The most effective way to avoid commodity fraud is to stay informed. The Justice Department has a crackdown on spoofing, the practice of creating a false impression of supply and demand in the commodity market in order to exploit the reactions of investors. The 2008 financial crisis spurred Congress to identify spoofing as a form of market manipulation. Moreover, the crackdown also comes as the Justice Department joins an investigation into the 2010 ‘Flash Crash,’ which briefly wiped $1 trillion from the U.S. stock market.
To avoid being victimized by commodity fraud, investors should be aware of the following red flags: o Unregistered Operators: Most scams involve unregistered operators. You can find out if a particular operator is registered by conducting a background check with the National Futures Association’s BASIC. Besides that, a commodity pool operator must also provide you with its account statements and risk disclosure documents.
o Be aware of spoofing: Enron and other energy-trading companies have been linked to numerous cases of commodity fraud. The company’s leaders were evangelists of deregulation and sought to erase the rules of the game to their own benefit. They hacked into databases to create artificial supply and demand in the market by placing large volume orders and cancelling them again. During this process, they made nearly $1.4 million.