Introduction
Promitor Capital Management LLC became the figurant of a fraud court case due to the credentials lies published by its owner William J. Wells with an objective to defraud investors. Along with this, the firm provided the misleading information as for its trading losses and the use of new investors’ finances to make the Ponzi-like imbursements to its oldest clients, which, in fact, turned out to be the embezzlement (SEC, 2015). More than 30 investors became the victims of Wells’ fraud scheme with the total amount of loss of over $1.5 million (FBI, 2015). In the following paper, the Promitor Capital Management LLC case will be addressed in detail with an objective to identify the nature of the crime involved and the issues related to the fraud detection and fraud deterrence.
The Key Issues Posted by the Case
According to SEC (2015), Wells and his enterprise Promitor Capital Management LLC were suspected in questionable investment practices and concealing the poor performance with the help of the fictional financial statements. From this comment, it becomes clear that Wells engaged in the embezzlement. The details of this embezzlement are evident in the following comment regarding the operations done by Wells:
- the company raised the estimate “$1.1 million from dozens of investors since 2009”,
- when the scheme was discovered “the Promitor fund brokerage accounts held less than $35, with the rest dissipated by trading losses and Ponzi-like payments, or diverted into Wells’s personal bank account” (SEC, 2015, para. 2).
In addition, Wells misrepresented his firm’s performance status by stating that it had been successful at the market. However, the real facts demonstrated the opposite. To support this conclusion, the following data by FBI (2015) can implement: “WELLS lied to prospective and existing investors by representing, including in fictitious account statements, that he had achieved consistently positive trading returns, when in fact, WELLS’s trading was remarkably unsuccessful and he realized trading losses every year since 2009” (para. 2).
Moreover, Wells misinformed investors regarding the stocks that their funds were invested in. According to FBI (2015), Wells defrauded the investors that their funds were put into particular stocks in particular times, but in reality none of the firm’s accounts had stocks at all. Furthermore, he “created so-called sub-accounts for clients, for which WELLS purported to execute individualized trading strategies, when, in fact, no such sub-accounts were ever funded” (FBI, 2015, para. 6). To hide these unappealing information, Wells created the fully fictions documents to persuade his clients in his business effectiveness (FBI, 2015).
The Promitor Capital Management LLC case therefore involves such issues as
- the source of compensation for the victim investors;
- corresponding enforcement measure for the fraud deterrence; and
- the issue of whether Wells’ enforcement measure should be mitigated due to the fact that he claims himself “an idiot” who “was trying to get some big trades to… make [investor] more money” (SEC, 2015, para. 3).
The third issue refers to the identification of the proofs suggesting that Wells did understand what he was doing and to what outcomes his actions would lead. A yet another issue is how Wells managed to convince investors that their funds went to finance the promising projects while there were no stocks behind the Promitor accounts at all and how investors could believe this information without sufficient business data vetting.
The Promitor Capital Management LLC case is the classic case of embezzlement. According to Wells (2013), embezzlement is defined as the willful taking or turning into one’s ownership someone’s finances or other types of property with the use of one’s position, professional authority, or customers’ trust. Park, Park, and Lee (2014) draw attention to the seriousness of the embezzlement problem by stating that embezzlements “severely harm the welfare of investors as well as other stakeholders” (para. 21).
They also clarify that it is quite problematic to foresee the embezzlement since it is a criminal undertaking (Park et al., 2014). The very event of embezzlement that took place in the given case is Wells’ decision to pay the initial investors with the new investors’ funds as well the withdrawal of the investor funds to his account. These Wells’ actions can thus be clarified as illegal and requiring the law-enforcement measures imposture.
The Stakeholders and Their Rights and Obligations
First and foremost, the stakeholders in the situation under consideration include the initial investors and the new investors. The two categories of the Promitor Capital Management LLC clients were affected by Wells’ illegal actions. However, the new investors are affected to the greater degree because they did not receive any profits from the firm and lost their funds instead, while the initial investors received the reimbursement from Wells who was trying to hide the traces of his fraud activity. From the other side, Wells is also the stakeholder because he is alleged to embezzle the funds lost by the investors and it is his legal and business responsibility to return the lost funds (Wells, 2013).
Stakeholder Rights and Obligations
The investor rights include the right for gaining the profits that are preconditioned by the cooperation agreement and returning the lost funds (Wells, 2013). The Wells’ obligations are to return the embezzled finances and fulfill his promises to his clients according to the signed agreement (Wells, 2013).
