Investment Fraud Lawyer Blog

Just when you think you could not become more cynical, Citigroup comes along and throws an award ceremony honoring employees who concealed evidence of mortgage fraud from the Federal Housing Administration (FHA). To make matters worse, the ceremony occurred in January 2011, long after “too-big-to-fail” Citigroup received $45 billion in taxpayer bailout money (the most of any financial institution).

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There has been a marked uptick in purchases of high-yield or junk bonds by retail investors. Junk bonds pay a higher interest rate to compensate investors for the increased risks of default, among other risks. So far this year, retail investors are have put $11.8 billion into junk bond mutual funds, $9.9 billion into investment grade bond funds, and $4.8 billion into stock funds (See Wall Street Journal, “Buyers Take a Shine to ‘Junk’”). Mutual fund managers are also buying more junk bonds to enhance returns.

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What’s the difference between a Wall Street bank and a whistleblower? Nothing! While Wall Street railed against whistleblower protections for employees in Dodd-Frank, turns out they are falling all over themselves to blow the whistle on each other. Why? Because the first to tattle gets protections that are not offered to the second to tattle. (“UBS Turning Whistleblower in Libor Probe,” Bloomberg). But wouldn’t it be better to encourage more employee whistleblowers so as not to have to dispense protections to corporate wrongdoers that make getting caught just a cost of doing business?

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Former investment banker and financial writer William Cohan has written a blistering critique of the SEC’s settlement with former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, essentially accusing the SEC of abject surrender to the forces of evil and begging the judge to reject the settlement: “We are all worse off for the SEC’s continued lax enforcement of wrongdoing on Wall Street. If it won’t protect us from charlatans, who will? Judge Block, please deny the proposed pathetic settlement and send the parties back to the negotiating table or, even better, your court room.” (“SEC Surrender Continues With Bear Bankers Deal: William D. Cohan,” Bloomberg).

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Investors beware – penny stock hucksters are preying on investors again. Jonathan Hoenig, managing member of Capitalistpig Hedge Fund warns “Penny Stocks Aren’t Worth a Dime” (SmartMoney.com, Feb. 6, 2012). Most of the stocks that make the yearly new-low list are penny stocks (less than $5 a share), and many institutional investors will not buy stocks under $5.00, according to Mr. Hoenig, for the following reason: “There are few lower probability trades than penny stocks, especially of microcap companies trading at a multi-month lows. They are the classic sucker's wager. Scratching off lotto tickets might be a better bet. It's a smart discipline: with thousands of different risks to assume, why take on the worst possible option?”

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While fraudsters are with us always, they are especially active in times like these when extremely low interest rates and stock market volatility have made conventional stock and bond investments unattractive and have given rise to a multitude of alternative investments, some of which may be fraudulent. To help combat this, the Certified Financial Planner Board of Standards, Inc. has put out a booklet called “Consumer Guide to Financial Self-Defense,” which features 10 “red flags” of fraud. It is the subject of a recent article in SmartMoney.com entitled “How to Fend Off Financial Fraudsters.”

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Congratulations to whistleblower Sherry Hunt of Silex, Missouri, a vice president of quality assurance at CitiMortgage, who will receive approximately $31.7 million or 20 percent of the $158.3 million that Citigroup agreed to pay to settle a False Claims Act suit involving mortgage fraud filed by the U.S. Department of Justice. It is the second-largest settlement ever in a mortgage-fraud case.

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The regulatory eye in the sky (the SEC) has apparently locked onto private equity firms, sensing valuation problems and conflicts of interest. Generally, private equity firms purchase troubled companies with mostly borrowed funds, cut costs, improve operations, and sell them for a profit, taking a management fee (typically 1.5% to 2.0%) in the interim, plus 15% to 20% of any profits. Private equity firms and how they do business made news recently in the Republican primary presidential debates.

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John Bogle, founder of The Vanguard Group Inc., recommends low-cost, passive index mutual funds as the best way to invest, but that recommendation does not extend to exchange traded funds. Exchange traded funds are good for trading, , according to Mr. Bogle, but trading is not good for investors. Trading and investing are not the same.

Continue reading " Vanguard Icon Says ETFs Are Bad For Investors " »

The Financial Industry Regulatory Authority (FINRA) is taking a closer look at a fast-growing alternative investment known as a non-traded business development company (BDC). According to InvestmentNews, FINRA spokeswoman Nancy Condon states, “we are looking at a number new products being sold to investors and BDC’s are one of them.” BDC’s are typically closed-end funds regulated under the Investment Company Act of 1940. BDC’s were created in 1980 by Congress in order to provide small companies with funding.

