Investment Fraud Lawyer Blog

An increase in corporate borrowing costs and Eastman Kodak’s recent bankruptcy filing have set off a round of speculation about whether it is the start of a growing trend in corporate bankruptcy filings. While Chapter 11 bankruptcy filings have been falling since 2009, George Putnam of BankruptcyData.com is expecting an uptick in corporate bankruptcy filings. (“Are corporate defaults set to rise?” USA Today) "We're going to see more big bankruptcies this year," Putnam was quoted as saying, adding: "We'll see a reasonable number even if the economy is pretty strong."

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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).

Continue reading "Ratings Agencies Praised MF Global’s Risky Off-Balance Sheet Bet" »

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).

Continue reading "HSBC Fined for Elder Abuse" »

Fitch Ratings issued a report on November 16 on the U.S. banking sector saying that “the risks of a negative shock are rising” if the effects of European debt crisis keep spreading. (“Fitch’s Warning Spooks Investors, “ Wall Street Journal).

Continue reading "Concerns Rise Regarding Wall Street Banks" »

When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.

Continue reading "High Correlations Among Asset Classes Means There's No Place To Hide" »

“[I]nvestors face a perfect storm – risky assets priced to achieve dismal long-term returns (except in comparison to equally dismal alternatives), coupled with the risk of an oncoming recession,” according to John Hussman (“John Hussman: Nearly every asset class set for ‘miserably low’ returns,” InvestmentNews).

Continue reading "Investors Have Few Attractive Investment Opportunities at Present" »

A study by the Charles Schwab Corporation indicates that retail investors want more information about the bonds they invest in, specifically, the base price of bonds and the amount of the markup by brokers. Andrew Osterland’s recent InvestmentNews article entitled “Bond buyers in the dark about broker markups – and not happy about it” discusses this study. Schwab arranged for the study in connection with promoting its BondSource platform. It reportedly provides access to new bond issues from more than 200 dealers, as well as in the secondary bond market, at a price of $1 per bond.

Continue reading "Bond Investors Want Better Pricing Information" »

Brokers often pitch alternative investments when the stock market is declining and returns on traditionally safe investments are too low. A few alternative investments may have some merit. Many more are flawed, bad and ugly in that they provide investors little more than uncompensated high risk. Then there are those that cross the line into the realm of the outright fraudulent. Unless the brokerage firm is itself a criminal enterprise, brokers often try sell fraudulent investments away from the firm to avoid detection by the firm. The practice is known as “selling away.”

Continue reading "'Selling Away' Abuses Are Costing Investors Millions" »

The recent sell-off in the high yield bond market could mean an increase in bankruptcy filings as shaky companies that depend on that market find it is closed to them, according to Oleg Melentyev, head of high yield strategy at Bank of America. Despite the extremely low yields on traditionally safe investments such as certificates of deposit and money market funds, weak economic data, U.S. budget concerns, rising commodities prices, and, especially, a resurgence of Europe's sovereign debt problems sent many investors out off riskier asset classes like high yield bonds and into U.S. Treasuries.

Continue reading "High Yield ('Junk') Bonds Are Speculative" »

Bond investors have significant risks lurking in their portfolios according to many experts. U.S. Treasury securities are priced for recession and very expensive. Yields are at historic lows. Inflation is highly probable before this decade is out, according to experts. Even a modest rise in interest rates would kill long and intermediate term U.S. Treasury bonds. One advisor who ran the numbers found that a rise of 3 percent in Treasury yields would result in a 40.7 percent loss on the 30-year bond and a 23.5 percent loss on the 10-year. Many money managers and advisors are avoiding U.S. Treasuries. A recent InvestmentNews headline reads: “Disastrous bond rout just up the road, experts warn.”

Continue reading "Bond Investors Face Their Own Set of Risks" »

Just as a low tide near the seashore can reveal shipwrecks, a falling stock market often reveals misconduct by investment advisers. This is particularly true with respect to an investment adviser’s duty to recommend only investments to a customer that are suitable in light of the customer’s investment objectives, status in life and risk tolerance. Unfortunately many investors only learn that their advisers have violated this duty when adverse market conditions develop.

