On February 23, 2010, the Project On Government Oversight sent a letter to Congressional committee members charged with financial oversight urging them not to trust or rely on the Financial Industry Regulatory Authority (FINRA) to police the brokerage industry. See “Watchdog slams Finra’s ‘abysmal’ record,” by Dan Jamieson, published in InvestmentNews.
Continue reading "Government Watchdog Calls for Elimination of FINRA" »
Sales of poorly understood, non-conventional investments tend to increase in low-yield environments like the present. Reverse convertible notes are an example of this dangerous trend, says Jeff Benjamin in his recent InvestmentNews article, “Reverse convertible notes warrant sales scrutiny.”
Bond exchange traded funds carry hidden risks. In a recent Wall Street Journal article, Sam Mamudi cautioned investors seeking safety in bond exchange traded funds to be aware of hidden risks that can magnify the losses and limit the gains in such investments. See “Bond ETF Buyers Must Stay on Guard for Hidden Risks,” March 1, 2010.
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The state of Hawaii took a $250 million write-down on the auction rate securities in its investment portfolio at the end of 2009, according to a recent Bloomberg report. The write-down included 57 issues of student loan-backed securities that were purchased from Citigroup for over $1 billion in 2007 and early 2008, when they were sold to the state as tax equivalents that could be liquidated within 7 to 10 days. But the state—like thousands of other investors holding auction rate securities—has been unable to liquidate, prompting the state to write down their value to $752 million. The liquidity problem with these securities has exacerbated budget woes for a state that has a $1.2 billion deficit due to the drop of tourism revenue tied to the recession.
Continue reading "Auction Rate Securities Abuses Contribute to State's Financial Woes" »
New York Attorney General Andrew Cuomo has announced a $2.75 million settlement with a former top executive at UBS over allegations that he used insider information to sell his auction rate securities just before the market for such securities collapsed. According to prosecutors in Cuomo’s office, the executive in question was UBS’s global head of municipal securities and was in charge of fixed income investments for the bank’s American operations when he decided to close his positions in auction rate securities in December 2007 because he heard that the market for student loan-based auction rate securities was about to fail—and he did so without warning investors of the increased risks of such securities.
Continue reading "Former UBS Executive Settles Regulatory Auction Rate Securities Action" »
Morgan Keegan has been aggressively fighting an array of regulatory actions and investor claims. As a result of these "hardball" defense tactics, Morgan Keegan's legal costs have doubled and are consuming a significant chunk of the firm's revenue as a result of investigations by securities regulators and legal actions by aggrieved investors, according to an Feb. 25 article in InvestmentNews by Bruce Kelly.
Continue reading "Morgan Keegan's Legal Costs Soar Under an Avalanche of Claims" »
A Memphis, Tennessee Chancery court has vacated an award in favor of an investor that was issued by a FINRA arbitration panel in a Morgan Keegan bond fund case. Vacatur of an arbitration award is highly unusual, and should not occur without proof of some corruption in the process, such as evident partiality of an arbitrator. The reason given by the Tennessee court was that two of the arbitrators were “biased” because they had previously ruled against Morgan Keegan in another Morgan Keegan bond fund case.
Continue reading "Tennessee State Court Ruling Undermines Securities Arbitration" »
While SEC Chairman Mary Shapiro is advocating a watered-down standard of conduct for brokers, which would not require them to act in their clients’ best interest, Republican fellow commissioners are trying to block many reforms she is willing to undertake, according to a recent Wall Street Journal article by Kara Scannell.
Continue reading "Is the SEC's Ineffectiveness the Result of Political Discord?" »
As reported in recent articles in Investment News, after the SEC filed fraud charges against Medical Capital Holdings Inc, the Financial Regulatory Authority indicated that it has “a number of investigations under way involving the allegations of wrongdoing arising from the sale of these ‘Reg D’ private placements.” Regulation D refers to the securities regulation that governs the sale of private-placement investments that don’t have to be registered with regulators.
Continue reading "Medical Capital Debacle Puts Private (Reg D) Offerings under the Microscope" »
Recently released figures show that colleges across the nation suffered a 19 percent decline in their endowments in 2009. Some school endowments have reported even steeper declines, including Georgia Tech (26%), the University of Georgia Foundation (23%), and Emory University (21%). While the financial markets as a whole experienced a significant downturn in 2008, the stock market began rebounding in early 2009 and many investment portfolios have since regained much of their value—but not all. According to an article in the Atlanta Journal Constitution, Emory has had to cut its expenses by $50 million a year and eliminated 500 administrative positions, despite having one of the richest endowments in the country. Smaller schools with more modest endowments are in a more precarious position, because a single bad investment may threaten the very survival of the institution.
