Sweepting Changes for the SEC and CFTC

17 06 2009

The White House today released a “white paper” outlining their plans for reform for the regulation of financial markets.  Two major changes will greatly affect the world of Securities Markets.  The first deals with Hedge Fund filings with the SEC.  From the Wall Street Journal.

Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission. Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities.

It seems that the main target of this regulation is not the hedge funds themselves, but Ponzi schemes.  The registration and reserve requirements will have the affect of allowing the SEC to monitor investments closely.  Ponzi schemes by their nature lack reserves because they are structured based on continuing investment and payouts to where their capitol is always less than what was invested.  This will raise large red flags for the SEC which has been criticized for their inability to spot Ponzi schemes.

The second major change involves an increase of police powers by both the SEC and the CFTCWall Street Journal:

The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal….

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan….

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In their conception, the SEC and the SFTC were not designed as policing bodies, but as regulatory institutions.  It will be interesting to see how they make the shift.   It would involve a major shift in the role played by both bodies.  There may even be some constitutional questions regarding federal policing powers.  Congress, and more importantly, the public ought to take a hard look at the Obama plan and scrutinize the proposed changes.

The white paper has been made available by the Wall Street Journal.  You can access it here.

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Chicago White Sox and a Ponzi Scheme

16 06 2009

The Securities and Exchange Commission today obtained a court order ending a $11 millions ponzi scheme operated by David Hernandez, a local felon turned Chicago sports internet entrepreneur.   Looks like his entrepreneurial efforts were focused on something other than Chicago sports.  From the SEC:

The SEC alleges that David J. Hernandez, who was convicted in 1998 for wire fraud arising from his previous employment at a bank, sold “guaranteed investment contracts” through his company that, unbeknownst to investors, was actually out of business. Hernandez promised returns of 10 percent to 16 percent per month and made false and misleading statements about his background, the use of investor proceeds, and the safety of the investment. Among Hernandez’s illicit uses of investor funds was to start up a Chicago sports-talk Web site called “Chicago Sports Webio” featuring Chicago-area sports figures and reporters.

Now look how Hernandez grossly misrepresents his credentials:

The SEC alleges that Hernandez, who lives in Downers Grove, Ill., misrepresented that Next Step Financial was a successful company that invested in payday advance stores when, in fact, it was out of business. He trumpeted a strong educational and banking background, claiming to hold a J.D. and M.B.A. and have more than 20 years of experience in banking. According to the SEC’s complaint, Hernandez never received the claimed degrees, and his banking career ended with the conviction for wire fraud. He never invested in payday advance stores as he claimed, nor did he purchase the insurance policies that purportedly covered investor funds.

“Chicago Sports Webio” is a venture between Hernandez and Chicago sports radio personality, Mike North, who was recently fired from sports radio The Score 670. For those northsiders who know that the good guys wear blue pinstripes and hats, not black, should not be surprised that the site is sponsored by none other than the “Chicago White Sox“.  The site features a rather attractive model/”sports personality”, April Rose.   I am assuming that she is nothing more than a pretty face, who looks good in a White Sox jersey, and really does not care at all about sports.

On a side note, if you would like read a blog by a stunningly attractive woman, it had better be someone who knows sports inside and out and is passionate about the subject.  I am talking about none other than Sarah Spain, who posts on mouthpiecesports.com. Best of all, she is a Cubs fan!

If you want to read the complaint, it is available in pdf. form from the SEC’s website.





Madoff Victims and the Securities Investor Protection Corporation

9 06 2009

The New York Times online has an article on how Madoff Victims may be compensated.  Included is a brief discussion of the Securities Investor Protection Corporation or SIPC.   The SIPC may be the only source of relief for some of the victims, and unfortunately, many of the elderly victims may not be eligible for SIPC relief.  From the New York Times Article:

The approach they seek would produce a significantly higher tally of cash losses than the formula being used by the court-appointed trustee overseeing the claims process for the Securities Investor Protection Corporation, a government-chartered agency financed by the brokerage industry….

Customers who qualify are eligible for up to $500,000 in immediate compensation from SIPC. Those whose eligible losses exceed that amount would divide up the assets recovered by the trustee.

Thousands of long-term investors, including elderly people who lived for decades on withdrawals from their Madoff accounts, do not qualify for SIPC payments because they withdrew considerably more over time than they originally entrusted to Mr. Madoff, Barry Lax, a lawyer for the plaintiffs, said.