Continue reading "Market Turmoil Expected to Precipitate an Avalanche of Suitability Claims" »

The Financial Industry Regulatory Authority (FINRA) has issued an investor alert warning against chasing yield with structured products, junk bonds and floating-rate bank-loan funds. The alert was prompted by "significant recent inflows" into high-yield products. Investors may find enhanced yields attractive in the current market environment of low yields on conventional fixed-income investments and higher stock market volatility.

Continue reading "FINRA Warns Investors about Structured Products and Other Non-Conventional Securities" »

In her recent New York Times article entitled “Findings That May Get Lost,” Gretchen Morgenson writes about a “disturbing paradox” presented by the following scenario: Investors who lost over $1 billion in toxic RMK bond funds may not benefit from the recent settlement with regulators that Morgan Keegan paid $200 million to obtain, despite findings that Morgan Keegan and James Kelsoe misled and defrauded investors in those funds, because Morgan Keegan’s lawyers will argue that the regulatory findings are irrelevant in arbitration proceedings filed by injured investors, and, incredibly, some arbitrators will agree not to consider those findings, despite court decisions holding that such findings must be admitted in evidence.

Continue reading "Morgan Keegan Toxic Bond Fund Cases Provide Disturbing Examples of How Industry Arbitration Fails Investors" »

Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to proprietary bond mutual funds that were both mispriced and loaded with risky subprime mortgage-backed securities. Approximately 39,000 investors lost $1.5 billion in the RMK bond funds (later renamed Helios) that were the focus of the charges.

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Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to bond funds that invested in subprime mortgage-backed securities. The charges were filed by the Securities and Exchange Commission, state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina, and the Financial Industry Regulatory Authority (FINRA). Former RMK bond fund portfolio manager James C. Kelsoe Jr., and comptroller Joseph Thompson Weller also agreed to pay penalties for their misconduct. Kelsoe is now barred from the securities industry.

Continue reading "Morgan Keegan Fined $200 Million for Fraud Involving Toxic Bond Funds" »

Best-selling “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led To Economic Armegeddon,” by Gretchen Morgenson and Joshua Rosner, “calls out greedy guys behind mortgage mess,” according to a USA Today book review by Kathryn Caravan. See also “Home Truths,” by James Freeman of the Wall Street Journal. Both reviews provide examples of how the book peels back layer after layer of a bad onion to reveal how a nice-sounding idea (home ownership for all) turned into a house of cards that was doomed to collapse, after being propped up by private greed and public corruption.

Continue reading "The Subprime Mortgage Mess: How the American Dream Turned into a Nightmare" »

In a recent article entitled “Tough Times Ahead for Bond ETFs,” Cambridge University grad Paul Amery, editor of www.indexuniverse.eu, which provides analysis and comment on Europe's exchange-traded fund and index industry, expressed concerns that the bond exchange-traded fund boom may be past its peak, and that this does not bode well for the overall U.S. financial markets.

Continue reading "Are Bond ETFs Facing a Hard Landing? " »

Fraudulent acts make headlines nearly every day. But when fraud occurs amongst friends and family, the violation really “hits home” – perhaps even in the most literal sense. Unfortunately, it is surprising how callous or devious some people can be, even the people trusted the most.

Continue reading "Affinity Fraud Generally Occurs When People Least Expect It" »

Small unrated municipal bonds whose coupons are not backed by tax revenues (“mini munis”) are a class of troubled assets that are imbedded in some seemingly safe municipal bond funds, according to a SmartMoney article by Russell Pearlman entitled “The Growing Impact of ‘Mini Muni’ Bonds.” Thousands of them are missing payments and may impair the performance of municipal bond funds that hold them, according to the article.

Continue reading ""Mini Munis" Haunt Bond Funds that Own Them" »

Jane J. Kim advises high yield or junk bond investors to be cautious in her Wall Street Journal article, “Trouble Lurks in ‘Junk’ Bonds.”

Continue reading "Experts Wave Caution Flags Regarding Junk Bonds" »