Financial Investigations Glossary
By: Bill E. Branscum
Copyright 2001

This is a glossary of terms that are, for the most part, unique to the world of financial investigations, or terms that have a different meaning than that which is commonly understood when they are used in this context.

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Baby Bond: Bonds with a denomination of less than a $1,000 par value. Baby bonds are a source of funds to corporations that lack access to large institutional markets and bring the bond market within reach of small investors.

Bad Debt: Open balance or loan receivable that is considered uncollectible and is written off by a firm. (Reserves are usually maintained for uncollectible accounts.) The relationship of recoveries and write-offs to accounts receivable can indicate a firm's credit and charge-off policies.
Badges of Fraud: Conduct that raises a strong presumption that it was undertaken with the intent to delay, hinder or defraud a creditor.

Balance Sheet: A financial report that entails the status of a corporation's assets, liabilities, and owners' equity for a specific date, usually at month end. It only captures this information as of that date; it does not cover a period of time.

Balloon: 1) A repayment schedule for a bond issue where a large number of the bonds come due at a one time (normally at the final maturity date). 2) A final loan payment that is considerably higher than prior payments.

Bank Guarantee Letter: The document furnished by a bank certifying that a put writer has enough funds on deposit at the bank to equal the aggregate exercise price of the put.
Bankmail: An agreement between a bank and corporation involved in a takeover. The bank agrees not to finance another acquirer's bid.

Bank of International Settlements (BIS): Structured like America's Federal Reserve Bank, controlled by the Basel Committee of the G-10 nations' Central Banks, it sets standards for capital adequacy among the member central banks.

Bankruptcy: Private individuals, privately held corporations and publicly traded companies may file for protection from creditors under federal bankruptcy laws. With regard to publicly held companies, these laws govern how they go out of business or recover from unmanageable debt. In the event that they file under Chapter 11 of the Bankruptcy Code in an effort to reorganize and become profitable again, management continues to run the day-to-day business operations, but oversight is exercised by the Court. If the company files under Chapter 7, they cease to do business, and their assets are liquidated by the Trustee who uses the money to satisfy debts to creditors and investors. The SEC may intervene if it appears that the company's officers and directors filed bankruptcy to shield themselves from lawsuits for securities fraud.
“BD” or Form BD: Document that broker-dealers must file and keep current with the SEC. It provides details about the firm's principals and officers, net capital compliance, and financial statements.

Bear and Bull Markets: A bear market is one in which prices are low or declining; a bull market is one in which prices are high or rising.

Bearer Bond: A security, usually a bond, that does not have the owner's name registered on the books of the issuer or on the certificate. Interest and principal, when due, are payable to the person in possession of the bond. The holder sends in or presents a coupon for payment. Most securities issued today are in registered form.

Bearer Form: A negotiable instrument including any paper, document or device that can be used to transfer value (e.g. travelers checks), written and signed unconditional promises (Promissory Notes), orders to pay a specific sum or money on demand or at a definite time are in bearer form if they are readily negotiable, transferable, payable to order or payable to bearer.

Bellwether: A leading indicator of trends. A bellwether stock is a stock which is used to gauge the performance of the market in general. General Motors is an example of bellwether stock in the past. Hence the saying "What's good for GM is good for America."

Beneficial Owner: The person(s) entitled to the benefits of ownership even though another party such as a broker or bank--the nominal owner--actually has possession and title to the security. Shares or title may be held by a bank or broker for safety and convenience, or in "street name" to expedite transactions, but the real owner is the beneficial owner.

Beneficiary: A person or entity who is the recipient of or will receive some or all proceeds of money or property held by the current owner upon a specified event or condition. With regard to Trusts, t Beneficiary is the person(s), company, trust or estate named by the grantor, settlor or creator to receive the benefits of a trust in due course upon conditions which the grantor established by way of a trust deed. An exception would be the fully discretionary trust. The beneficiary could be a charity, foundation and/or person(s) which or who are characterized by "classes" in terms of their order of entitlement or their hierarchy.

Best Execution Requirement: The obligation of Market Makers, broker/dealers, and others to execute customer orders at the best price available at the time the trade is entered.

Blank Check Company: A development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These very small companies typically involve speculative investments and often fall within the SEC’s definition of "penny stocks" or are considered "microcap stocks." Because of the nature of blank check companies, the SEC does not allow them to use some of the exemptions from the registration requirements when selling their securities.

Blind Trust: A trust whereby executors have full discretion of assets and the beneficiaries have no knowledge of holdings within the trust. Blind trusts are generally used when Settlors/Grantors/Trustors wish keep beneficiaries in the dark regarding trust assets.

