Is owning index funds a good idea? It depends on the index, according to personal finance expert John Waggoner (“Funds following odd index? Just say no”). Broad based index funds are a good idea, but new exotic niche funds are not.
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The Securities and Exchange Commission has implemented a strategy of using computer analyses to identify hedge funds and other firms whose claimed investment performance figures warrant special scrutiny for possible fraud. Working on the theory that, if the performance seems too good to be true, maybe it is, the SEC has commenced lawsuits and investigations into a number of supposedly “outperforming” hedge funds. More than 20,000 funds have or will be screened by the SEC’s new system.
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Whether from “outright bribery and the hope of future job offers” or “ideological conformity and the desire for good relationships and a peaceful life,” the Securities and Exchange Commission is a “captured” agency controlled by Wall Street. That is why the SEC allows the likes of Citigroup to sell its clients a product that Citigroup “built-to-fail” and bet against, in exchange for Citigroup paying a modest fine and promising not to violate the securities laws again (which everyone knows the SEC has no intention of enforcing) – all without admitting that it did anything wrong. The big banks continue to break the law because of the low probability of getting caught plus the inconsequential consequences of getting caught, and that is why we will face another financial crisis in the near future. That is the takeaway from James Kwak’s article in The Atlantic entitled “Too Big to Stop: Why Big Banks Keep Getting Away With Breaking the Law.”
It’s getting crazy out there in ETF land. Leveraged exchange traded funds like Direxion Funds that deliver two times the return of a benchmark are being jacked up to three times the return. Many market observers believe that the highly leveraged exchange traded funds are contributing to the market volatility that is causing investors to flee the stock market. (“Beware of ETFs On Steroids,” Bloomberg Business Week, Markets & Finance).
Continue reading " Some Exchange Traded Funds (ETFs) Are Morphing Into Monsters " »
Many stock mutual funds are down for the year, and the reason why has to do in part with high expenses and use of derivatives. The average diversified equity mutual fund has declined 5.9 percent this year, compared with only a 1.4 percent decline in the S&P 500 stock index, and 92 percent of equity mutual funds have lost value this year. (See John Waggoner’s USA Today article entitled “It’s been a pitiful year for stock funds”).
Continue reading " Stock Funds Underperform Major Index " »
The Houston Athletics Foundation, which funds athletic scholarships for the University of Houston, is apparently the victim of a major ponzi scheme perpetrated by David Salinas, a Houston-based money manager. Approximately, $2.2 million (over 40 percent) of the Foundation’s assets are unaccounted for, having been supposedly invested in bonds that never existed. The ponzi scheme involved $39 million raised from more than 100 investors, including numerous high-profile college coaches.
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The Financial Industry Regulatory Authority (FINRA) has fined Wells Fargo Investments $2 million and ordered it to pay restitution to customers for unsuitable sales of reverse convertible securities, and other misconduct. The reverse convertibles sales involved one broker and 21 customers with 172 accounts. Seventy one percent of the customers were over 80 years old. (See “Wells to pay $2M to settle claims broker sold unsuitable investments to seniors,” Investment News).
Continue reading " Securities Regulators Fine Wells Fargo $2 Million for Elder Fraud " »
MF Global’s exposure to European sovereign debt was not done through straightforward purchases of bonds. Instead, CEO Jon Corzine used a transaction known as repurchase-to-maturity (RTM). The RTMs allowed MF Global to, in essence, buy the bonds on margin, yet classify the purchase as a sale, with the bond and the repurchase liability removed from MF Global’s balance sheet, thereby concealing the risk. (“A Romance With Risk That Brought On a Panic,” New York Times, Dealbook).
Corzine started his career as a trader at Goldman Sachs and remained a trader (i.e. risk taker) at heart. “His obsession with trading was apparent to MF Global insiders over his 19-month tenure.” When he joined MF Global as CEO, he intended to turn the struggling firm into a mini-Goldman through proprietary trading largely directed by himself, according to the article. To that end, “[h]e pushed through a $6.3 billion bet on European debt – a wager big enough to wipe out the firm five times over if it went bad – despite concerns from other executives and board members” (which approved the transactions, according to Corzine).
