NEW YORK, Nov. 19 - Federal authorities on Wednesday charged 47 people, netted in a sting operation dubbed "Wooden Nickel," with running a scam in the foreign currency market that defrauded retail investors and big Wall Street firms of millions of dollars.
The latest scandal to hit Wall Street involves charges related to stock and wire fraud, extortion, kickbacks, rigged trading, money laundering, guns and cocaine. The schemes included phony trades and fraudulent or non-existent investments to con small investors into thinking they were getting a piece of a market generally beyond their reach.
The Federal Bureau of Investigation's 18-month operation used one undercover agent posing as a hedge fund manager who operated in the industry and provided recordings of the suspects.
One scheme, known as the "Game" or "Points for Cash," involved rigged trading that allegedly pervaded the interbank foreign exchange market for at least 20 years, prosecutors said.
"Today's charges run the gamut of fraud. With more than 1,000 victims from small investors to large banks, the losses are in the millions," U.S. Attorney for the Southern District of New York James Comey said at a news conference at his offices in lower Manhattan.
Defendants named in the sting included employees of J.P. Morgan Chase, Societe Generale, UBS AG, the Dresdner division of German insurer Allianz, Israel Discount Bank, Tullet Liberty, Tradition North America, ICAP Plc. and a former member of the New York Federal Reserve's private-sector foreign exchange committee.
The committee is an ad-hoc group of financial industry professionals that sets "best practice" policies for the industry, but it is not formally connected to the bank.
"Some of the world's biggest banks were scammed by corrupt players inhabiting every level of the forex interbank market," Comey said.
The large banks, which do not face charges themselves, were informed of the investigation only a few days ago in order to protect the undercover agent, Comey said.
He said it was not possible to give a total value of the banks' losses in rigged trades. But in the course of a six-month period, the investigation discovered 123 trades in which the winnings for the "bad guys" was $650,000, he said.
"But we also learned during this investigation that this had been going on far and wide for over 20 years, so the imagination runs wild in terms of loss," Comey said.
The investigation is ongoing, and not all suspects have been apprehended, a Justice Department spokesman said.
BANKS AND BOILER ROOMS
In the case of the large banks, law enforcement officials alleged foreign exchange brokers at the institutions defrauded their employers by steering losing trades to corrupt outside brokers who then "kicked back" part of the profits from the pre-arranged trades to the bank employee.
In cases involving retail investors, smaller currency trading firms, including Madison Deane & Associates, New York Capital Assets, Inc., ISB Clearing Corp, Oxford Capital Group LLC -- identified as "boiler room" operations -- would deceive retail investors by selling them fake investments and pocketing the cash, the government said.
Included in the complaint were allegations that some Madison Deane employees "each purchased expensive Rolex watches" with customers' money. Madison Deane allegedly solicited at least $2 million in retail customer funds from the fall of 2001 through early 2003, but had no ability to conduct currency transactions.
Damon Ripley, who controlled New York Capital, was charged, along with Berman Toro, with conspiring to buy 10 kilograms of cocaine and to distribute 5 kilograms of the drug. Ripley was also charged with illegal possession of a firearm, having been convicted of a weapons felony in 1991.
Over 200 FBI agents fanned out across the United States to make arrests starting on Tuesday afternoon in New York, New Jersey, Connecticut, Colorado, Florida, and Tennessee, said Comey.
HANDCUFFS AND SUITS
In one instance, handcuffed, well-dressed individuals, some with their heads covered, were led from New York's 2 World Financial Center, having gathered on Tuesday evening for drinks before heading to Atlantic City, New Jersey, on a gambling spree, officials said.
As a result of the sting operation, charges were also filed by the Commodity Futures Trading Commission and the Securities and Exchange Commission (News - Websites) . They included commodities fraud charges against several currency trading firms.
The SEC filed a civil action charging United Currency Group Inc. and its chief executive officer, Adam Swickle, with securities fraud. It said Swickle was charged with raising over $700,000 from 21 investors by selling worthless stock in his purported currency trading firm, United Currency Group.
Nearly all the firms named were contacted by Reuters and offered either "no comment" or distanced themselves from the individuals charged, saying the banks were not part of the criminal activities.
While the $1.2 trillion-a-day foreign exchange market has no government regulator, large financial institutions have in recent years stepped up compliance requirements for their traders.
Gregory Mocek, the CFTC's enforcement officer, said there are no plans to try to regulate the larger interbank currency market. "That's something for Congress to decide," he said in response to a question from Reuters.
John McCarthy, director of foreign exchange trading at ING Capital Markets in New York and a 24-year industry veteran, said: "In the long run, the foreign exchange market crosses every border and as a consequence regulating it would be a monumental and probably impossible task."