May 10, 1994
TO: MEMBERS - ONE PER COMPLEX NO. 29-94
OPERATIONS MEMBERS NO. 17-94
SEC RULES MEMBERS NO. 33-94
TRANSFER AGENT ADVISORY COMMITTEE NO. 20-94
RE: STOLEN CHECKS USED FOR FUND INVESTMENT
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The Institute has been advised that certain fund groups may
be the victims of fraud involving the use of stolen checks for
fund investment. We understand that in a typical case, an
individual uses a stolen check to open a mutual fund account in
the name of the payee of the check. When the check clears, the
mutual fund account is liquidated either through the fund's check
writing privileges or through a wire transfer to a bank account.
One way in which this apparently is accomplished is as
follows: An individual ("X") steals a check payable to another
party ("Y"). At the same time, X convinces a third party ("Z")
to allow X to have the money wired to a bank account registered
to Z. Z consents and discloses the bank account information. X
then endorses the stolen check and submits it to a mutual fund
along with an application to establish a joint account in the
names of Y and Z. Once the investment check clears, X requests a
wire transfer to Z's bank account, and Z, unaware of the fraud,
turns proceeds over to X.
Often, the fraud is not detected until the mutual fund
account has been liquidated, because the payee and payor of the
stolen check are not immediately aware of the theft of the check.
Eventually, however, the theft is discovered and the payee
contacts the financial institutions involved, including the
mutual fund, and demands reimbursement. We understand that a
number of fund groups have suffered losses as a result of this
type of scheme.
The Institute has been informed that at least one fund group
avoids this problem by refusing to open an account with a third
party check, i.e., a check made payable to someone other than the
fund or fund group. Fund groups that accept third party checks
may wish to establish procedures to examine account applications
for matters that in some instances may merit further inquiry,
such as a) discrepancies in registration information for the
mutual fund account and the bank account to which funds may be
wired, and b) whether the telephone directory listing for the
address of the check payee matches the address provided on the
account application.
It is not clear how many persons may be involved in the
reported fraudulent activity or whether some activities are
related. The U.S. Postal Service is investigating this matter.
If you believe that your fund group may be experiencing these
problems, please contact Inspector Bob Lucid of the Chicago
branch of the U.S. Postal Service at 312/765-4437.
Angela C. Goelzer
Associate Counsel