Continue reading " Ratings Agencies Praised MF Global’s Risky Off-Balance Sheet Bet " »
Promoters of fraudulent investments are targeting the 77 million baby boomers in the U.S. who make up 25 percent of the population, according to securities regulators and prosecutors (“Boomers Wearing Bull’s-Eyes,” Wall Street Journal, Kelly Greene). Regulators expect to file a record number of enforcement actions involving investors age 50 years and older, as financial fraud against boomers is “rampant” throughout the nation, according to the article.
In 2010, there were 1,241 criminal and civil regulatory fraud actions involving investors age 50 and over, versus 506 cases in 2009, according to the North American Securities Administrators Association (NASAA), the association of state securities regulators. Unfortunately, the number of enforcement actions is tiny compared to the number of actual fraud cases out there.
Continue reading " Investment Fraud Against Older Americans Is 'Rampant' " »
Opponents of a bill that would shift the oversight of investment advisors from the Securities and Exchange Commission (SEC) to another entity such as the Financial Industry Regulatory Authority (FINRA) are gratified that the introduction of the bill has been delayed for several months, according to an aide to House Financial Services Committee Chairman Spencer Bachus, R-Ala. (“SRO bill opponents gaining traction with lawmakers,” InvestmentNews). Congressman Bachus is reportedly hesitating because of concerns expressed by the bill’s opponents.
The bill’s opponents include the House financial panel's ranking Democrat, Rep. Barney Frank, the Investment Adviser Association, and the North American Securities Administrators Association (NASAA) (the association of state securities regulators), which opposes FINRA-style “self-regulation” and advocates independent state and federal oversight.
Continue reading " Concerns Grow Over SRO Bill For Advisors " »
Criminal acts did not play an important role in causing the mortgage crisis, according to an opinion piece in the Wall Street Journal written by Gordon Crovitz, a former publisher of the Journal. In Crovitz’s view, critically flawed policies and rules in the U.S. and abroad did so, and set the stage for the global shocks we see today. Crovitz did not say that crimes did or did not occur; he said that bad regulations were “worse than a crime.” (“Financial Regulation: Worse Than a Crime,” Wall Street Journal, Opinion). Other informed observers believe the subject of Wall Street crime is a very serious matter.
There is no doubt that, as Crovitz says, policies that subsidized bad mortgages in the U.S. and shaky European sovereign debt, and the “Basel rules” that called for big banks to place significant amounts of capital in investments like mortgages and mortgage-backed securities, were based on unwarranted assumptions that those investments were low-risk. When they imploded, many banks that held the same undiversified bad investments went down too. Crovitz concludes: “The reason prosecutors can't prove criminal intent is that in many cases the bankers were simply trading in compliance with the regulations governing them.”
Continue reading " Ignoring Financial Crimes Makes Next Financial Crisis Inevitable " »
After federal district court judge Jed Rakoff “forcefully rejected” a $285 million settlement between the SEC and Citigroup, Susan Beck bravely decided to read the prospectus for the Class V Funding III CDO at the center of the controversy, in order to see the disclosures that Citigroup says are adequate. What she found was a “brain-scrambling, obfuscating collection of words.” (“Susan Beck’s Summary Judgment: The Problem with Citi’s Disclosure Argument,” AmericanLawyer.com).
The SEC had accused Citigroup of failing to disclose to investors in the CDO that it had a role in selecting one-half of the $1 billion of assets in the deal and then bet against some of them. The investors lost $700 million while Citigroup made $160 million on the deal. Citigroup argued that its disclosures to investors were adequate, given that the investors were “sophisticated.”
U.S. household net worth fell 4 percent to $57.4 trillion, the sharpest drop in over two years, and Americans’ stock portfolios fell 5.2 percent in the third quarter. About 50 percent of Americans own stocks or stock mutual funds. (“Wealth in U.S. takes big hit,” Atlanta Journal Constitution).
Continue reading " Household Wealth in the U.S. Continues to Decline " »
For the seventh straight month, equity mutual funds reported net outflows (investor withdrawals). For the week ended November 30, equity mutual funds’ net outflows consisted of $6.67 billion from domestic equity funds and $2.96 billion from foreign equity funds, according to the Investment Company Institute, the national association of U.S. investment companies (i.e., mutual funds). Overall, U.S. mutual funds lost $9.24 billion to withdrawals last week, the most in almost two months. (See InvestmentNews: “Mutual problem as stock fund investors still heading for the exits”).
