Views on improving the integrity of global capital markets
02 May 2013

MRI International Scandal: Another Reason Ethical Behavior is Needed in the Marketplace

“A friend told me that I could earn more than investing in the stock market.” “At first I was skeptical, but as they paid me a dividend I used my retirement savings to invest in this scheme.” These were only a few of the many remarks of regretful retail investors who may have been victims of another Madoff-style scam. Although regulators are still investigating the case, it is still worth a closer look.

The name of the company involved this time is MRI International, headquartered in Las Vegas. There are signs that suggest the Japanese subsidiary of MRI International had sold around US $1.3 billion worth of investment products that were meant to provide income on U.S. medical fee receivables to Japanese retail investors.

News reports show that  the promised annual returns were as high as 8.5% in Japanese yen. All of this was to be achieved without any risk to the invested amount since the principal was guaranteed, according to the reported sales talk of marketing people. Depending on the amount invested, the status of the client (also referred to as a “member” in Japanese) appeared to have been different. Japanese media reports that there were platinum members and gold members, and the biggest investors were invited by the company to visit the medical institutions that MRI International bought receivables from. Provided that the allegations are true, there are feared to be more than 8,700 retail investors who have fallen victim to this scheme.

What happened? The answer to this is not 100% clear yet, but initial indications suggest the possibility of a Ponzi scheme. Following inspections by the Kanto Local Finance Bureau, a subsidiary of the Ministry of Finance in Japan, MRI International’s operating license was revoked. In a public statement explaining the reasons for revocation of MRI International’s license, the Kanto Local Finance Bureau referred to a number of problems with the investment scheme. For example, the company used funds from clients, which had originally been intended for investments into the products offered to retail investors, to pay dividends and redemptions to other clients. The products were marketed using false information, and contractual documents included incorrect information as well. To top things off, recent annual reports filed with regulatory authorities, and responses to requests by regulators for details on the state of custody accounts, included untrue statements. To draw a complete picture about what happened, Japanese regulators are now coordinating with their counterparts in the U.S.

“There was not enough explanation about the risks involved.” “Product information only related to the profitability of the investment and its safety.” These are more examples of remarks from potential victims in the MRI International case. What should they have done before investing? The promise of a guaranteed return that is unusually high should warrant additional consideration. In the case of MRI International, for example, the fact that the underlying assets were in U.S. dollars and stable payouts were guaranteed in yen suggests the existence of exchange rate risk — which, given the often large fluctuations in the currency markets, could be quite substantial. No matter how promising and safe an investment may seem, for reasons of risk diversification it is better not to invest one’s total financial holdings into only one investment product. Investment professionals follow this simple rule as well.

Regulators in Japan are working hard to make sure that scams will not happen in the future. Reorganizing and strengthening the approach to industry oversight in Japan is one suggested action for reform that has already emerged. It looks as though this case might yet again confirm the limits of financial industry regulations, even if a strong enforcement mechanism is in place. In order to put a brake on the continuously emerging ethical lapses in the finance industry more than a set of rules and enforcement is required; a highly ethical attitude of market participants would be the most welcome solution in this regard.

CFA charterholders, for example, must abide by the CFA Institute Code of Ethics and Standards of Professional Conduct, and they have to reconfirm their compliance with it annually in an explicit statement. More and more pension funds are checking whether an asset management firm has adopted the Asset Manager Code of Professional Conduct before they invest; this serves as a signal that the company is committed to high standards of ethical behavior. Perhaps it is time for retail investors to do the same.


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About the Author(s)
Alexander Flatscher, CFA

Alexander Flatscher, CFA, is a former director of professional standards at CFA Institute. He was responsible for promoting the ethical standards, policies, and positions of CFA Institute in the Asia-Pacific region.

10 thoughts on “MRI International Scandal: Another Reason Ethical Behavior is Needed in the Marketplace”

  1. B says:

    Mechanisms reminders of ethics are a good way to prevent such problems, this is shown for example in Dan Ariely’s research related to cheating and conflicts of interest. An ideal moment in which that type of mechanisms can be introduced is just before a transaction is made.

  2. Alexander Flatscher, CFA says:

    Thank you very much for your comment.

  3. Tatsuro Sakai says:

    I have invested MRI International since 2004. I have asked them
    th disclose fund remaining balance such as cash position, MARS
    Balance and aging of MARS, however thier answer was always
    “No” Their comment is MARS have confidential personal information
    Therefore even if Japanese M.O.F. aske to open, they will not.

    I need to know more about Invested cash on this fund.
    Please make comment and suggest me what should i do.

    Best Wishes

  4. Alexander Flatscher, CFA says:

    I am very sorry to learn about your experience as an investor with MRI International. As an organization we work positively with institutions including regulators and industry associations to improve the integrity of the investment industry globally. In an ideal sense, we strive for a situation where cases like the one of MRI International do not happen anymore. Unfortunately, however, we do not have the capacity at this stage to advise individual investors on the best course of action should they become victims of fraud.

  5. Paul says:

    Improved Financial Regulations and Ethical practice is the only positive solution to circumstances like the one explained above.

    Recent history, taking the Great Depression into account, reveals the human Race has the capacity to creat “wealth”, but managing such wealth has proved an elusive task.

    Good read.

    1. Alexander Flatscher, CFA says:

      Thank you very much for your supporting comments. You echo our stance on the importance of ethical behavior. As you implied, regulations alone cannot create ethical practices per se. but if they are combined with a commitment to high levels of ethical behavior the number of fraud cases can be reduced significantly. Companies that adopt the Asset Manager Code of Professional Conduct, for example, send a strong signal that they operate based on a culture where adherence to high ethical values is of highest importance.

  6. Ankit Sharma says:

    Can greed be regulated and supervised ?

    1. Alexander Flatscher, CFA says:

      Thank you for your comment. You raise the valid point of whether regulation is any match for the power of greed. Certainly, regulation can counterbalance instincts towards greediness by imposing penalties for actions that do not serve the interests of market integrity. We also think that through greater awareness of behavioral aspects of unethical conduct, market practitioners can develop ethical “muscle memory” to avoid being tempted down an unproductive path (see, for example, the CFA Institute ethical decision making training programs. And investors can look for signals of real commitment by practitioners to high ethical standards as well as by firms to ethical conduct through compliance with regulatory standards and voluntary best practices like the CFA Institute Asset Manager Code of Professional Conduct.

  7. Lee Barton says:

    I put deposits on a number of MRi International property developments, but withdrew when I saw how the whole organisation was being run. I am an economist, but needed to invest in property to provide a good pension for my retirement in 2009. I also paid 530 euros for a lifetime membership that gave me benefits as a ‘member’, but the website closed some time ago.

    I was a lucky one, and received my deposits back, less an ‘administration fee, plus the loss of payments for memberships and the cost of travelling and legal fees, so have lost many thousands of euros, but not as much as many of my Japanese friends.

    There has to be consequences for those who carry on working these scams and deceits. Personal fortunes have been made on the back of taking it illegally from those who have spent their lives saving for retirement only to have it taken away. It is time to use the personal fortunes of those who continue to flout the law so as to pay back the investors who were misled and given false promises that could never be realised.

    Lee Barton

  8. Alexander Flatscher, CFA says:

    Thank you for your excellent comment, Mr. Burton.

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