The Choices Available and Costs and Tradeoffs
The situation that took place could develop in a different way if Wells provided the investors with the realistic information about his business and its value. Besides, he had neither legal nor ethical right to represent himself as a registered investment consultant without such competences and the documents attesting them (Soltani, 2014). The choices that were available for the investors if they could have the trustworthy information from the very beginning are plain and they amount to the decision to abstain from such a risky business opportunity (Soltani, 2014).
The costs and tradeoffs for the investors in the event that the trustworthy information is available from the very beginning tend to the zero level. In the circumstance that Wells truly appears insufficiently qualified for the evaluation of the highly-risky options and his actions were caused by the lack of proficiency, he had to inform the initial investors and bear the agreement costs on his own (Soltani, 2014). However, it is hardly that the scheme was put into practice by mistake which can be seen from Well’s subsequent actions towards the final objective to embezzle the clients’ finances.
The Resolution of the Situation
To resolve the situation, the Promitor Capital Management LLC owner should be charged for the felony and embezzlement. The person will need to be fined and his funds from his own banking account should be confiscated and returned to the victims of his scheme. Provisions should be made to compensate the loss to all the stakeholders affected. A special attention should be paid to the group of the new investors because it is with their funds that the debt to the initial Promitor Capital Management LLC investors was compensated (SEC, 2015). Furthermore, Wells should be restricted from participating in similar business activity in the future.
The Impact of the Situation
The impact of the situation is tremendous. The largely affected group is the new investors because it is them who without their slightest awareness paid to the initial investors for the illegal practices of the Promitor Capital Management LLC owner. This case should become the precedent for the development of the stricter control rules for the firms participating in the investment sector. The Promitor Capital Management LLC owner precedent should also turn out to be the initiator of establishing the stricter rules in the federal antifraud law (Juric, O’Connell, Rankin, & Birt, 2015).
Questions Adding to Substance of Learning
To add substance of learning, the audience may benefit from observing additional questions on why the classic fraud cases such as the Promitor Capital Management LLC case continue to occur, why the investors continue to remain naïve as for the promises of the self-claimed investing consultants, and why the federal law-enforcements agencies continue to tolerate the firms like the Promitor Capital Management LLC at the market. These questions will help the readers generate the new knowledge on how the doubtful investment offers can be avoided and how the fraud artists could be differentiated from the professionals.
Case Evaluation
The Promitor Capital Management LLC case is the classic illustration of the embezzlement practice. The firm’s principal appeared to be nothing else than the fraud artist who managed to deceive the investors with the use of instant lies and financial indicators misrepresentation. In connection with the given case, I would draw the audience’s attention to the issue of the Ponzi-like adventures. The Ponzi scheme is well-known to the wide public since the 1920s and still, hundreds of firms around the U.S. continue to use this corrupted scheme for their crooked business, and thousands of investors remain credulous to the promises of the schemers (Park et al., 2014). This situation requires interference from the law-enforcement agencies to prevent the further embezzlement scandals and make the economic system healthier thus.
Conclusion
Concluding on the mentioned above it should be stated that the Promitor Capital Management LLC case is a classic illustration of how unreliable firms act to mislead investors by exaggerating on their operational success, proficiency level, and the applied business technologies. This example provides more insights for the audit professionals as for the detection and deterrence of embezzlement. The Promitor Capital Management LLC also raises a number of issues related to the Ponzi-like schemes as for why the situations of this kind continue to take place and what policy interventions should be done in order to ravel them. Overall, the case under investigation in this project suggested the following findings: investors need to pay more attention to verify someone’s investment consulting skills, and investors should be more demanding when checking the investment operator firm’s sustainability.
References
Juric, D., O’Connell, B., Rankin, M., & Birt, J. (2015). Determinants of the Severity of Legal and Employment Consequences for CPAs Named in SEC Accounting and Auditing Enforcement Releases. Journal of Business Ethics, 1-19.
Park, J., Park, Y. W., & Lee, P. (2014). Embezzlement Disclosure Request and Information Asymmetry between Individual and Institutional Investors. Web.
Soltani, B. (2014). The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals. Journal of Business Ethics, 120(2), 251-274.
The Federal Bureau of Investigations (FBI) (2015). New Jersey Man Arrested and Charged in Manhattan Federal Court with Securities Fraud. Web.
U.S. Securities and Exchange Commission (SEC) (2015). SEC Charges New Jersey Fund Manager With Securities Fraud. Web.
Wells, J. T. (2013). Corporate fraud handbook: Prevention and detection (4th ed.). New York, N.Y.: John Wiley & Sons.