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In the Medical Capital Receiver case, the SEC Receiver recently filed the “Receiver’s Proposed Plan for Distribution” (the “Plan”) which contains some disturbing news for those investors who were pro-active and obtained recoveries against third-parties through litigation (including class actions) or arbitration. As proposed in the Plan (set forth on Page 14 section 4) the Receiver would deduct any funds that an investor received from third-parties in arbitration or litigation dollar for dollar against any sums that would be due from the Receiver.
Continue reading " SEC Receiver's Plan is Unfair to Proactive Medical Capital Noteholders " »
Wells Fargo will pay $148 million to settle charges that its Wachovia Bank unit conspired to rig bids on investment contracts for municipalities. (“Wells to Pay $148 Million to Settle Wachovia Bid-Rig Case,” Wall Street Journal). As part of the settlement, the Justice Department will not prosecute the bank. Wachovia reportedly admitted and accepted responsibility for the illegal conduct (which the SEC has so far not required settling defendants to do).
Continue reading " Wells Fargo Pays $148 Million for Defrauding Municipalities " »
A report issued by the McKinsey Global Institute forecasts that investor allocation to equities worldwide will drop from 28 percent in 2010 to 22 percent in 2020. (“Equities Losing Appeal in Global Financial System,” InvestmentNews).
Continue reading " Investor Demand for Equities is Waning " »
Thinly sliced niche exchange traded funds provide exposure to arcane parts of the market, but they may not be what investors had in mind when they purchased them. (“Thinner and Thinner: ETF Providers Cut Market Into Ever-Narrower Slices,” Wall Street Journal).
Continue reading " Exotic ETFs Become Riskier and Riskier " »
The U.K. Financial Services Authority fined HSBC Holdings PLC £10.5 million (its largest fine ever) for selling unsuitable products to elderly customers. HSBC was further ordered to pay another £29.3 million to compensate customers, who were advised to buy bonds whose maturity dates were longer than the customers’ life expectancies. (“HSBC Fined for Selling Unsuitable Products to Elderly,” Wall Street Journal).
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The four top selling nontraded real estate investment trusts have either closed or say they intend to close soon. This has left industry participants wondering whether new players will be able to fill the void. “As top nontraded REITs close, doubt over new ones,” InvestmentNews). Industry participants apparently believe the $9 billion nontraded REITs market is still popular with investors. But that may not be the case for long as negative press reports, well-publicized disciplinary actions and investor arbitration claims have increased investors’ awareness of the risks of these alternative investments. In fact, Registered Rep Magazine, a publication geared to brokers, recently published an article reporting that the securities industry is beginning to take notice of these storm warnings in the nontraded REITs arena. (“NonTraded REITs Raising Red Flags in the Industry,” Registered Rep).
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Wiretaps of hundreds of conversations have led federal authorities to pursue charges against individuals at two well-known hedge funds and an established mutual fund that caters to ordinary retail investors. The targets are former traders at hedge funds Diamondback Capital management LLC and Level Global Investors LP, and an analyst at mutual fund company Neuberger Berman Group LLC. If charges are brought, they would represent a substantial expansion of the insider trading investigations underway. Word is that two former research analysts at Level Global and Diamondback are cooperating with authorities. (“More Charges Set for Insider Probe,” Wall Street Journal).
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Even in today’s turbulent economy, many people dream of retiring early and living off of their investments. On occasion, unscrupulous investment advisers have been known to take advantage of this wish by promoting deceptive early retirement schemes. This problem has become a big enough problem that the SEC and FINRA have started warning investors to beware.
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Registered Rep Magazine, a publication geared to brokers, reports that the securities industry is beginning to shun non-traded real estate investments trusts (REITs). Well-publicized disciplinary actions and investor arbitration claims, as well as the hundreds of independent brokerage firm that were forced to close their doors as a result of improper sales of non-traded REITs, have brought an increased awareness of the risks of these alternative investments on the part of investors and the securities industry. (“Non-Traded REITs Raising Red Flags in the Industry,” Registered Rep).
Continue reading " Brokerage Firms Beginning to Grow Leery of Non-Traded REITs " »