Continue reading "Have College Endowment Funds Been Victimized by Unscrupulous Brokers?" »
The Federal Home Loan Bank of Seattle has filed 11 lawsuits against an array of Wall Street banks, seeking rescind $4 billion of mortgage-backed securities with interest, according to a Feb. 16 Wall Street Journal article by Nick Timiraos, “Home Loan Bank Sues Wall Street Firm.” The lawsuits were filed in late December in King County Superior Court in Washington. A spokeswoman for The Federal Home Loan Bank of Seattle said the institution had "a responsibility to its member shareholders to enforce its rights."
Continue reading "Federal Home Loan Bank Sues Securities Firms to Recover Subprime Losses" »
The Wall Street Journal reported that the Securities and Exchange Commission will begin examining the marketing of retirement products known as target-date mutual funds. “SEC to Examine Marketing of ‘Target Date’ Funds,” Feb. 6, 2010, by Fawn Johnson.
Sellers of exchange traded funds are pandering to the latest investment fad and putting investors at peril, according to David K. Randall in his March 1 Forbes article, “Rearview ETFs.”
They are taking advantage of an unfortunate quirk of human nature, which leads investors to chase last year’s hot sector in an effort to replicate eye-popping returns. This phenomenon is so well-known that it even has a name: "recency," the tendency to assume the near future will look a lot like the recent past. Unfortunately, recency often leads investors to climb into hot sectors just as they're cooling, according to the article.
Continue reading "Beware the Hidden Risks of Exotic Exchange Traded Funds ("ETFs")" »
Cellular South Inc. has filed a federal lawsuit in Mississippi against JP Morgan Securities for misrepresenting the risk and liquidity of auction rate securities, leaving $4 million in securities that it cannot liquidate. Auction rate securities are fixed-income debt instruments – typically municipal bonds, preferred shares of closed end mutual funds, or asset-backed securities collateralized by student loans or mortgages – for which the interest rate is regularly reset through an auction process. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. The Cellular South suit alleges that JP Morgan manipulated the market by failing to disclose that it was supporting the auctions, thereby creating the false appearance of stability and liquidity in the auction rate securities market.
Continue reading "JP Morgan Sued For Auction Rate Securities Losses" »
Charles Schwab Corp. added a record number of independent investment advisors in 2009 as thousands of brokers left Wall Street firms, like Bank of America, Merrill Lynch, and Morgan Stanley Smith Barney, to launch their own investment advisory firms. See Reuters “Schwab says ‘breakaway broker’ trend has legs,” by Joe Rauch, Jan. 25.
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What is an exchange traded fund? John Waggoner explains in his Feb. 12 column in USAToday, “What the heck are ETFs? It’s complicated.” Waggoner is USA TODAY's investing columnist, and formerly was senior editor at The Independent Investor, then the nation's third-largest investment advisory newsletter.
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The Commonwealth of Massachusetts Securities Division recently filed a Complaint (“Complaint”) that makes some startling allegations about Securities America’s actions in selling Medical Capital Notes. The collapse of the Medical Capital investments has left investors nationwide in the hole to the tune of about $1 billion.
Continue reading "Securities America Faces a New Wave of Medical Capital Problems" »
Ordinary (i.e., unleveraged) exchange traded funds or ETFs are supposed to be lower-risk cousins of closed-end mutual funds, but some of them are just as risky as closed-end funds, and for the same reasons, according to a recent Wall Street Journal article by Eleanor Laise, “Risks Lurk for ETF Investors.”
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Brokerage industry lobbyists and SEC Chairman Mary Shapiro are trying to change draft legislation to water down duties owed by brokers to customers. Specifically, they are trying to persuade the Senate Banking Committee to eliminate provisions in a draft bill that would require brokers who provide investment advice to act in the best interest of their clients – that is, to act as fiduciaries. See Sara Hansard’s Feb. 7 InvestmentNews article, “Consumer groups say brokers may dodge fiduciary requirement.”
On January 11, 2010, the Financial Industry Regulatory Authority (FINRA), which is the so-called self-regulatory organization responsible for regulating brokerage firms’ sales practices, laid off five senior enforcement officials, according to a recent Wall Street Journal article by Suzanne Barlyn. They include Katherine Malfa, vice president and chief counsel of enforcement with nearly 20 years of service; Rory Flynn, vice president and chief litigation counsel; Evan Rosser, vice president of strategic planning, and Michael Armelin, an assistant director in the enforcement department, according to the article. The fifth enforcement official, from FINRA's New York office, wasn't identified.