Block: A large quantity of a security that is either held or traded. Generally, a block is considered to be 10,000 shares or more of stock and 200,000 or more bonds.

Block Trade: A large amount of a stock's shares sold as a single unit.

Blue-Sky Laws: Every state has its own securities laws—commonly known as "Blue Sky Laws"—that are designed to protect investors against fraudulent sales practices and activities. While these laws can vary from state to state, most states laws typically require companies making small offerings to register their offerings before they can be sold in a particular state. The laws also license brokerage firms, their brokers, and investment adviser representatives. The term is said to of originated in the early 1900s by a Supreme Court Justice who wanted to protect investors from speculative ventures that had, "as much value as a patch of blue sky."

Board of Governors: The controlling body of NASD

Board of Trustees: A board acting as a trustee of a trust or as advisors to the trustee depending upon the language of the trust indenture. Also see Committee of Advisors.

Boiler Room: A base of operations from which con artists launch fraudulent telemarketing scams, schemes and swindles. These may be a rented office, a basement in a home or any other place where the perpetrator can establish a bank of telephones and cold callers can operate undisturbed. They are called boiler rooms because they are a “high pressure” environment.

BOM (Branch Office Manager): Individual who is in charge of a branch office of a brokerage firm or a bank. BOMs who supervise the activities of at least three brokers must pass supervisory tests given by the exchanges and the NASD.

Bond: A certificate of indebtedness in which the issuer (borrower) promises to pay the bondholder (creditor) a specified amount of interest for a specified time period and to repay the debt at maturity. Obligations that are due in more than one year are classified as bonds whereas if the debt is for less than one year, it is called a "note." Bondholders are creditors of the issuer and they do not have ownership privileges. A bond may be registered either by issuing certificates in the bondholder's name, book-entry or in bearer certificates.

Book-Entry Securities: Securities that are registered to an owner without the issuance of a physical certificate. Ownership is reflected by an entry in the issuer's books. This method of registering securities has grown in popularity because investors need not worry about the location of their certificates and it requires less paperwork for a brokerage firm.

Branch Office: Any location identified by any means to the public or customers as a location at which an NASD member conducts investment banking or securities business.
Branch Office Manager (BOM): Individual who is in charge of a branch office of a brokerage firm or a bank. BOMs who supervise the activities of at least three brokers must pass supervisory tests given by the exchanges and the NASD.

Bridge Loan: A short-term loan that is used just until a person or company can secure permanent financing.

British West Indies (BWI): In the Caribbean, including the UK-dependent territories of Anguilla, the British Virgin Islands (BVI), the Cayman Islands, Montserrat and the Turks and Caicos Islands.

Broker: A person who handles investors' orders to buy and sell securities. For this service a commission is usually charged. Brokers specializing in stocks, bonds, options, or commodities act as an agent.

Broker-Dealer: An individual or firm in the securities business who acts as a principal rather than as an agent in a specific transaction. Principles buy and sell securities for their own account and risk. A dealer's profit or loss is derived from the difference between the price he/she pays for the security and the price he/she receives when selling the security to a customer. Because most individuals and firms act as both brokers and dealers, the term broker-dealer is commonly used.

Bucketing: Where, in an attempt to make a quick profit, a broker confirms an order to a client without actually executing it. If the eventual price that the order was executed at was higher than the price available when the order was submitted, the customer would simply pay the higher price. On the other hand, if the execution price were lower than the price available when the order was submitted, the customer would pay the higher price, and the brokerage firm would pocket the difference.

Bucket Shop: 1) A brokerage firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities that they sell are typically poor investment opportunities, almost always penny stocks. 2) A brokerage firm that engages in “bucketing.”

Bull and Bear Markets: A bear market is one in which prices are low or declining; a bull market is one in which prices are high or rising.

Business Conduct Committee: A committee, organized under the NASD in each of its 13 districts, that acts as a hearing tribunal for trade practice complaints made under the Code of Procedure--also called the "District Business Conduct Committee." The committee ascertains the facts and, when warranted, imposes discipline. Decisions may be appealed to the NASD's Board of Governors.

Business Trust: A trust created for the primary purpose of operating or engaging in a business. It is a person under the Internal Revenue Code (IRC). It must have a business purpose and actually function as a business.

Buying On Margin: Buying securities on credit in an established margin account at a brokerage firm.

Bypass Trust: A written agreement established by parents that allows them to pass their assets to their children in the event of their death.

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I welcome your comments, questions and suggestions.

© Copyright 2002 - Bill E. Branscum. All Rights Reserved.