Bloomberg is reporting that the SEC’s recent fraud action against the State of New Jersey may be the first of many such suits targeting public officials who raised money in the $2.8 trillion municipal bond market. New Jersey agreed to settle the fraud charges on August 18, 2010, the same day they were filed by the SEC.
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Both risk averse and yield-hungry investors who have created a bubble in the market for bonds – including both US Treasuries and corporate junk bonds – are in for a rude awakening if things do not go just right, according to an August 22, 2010 InvestmentNews article, “The dangers of the growing bond bubble.”
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Under the new Dodd-Frank financial reform law, hedge funds with $100 million or less under management will be overseen by state regulators. While state securities regulators have done a remarkable job of enforcement given their limited funds, is Congress asking too much of them? The answer may be a resounding “yes” since the budget cuts in many states have resulted in a lack the funds and staff to do the job, according to an August 19, 2010 Wall Street Journal article by Kara Scannell, “States Will Be Hedge-Fund Police.” If that is the case, a major piece of financial reform may turn out to be illusory. That is because a disproportionate amount of fraud tends to be committed by these thousands of mid-sized and smaller hedge funds that will now be policed by the states.
Sales pitches often misrepresent and fail to disclose important facts about equity-indexed annuities, according to Mel Lindauer in his August 13, 2010 Forbes article, “The Truth About Equity-Indexed Annuities.”
Despite claims that they are simple, equity-indexed annuities are so complex that most people who sell them have an insufficient understanding of how they operate, according to the article.
Continue reading "Forbes Magazine Warns Investors about Equity-Indexed Annuities" »
The Financial Industry Regulatory Authority (FINRA) is investigating possible sales practice violations (e.g., misrepresentations and omissions) by Morgan Stanley, Barclays, and Credit Suisse in pitching collateralized debt obligation securities (CDOs) to institutional investors, according to a July 23, 2010 Reuters article by Steve Eder and Leslie Gevirtz, “FINRA probes M Stanley, Barclays, Credit Suisse.”
Buried in the 2,300 pages of the new Dodd-Frank Financial Reform Act is a provision called Section 922 that provides for substantial financial rewards for any person who provides “original information” to the SEC that leads to a successful enforcement action relating to the violation of federal securities laws. The whistleblower may be an investor, an employee or other industry insider, or any other member of the public not employed by a law enforcement or regulatory agency. If the whistleblower’s tip leads to a monetary sanction of over $1 million, the whistleblower will be entitled to between 10% and 30% of the amount recovered by the SEC. The new law also provides whistleblowers with legal protection from retaliation, giving them the right to sue for damages if they lose their jobs or are blackballed by the industry. Together, these new provisions provide a powerful incentive for investors and financial professionals to report misconduct in the securities industry, which will hopefully have the long-term effect of deterring fraud and other abuses.
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Citigroup was “negative” on subprime mortgages at least as early as 2006. Despite that, Citigroup continued to originate subprime mortgages and underwrite subprime mortgage-backed securities in large quantities. In 2007, Citigroup originated $19.7 billion in subprime mortgages and underwrote $13.4 billion in subprime mortgage-backed securities. Senior management says it did not have a clue what was going on. See April 8, 2010 article in the Huffington Post by Shahien Nasiripour, “Citi ‘Negative On Subprime mortgages As Early As 2006, Yet Firm Continued to Pump Out Subprime Mortgage Products.”
Continue reading "Citi Knew of Subprime Problems and Risks in 2006" »
Merrill Lynch hid its toxic subprime exposure inside off-balance sheet “Special Purpose Vehicles” (like one named Pyxis) until autumn of 2007 when CDO specialists at Moody’s figured it out and set off alarm bells that forced Merrill to revise its self-reported subprime exposure from $15.2 billion to $46 billion, according to an August 9, 2010 New York Times article by Louise Story, “Merrill’s Risk Disclosure Dodges Are Unearthed.” And – get this – Merrill’s senior executives supposedly did not know what was going on!
Continue reading "Merrill Lynch Concealed Subprime Risks Using Tricky Tactics" »
Wall Street banks have created the “next investment bubble” by creating and selling complex, opaque structured notes to income oriented investors, according to an August 9, 2010 Bloomberg article by Zeke Faux and Jody Shenn, “Structured Notes Are ‘Next Bubble,’ Whalen Says.” In fact, Christopher Whalen, a former Federal Reserve Bank of New York official and managing director of Institutional Risk Analytics, claims that Wall Street “firms are busily creating the next investment bubble on Wall Street -- this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all -- that is, pure derivatives.” Mr. Whalen’s words carry great weight, since he predicted the collapse of the mortgage backed securities market in March 2007.
It is no surprise that retirees are often the targets of investment scams. But it is a surprise that the scammers are often empathy-challenged senior citizens themselves, and that is surprising. Attorneys and advocates for the elderly are reporting an increase in the number of elder scams perpetrated people their age, according to an article in Bloomberg BusinessWeek, “Senior Swindlers: A Sucker Retires Every Minute.”
