Prime Bank Fraud

Prime Bank Programs

The prospect of securities with an extremely high yield are understandably attractive to investors – but promises of guaranteed profits are frequently false.

These schemes are sometimes pitched as "prime bank" programs and may involve lesser-known financial instruments such as debentures, bank guarantees, and standby letters of credit. 

Fraudsters may claim to have insider access to "bank guarantees" or "medium-term bank notes" they can buy at a discount and sell at an inflated price. Say, for example, these guarantees were valued at $20 million and could be immediately resold at a three-percent profit in 10 tranches –  the seller would receive an instant 30% return on investment. Sound enticing? Unfortunately, all profits from these schemes are fictitious, and every last dollar of investment capital is simply pocketed by the fraudsters.

Promoters falsely claim the securities are backed by major banks or international finance organizations such as the World Bank, Federal Reserve, International Monetary Fund, or the International Chamber of Commerce.

The Securities and Exchange Commission has pursued numerous enforcement actions against prime bank frauds. The SEC warns investors: "Promoters claim that transactions must be kept strictly confidential by all parties, making client references unavailable. They may characterize the transactions as the best-kept secret in the banking industry, and assert that, if asked, bank and regulatory officials would deny knowledge of such instruments."

Red flags for fraud include unreasonable "risk free" returns as high as 30 to 40 percent, and a short-term offering in which investors are pressured to act immediately before the "opportunity" disappears.

Investors may be required to sign legal documents such as non-disclosure (NDA) and non-circumvention agreements. The terms of these agreements might expressly prohibit investors from discussing the scheme with any outside parties, such as an investigator or attorney. Yet if these contracts were proffered under false pretenses, with the intent to further a fraud, they are very likely unenforceable. Investors who have signed an NDA and are defrauded through a criminal scheme have not necessarily lost their rights to retain a private investigator; seek redress in civil court; or notify securities regulators and law enforcement.

About the Author

John Powers is president of Hudson Intelligence, a private investigation agency specializing in the investigation of investment fraud and financial crimes.

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