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the Kanto Local Finance Bureau, a subsidiary of the Ministry of Finance in Japan, MRI International’s operating license was revoked.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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