One good thing that might come out of the Dodd-Frank financial reform act is better self-policing by Wall Street. Not that Wall Street has changed its unscrupulous ways. But the Securities and Exchange Commission is expecting a big increase in tips from senior employees and third parties because of whistleblowing incentives in the new law that can reach seven-figures, as reported by CNBC in an August 9, 2010 article entitled “Wall Street Rewards to Trigger a Surge in Informants.”
One of the worst and most unsuitable investments we have ever come across is the reverse convertible. Like the Devil himself, they have so many names, and are not easy to recognize on brokerage statements. UBS calls them “Yield Optimization Securities.” They are also known as “revertibles,” “revertible notes,” “reverse exchangeable securities,” and so on. And they are devilishly popular – brokerage firms sell a lot of them to elderly, retired, and on-the-brink of retired investors who need a way to generate sufficient income to live on without undue risk to their principal. The problem is that these investments are essentially put option contracts that do jeopardize principal, and brokers do not explain that critical fact.
Continue reading "Investor Alert: Reverse Convertibles Can Be Extremely Toxic" »
A recent USA today article highlights the fact that investment scams usually increase when there is an economic downturn. The article refers to The North American Securities Administrators Association’s recently released list of Top 10 Investor Traps: The list and discussion points, which are located at http://www.nasaa.org/nasaa_newsroom/current_nasaa_headlines/13048.cfm are as follows:
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Pennsylvania regulators have charged TD Ameritrade with fraud in selling its Reserve Yield Plus Fund, according to an August 4, 2010 Wall Street Journal article by Daisy Maxey, “TD Ameritrade Faces Civil Fraud Complaint Over Reserve Fund.” The Reserve Yield Plus lost money in the midst of the financial crisis in September 2008.
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Scams will always be with us but they are especially plentiful when traditional investments like stocks and bonds are not doing well, according to John Waggoner of USAToday in his August 5, 2010 article, “Investment Scams Thriving.”
"It's pretty bad out there," Texas Securities Commissioner Denise Voigt Crawford was quoted as saying. The primary victims are those trying to make up losses in their 401(k) plans and stock portfolios, she added.
Continue reading "Regulators Report that Investment Scams are on the Rise" »
A Financial Industry Regulatory Authority (FINRA) arbitration panel has ordered UBS AG to pay $80.8 million to a Maryland cellphone marketer for lost profits when its cash was frozen in auction-rate securities in early 2008, according to an August 4, 2010 Wall Street Journal article by Randall Smith, “UBS to Pay $80 Million in Auction-Rate Case.”
In a recent Financial Industry Regulatory Authority (FINRA) arbitration, a South Florida panel specifically found that Respondents Citigroup Global Markets, Inc. f/k/a Citigroup Investment Services, and Citigroup Alternative Investments, LLC were guilty of negligent mismanagement of MAT/ASTA funds, as well as negligent supervision of their registered representatives. This award should open the door for many investors to recover the damages they sustained, particularly in early MAT/ASTA deals.
The Financial Industry Regulatory Authority (FINRA) has ordered SunTrust Investment Services, Inc. of Atlanta, GA (“SunTrust”), to pay $1.44 million in fines and restitution for misconduct arising out of unsuitable recommendations and churning the accounts of 17 mostly elderly customers, according to an article by J. Scott Tinsley in the Atlanta Journal Constitution (“SunTrust unit fined for improper trades”). $900,000 of that amount is a fine, which includes nearly $224,000 in disgorgement of commissions flowing from the unsuitable trades. The remaining $540,000 will serve as restitution to the customers who incurred losses.
Continue reading "SunTrust Burns Elderly Victims" »
Financial abuse of elderly people is increasing as more seniors are being lured into investments that are unsuitable (inappropriate) or outright frauds.
According to recent articles in InvestmentNews and Bloomberg, one out of every five Americans older than 65 has been the victim of a financial scam. This means that more than 7.3 million seniors have been taken advantage of financially. New York-based insurer MetLife estimates the total costs of elder fraud comes to more than $2.6 billion a year. One of the reasons for the trend is the significant number of elderly individuals who have significant wealth and who may be suffering from some degree if cognitive difficulties.
Continue reading "Financial Abuse of the Elderly has become a Growth Business" »
Investors will soon be able to see more customer complaints, criminal convictions and rulings against brokers when they check out their broker on the Financial Industry Regulatory Authority’s (FINRA’s) web site through its free online BrokerCheck service, according to a July 14th article in InvestmentNews. While the absence of complaints does not guarantee that brokers will always adhere to “high standards of commercial honor and just and equitable principles of trade,” as FINRA purports to demand, investors should always avail themselves of this opportunity, preferably before doing business with a broker.
Continue reading "Soon You Will Be Able to Learn More about Your Financial Adviser" »
