides a heightened review of incoming allegations of serious frauds, offers a centralized point of contact internally and externally on fraud issues, and consolidates recognized staff expertise in expedited fraud detection and investigation. The office combined several departments, including the Office of the Whistleblower—established in March 2009 and departments investigating insider trading and manipulation.

Last year, and through October of this year the Office of Fraud Detection and Market Intelligence referred more than 1,100 matters involving potential insider trading or other types of fraudulent conduct by individuals and entities outside FINRA's jurisdiction to the SEC. These matters covered a wide range of issues, including insider trading, microcap fraud and Ponzi schemes.

Let me give you a few examples. In April, Joseph Mazella, the founder and President of the Great Atlantic Group, Inc., a Staten Island-based real estate and financial consulting company, was charged with securities fraud, wire fraud and money laundering. The charges stemmed from his alleged operation of a $12 million Ponzi scheme from 2007 to 2010. The charges were a result of a referral from OFDMI to the Federal Bureau of Investigation.

In another case, a referral from OFDMI to the SEC led to the discovery of a 20-year, multimillion dollar Ponzi scheme that victimized mostly federal law enforcement agents. An analyst in OFDMI spotted red flags while conducting a routine review of a regulatory filing about a year and a half ago. We expedited the review of the case and, because the fraud occurred through the firm's advisory business, we ultimately referred it to the SEC for investigation and prosecution within about 30 days of our discovering the fraud.

We've also enhanced our examination programs and procedures in a variety of ways intended to help us better detect conduct that could be indicative of fraud. It is our goal that exam teams focus most on those areas at firms that pose a real risk to investors. In late 2010, we created a new Office of Risk to begin the process of strengthening our ability to identify high-risk firms, branch offices, brokers, activities and products through broader data collection and more comprehensive analysis. We are asking the firms we oversee for more information to help us better understand their business models, including information about business activities, the types of products they sell and their customer base. This information will be used to better understand the risks that exist for individual firms and to tailor our regulatory responses to those risks.

Another critical element in our approach to fraud prevention is education. Through the FINRA Foundation, and FINRA's Office of Investor Education, we have reached hundreds of thousands of consumers through investor alerts, interactive tools, live events and editorial content all designed to help them make wise financial decisions—and at the very least to avoid falling victim to a fraud. For example, a range of investor alerts issued just this past year warned investors about:

  • gold stock scams that mine your pocketbook;
  • fraudulent schemes exploiting the tsunami and nuclear crises in Japan; and
  • pre-IPO scams purporting to offer access to shares of Facebook and other popular, well known private companies.


In addition, two years ago, we produced an hour-long documentary—"Tricks of the Trade: Outsmarting Investment Fraud," to teach the tactics commonly used by fraudsters and the simple steps every investor can take to reduce their risk of being defrauded. It has aired on PBS stations nationwide.
 
FINRA also provides investors—online or through a toll-free call—with a service called BrokerCheck. BrokerCheck allows investors to quickly access information about the disciplinary history, professional background, business practices and conduct of the brokerage firms and individual brokers with whom they invest. While dealing with a licensed professional and a registered investment firm isn't a guarantee against fraud, the reality is most investment scams tend to involve unlicensed professionals touting unregistered securities.

We also offer an increasingly important resource—the Professional Designation Database. It's the only tool available that helps investors to decode professional designations and better understand what education and experience requirements are necessary for any given designation, including those that suggest special expertise in the needs of senior citizens.

And at heart of the FINRA Foundation's investor protection campaign is a three-part curriculum designed to help investors recognize their own vulnerabilities, identify the red flags of fraud and know where to go to verify information before they hand over any money. Before we began using that curriculum and training our partners to deliver the program, we conducted field tests to see whether the program impacted investor behavior. And you'll hear what we learned later today.

These are just a few examples of what the FINRA Foundation is doing to help investors protect themselves—and I've focused on investors because the securities business is the area FINRA regulates. But we all know that not all financial fraud involves securities or investments.

When you hear later today from the researchers who will share their findings on victim profiles, you'll see that different types of financial fraud target different types of victims with a different battery of tactics. These distinctions are critical for fraud investigators to be aware of—and for financial educators and consumer advocates to take into account when designing and delivering prevention strategies and messages.

While impressive progress has been made, especially in these tough economic times, we've got to do more. Everyone here at this conference brings different skills and experiences to bear on the critical issues of understanding and undermining financial fraud. We've got to tap the brain trust in this room and focus our energy and resources on finding creative ways to thwart those who would steal, especially from those who can least afford it.

Beyond Today and Tomorrow
In closing, I want to stress how honored we are to have all of you involved with the Research Center and its efforts. It's this kind of collaboration and thinking that can really make a difference in the war on financial fraud.

From here, the goal is to take what we learn from each other out into the real world. First, and most importantly, we should make sure we all keep talking. Second, we need to actively ensure that the research coming out of the Center gets into the hands of the people that need and use it most—effective distribution is key. Third, we need to engage law enforcement and other practitioners to see what new research needs funding based on trends and tactics they're seeing. Ultimately, we want to use all this work to continue to enhance the way we go after fraud criminals and educate consumers to protect themselves.

We're looking forward to continuing the dialogue we start here and sincerely hope that you will engage with the Center going forward.

Now, I'm pleased to introduce our keynote speaker, SEC Chairman Mary Schapiro.