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Predicting Fraud by Investment Managers

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  • Wil liam C. Gerken
  • Stephen G. Dimmock

Abstract

We test the predictability of investment fraud using a panel of mandatory disclosures filed with the U.S. Securities and Exchange Commission (SEC). We show that past regulatory and legal violations, conflicts of interest, and monitoring have significant power to predict fraud. Avoiding the 5% of firms with the highest ex ante predicted fraud risk would allow an investor to avoid 29% of fraud cases and over 40% of the total dollar losses from fraud. We examine the ability of investors to implement fraud prediction models based on the disclosure filings, and suggest changes in SEC data access policies that could benefit investors.

Suggested Citation

  • Wil liam C. Gerken & Stephen G. Dimmock, 2011. "Predicting Fraud by Investment Managers," NFI Working Papers 2011-WP-09, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2011-wp-09
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    References listed on IDEAS

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    More about this item

    Keywords

    Fraud; Investment Fraud; Operational Risk; SEC; Disclosure; Form ADV;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K2 - Law and Economics - - Regulation and Business Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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