On November 19, 2003, the Commodity Futures Trading Commission (CFTC) and the FBI announced the completion of an 18-month undercover operation that resulted in more than 30 traders and brokers being charged with wire fraud, money laundering, securities fraud and conspiracy. This was "Operation Wooden Nickel".

The traders and brokers had been using boiler room tactics to lure investors into investing in the forex market. Boxes of evidence suggested that the systematic robbery of investors had gone on for almost two decades.

The scheme was simple. The brokers would call up clients (or even strangers) and tell them they had a way for individual investors to get involved in multi-million dollar currency trades. These are trades usually limited to institutional and sophisticated investors. Offers of this kind should have sounded a warning bell because of strict SEC restrictions designed to protect small investors from risking more than they can afford to lose. Unfortunately, the promise of "profits, profits, profits" dulled the common sense of more than a few investors.

Gradually, investors would be urged to invest greater sums of money in ways they did not fully understand - usually futures and options contracts. Then, the investors would be pleasantly surprised with large paper profits these trades produced. Encouraged and now emboldened, investors put more money into the forex market, only to find themselves stunned when their portfolios suddenly plunged.

The unethical broker would urge his or her investors to put more money in at this bottom. Magically, investors' holdings would skyrocket again. But any paper gains were short-lived and would plummet whenever investors considered cashing out. This cycle could repeat several times until the investors decided to cut their losses and exit the forex market entirely, whereupon investors were told that all of their money was lost, but that it could recovered if they put in more money at the very obvious bottom.

Behind the curtain of volatile markets and risk, a group of brokers and traders had set up a false market to fleece unwary investors. The forex contracts and trades were nothing but paper fabrications. The investors paid commissions to the brokers and traders, but the group would pocket the rest, while plotting the false ups and downs of positions they never actually created on behalf of their clients. Several people charged in these crimes had started a company to execute these false trades and, adding insult to injury, also pocketed the proceeds from the sale of worthless stock to the investors they were already swindling on forex trades. Frauds like these provide an important lesson for individual investors: never put your money into something you don't understand and haven't researched on your own.

For more on this topic, read Investment Scams: Introduction and Understanding Dishonest Broker Tactics.

This question was answered by Andrew Beattie.



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