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Representative Spencer Bachus (Republican, Alabama), the Chairman of the House Financial Services Committee (which oversees the financial services industry), is under investigation by the Office of Congressional Ethics, for allegedly trading on non-public information he gleaned as a result of his elective office and leadership role in Congress. (“Rep. Bachus Faces Insider Trading Probe: Report,” CNBC.com). The article did not say whether the Securities and Exchange Commission or Department of Justice is also investigating.

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Student loan debt problems are lurking on the horizon. Americans owe $1 trillion on college student loans, more than they owe on credit cards, which is too much. 2010 graduates owed $25,250 on average (up 5 percent from 2009). Parents of 2010 graduates owed $34,000 on average. More parents are going into debt to pay for their childrens’ college – 17 percent in 2010 versus 5.6 percent in 1993. The default rate is 9 percent for a two-year period ending in 2010, up 2 percent from the previous period. A student who borrows $20,000 a year for four years will have a repayment obligation of $1,000 per month, as much as a small mortgage, according to one financial advisor. (“Student loans the ‘next debt bomb’ for U.S., attorneys warn,” InvestmentNews).

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Various well-respected market followers are beginning to sound alarm bells regarding municipal bonds and municipal bond funds. Investors and financial advisers are encouraged to take heed and proceed with caution.

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As Wall Street continues to question why its business is declining, a recent Financial Industry Regulatory Authority (FINRA) arbitration case provides part of the answer. The arbitration panel ordered Bank of America Merrill Lynch (Merrill Lynch) to pay $1.38 million to an investor who lost money in a complex structured product composed of pooled loans that were sliced into tranches with varying payouts and risks. While the basic claim doesn't sound particularly egregious, the underlying facts were.

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Questions continue to arise regarding the too-cozy relationship between the SEC and Wall Street. Recent reports claim that the SEC, when settling with big Wall Street firms, has a practice of granting waivers that preserve special privileges enjoyed by those firms, and protect them from serious consequences that would otherwise result from their wrongdoing. For example, the waivers preserve fast-track offering privileges for “well-known seasoned issuers,” which allow big Wall Street firms to quickly raise capital in the securities markets. Other waivers permit the firms to continue managing mutual funds and engaging in certain market activities.

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The Financial Industry Regulatory Authority has issued a Regulatory Notice (12-03, Jan. 2012) to “remind” its member firms of their sales practice obligations with regard to complex products, and to provide them “guidance” in exercising heightened scrutiny and supervision over marketing and sales of complex products. Complex products are not defined in the Notice, but are described as including a host of alternative investments, such as derivative-based products, nontraded REITs, structured notes, inverse or leveraged exchange traded funds, hedge funds, and securitized products like mortgage-backed securities and asset-backed securities.

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Affinity fraud is a big problem and it is growing. The affinity aspect of it refers generally to the fraudster’s standing as an insider among a group of people who share a common interest. This standing as a member of the group, so to speak, makes the fraudster presumptively trustworthy. Unfortunately, affinity settings are breeding grounds for investment fraud.

Continue reading " Affinity Fraud Hits Close to Home " »

The London investment company, Centaur, which launched its Galileo fund to provide investors with the opportunity to generate returns through none other than sports betting has collapsed resulting in what is reported to be a 100% loss with investors holding the bag for about $2.5 million.

Continue reading " Hedge Fund Formed to Bet on Sports Collapses " »

The Financial Industry Regulatory Authority (FINRA) recently issued a report outlining is its regulatory and examination priorities for 2012. The securities industry regulator is focusing on conduct and products meant to beat the market that are unsuitable investments for many investors.

Continue reading " Securities Regulator Alerts the Public About Dangerous Investments and Investment Strategies " »

U.S. investors have poured money into single-country exchange traded funds with encouragement from Wall Street, but that can be a dangerous strategy. Such a strategy often leads to dangerous over concentrations, which, like leverage, can amplify both gains and losses. (See SmartMoney Magazine, “Wilting ETF Returns”).

Continue reading " Currency Risk Haunts Single-Country Exchange Traded Funds (ETFs) " »

Federal prosecutors plan to file criminal actions against four former traders who allegedly overvalued collateralized debt obligations (CDOs) sold by Credit Suisse in order to increase their commissions. The events occurred in 2008 and resulted in a $2.85 billion write down by Credit Suisse. Credit Suisse fired the traders and cooperated with authorities in their investigation. (“Ex-Traders at Credit Suisse Expected to Be Charged With Fraud,” New York Times, Dealbook).

Continue reading " Credit Suisse Traders Face Criminal Charges for Mortgage Investment Fraud " »