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.
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).
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Wall Street firms apparently like arbitration when they are being sued by customers but prefer court when they want to sue their former employees. This disconnect speaks volumes.
In connection with the Medical Capital receivership, the SEC Receiver recently filed its “Proposed Plan for Distribution” (the “Plan”). Unfortunately, the Plan contains some disturbing news for those investors who were pro-active and obtained recoveries against third-parties through litigation (including class actions) or arbitration.
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Brokerage firms that sell nontraded REITs reportedly “cringe” at Investor Alerts posted by the Financial Industry Regulatory Authority (FINRA) warning of the dangers of those products. They know that such alerts cause investors “anxiety and concern,” as they learn about the risks that were not disclosed to them by their brokers. Brokerage firms routinely fail to disclose material risks about the nontraded REITs they sell for two reasons: (i) they failed to inform themselves of the risks by conducting appropriate due diligence, and (ii) they don’t want to cause potential investors any “anxiety and concern,” because that would be bad for sales, which pay hefty commissions to the sellers. (“Non-traded REITs face tough scrutiny,” InvestmentNews).
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MONEY Magazine identifies nontraded REITs as very risky investments that should be avoided. In the last 10 years, the number of nontraded REITs has exploded into a $9 billion dollar market, as yield hunters piled in. Unfortunately, many investors including, most recently, investors in Behringer Harvard Opportunity REIT I have learned about the problems with these investments the hard way.
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The Securities and Exchange Commission has charged an Illinois-based advisor with selling fictitious securities via social media. Anthony Fields, CPA, doing business as Anthony Fields & Associations and Platinum Securities Brokers offered over $500 billion of phony securities through a variety of social media sites, including using LinkedIn discussions to promote nonexistent “bank guarantees” and “medium-term notes.” Many potential buyers indicated they were interested.
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It is a basic principle of Good Government 101 that when a government issues a contract, it should be subject to competitive bidding rather than being doled out to a crony of some bureaucrat. Yet eighty percent of bond underwriting contracts that are issued by state and local governments to Wall Street banks are not done by competitive bidding. Instead “local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians,” according to Matt Taibbi (“How Banks Cheat Taxpayers”).
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The SEC is going after advisory firms and their principals that misrepresent facts that bear on their experience and credentials on form ADVs. Such violations suggest an intent to mislead investors. ("ADV crackdown on, as SEC says firm claimed $200M in AUM, had $3M,” InvestmentNews).
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To help ring in the new year, the Securities and Exchange Commission has published a list of 10 tips for investors. In so doing, the SEC may be stepping outside of its role as the nations top securities laws enforcer, but that role gives it a special vantage point, so let’s listen. The SEC’s list (presumably in order of priority), with some embellishments of our own, is as follows:
1. Get rid of debt, especially high-interest debt. You may not have needed an SEC tip for that, but it is undoubtedly good advice. Deleveraging is occurring all over the world as big financial institutions and individuals that borrowed to the hilt and beyond during the housing and financial markets bubble, slowly unwind those disastrous positions. Some estimates are that deleveraging will take a decade or more.
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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.
Continue reading "'Serious Fraud' Exists in Hedge Fund Market" »
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).
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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).
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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).
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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.
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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.
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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.”
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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.
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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).
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