The SIPC is like the FDIC for securities investors.  It is a government mandated, non-profit insurance company set up to protect the accounts of securities investors.  However, unlike the FDIC, it is not a federal agency, but a self-funded corporation.  Although it is not administered by the government, government officials play a role in that some of its governors are appointed by the President of the United States, under the bill that orginally created the corporation.  Generally, investors are insured for up to $500,000 per account.   Most of the securities traded on Wall Street are covered, however, failure to execute  trades transacted under naked short selling are not.





The Pequot has sunk!

29 05 2009

Looks like Captain Ahab Samberg did not get his whale.  Amidst a probe by the Securities and Exchange Commission, one of the more powerful hedgefunds, Pequot Capital Management, has decided to close shop.  The SEC has been keeping an eye on the legendary investor, Arthur Samberg for possible insider trading involving Microsoft.  Sanberg has decided to liquidate some of his largest hedge funds. From Bloomberg:

The U.S. Securities and Exchange Commission in January reopened a probe into whether Samberg’s funds illegally profited by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. Investigators learned of documents that show former Microsoft employee David Zilkha may have obtained confidential information in 2001 about the software maker, said one of the people. Zilkha left the Redmond, Washington-based company that year to join Pequot, where he worked for less than a year.

“Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction,” Samberg, 68, wrote in the letter, a copy of which was obtained by Bloomberg News.

This is the third complaint by the SEC against Pequot.  Here is a copy of the latest complaint.





Cuban says SEC Insider Trading Lawsuit Should be dismissed

28 05 2009

Mark Cuban through his attorney is stating that the court should dismiss the Insider Trading claims against him by the Securities and Exchange Commission.   The law is relatively simple.  Those who have access  to confidential corporation information cannot engage in trading based on information that they know, which is not available to the public.  In plain English, if someone owns a large amount of stock in a company, and is informed of the company’s impending doom (or other substantial loss) based on information that is not made to the public at large (ie- confidential information), he/she cannot use that information to trade their stock in order to avoid a financial loss.  They need to wait until the information is made to the public through normal reporting procedures.  According to the article in Bloomberg, Cuban claims that although he did have confidential information, he did not have a fiduciary relationship with the company, and therefor did not incure liability.  From the article in Bloomberg:

In its Nov. 17 lawsuit, the SEC claimed Cuban, 50, promised during a telephone call with Mamma.com’s chief executive officer to keep information confidential about the company’s stock sale. Later that day, Cuban avoided more than $750,000 in losses by ordering the sale of his 6.3 percent stake in the Montreal-based Internet search company, the agency said.

Fitzwater said he would rule on Cuban’s request at a later date….

Kevin P. O’Rourke, an SEC lawyer, denied the agency was trying to enlarge the law.

“This case, we believe, is based on a straight-down-the- line application of insider-trading law,” he told Fitzwater.

Ferrara argued that Cuban’s confidentiality agreement didn’t make him Mamma.com’s “fiduciary,” or someone required to act for the benefit of another.

The alleged vow to keep information secret doesn’t create a duty to refrain from acting on it, he said. An SEC rule at issue in the case pertains only to family or other personal relationships, he said.

Here is a copy of the original complaint against Mark Cuban.





SEC sues Professor and Lawyer for Securities Fraud

27 05 2009

I am glad I didn’t have this professor for Business Ethics.  To top it all off, it seems as they used their students as employees to further their scheme. From Star-Telegram:

Using forged bank records, the men made it appear that a company they controlled was earning spectacular returns from such trades, the lawsuit says. As a result, the suit says, since at least July 2006 more than 60 investors bought stock in the company, Global One.

The SEC obtained an emergency court order to freeze the assets of Robert D. Watson, who taught at A&M from January to April, and attorney and CPA Daniel J. Petroski of Houston. A court-appointed receiver will try to recover assets.

I will soon get around to writing my large, long awaited article on Ponzi schemes and how to avoid them.  It may seem like old news, but most Ponzi schemes often start when the market is down, so now is a prime opportunity for shifty individuals to take advantage of ordinary people.





Sonia Sotomayor and Securities Litigation

26 05 2009

Today President Obama nominated Sonia Sotomayor for the Supreme Court of the United States vacancy left by Justice David Souter.  It is interesting to note that Judge Sotomayor has had four of her rulings overturned by the very court she is now nominated to sit.   One of these cases dealt with in an interpretation of law dealing with Securities Litigation Uniform Standards Act .

The case, Merrill Lynch, Pierce, Fenner and Smith, Inc., v. Dabit, 547 U.S. 71 (2006) arose out of an investigation of Merrill Lynch by then New York State Attorney General, Eliot Spitzer.  The public investigation alleged that a breach of fiduciary duty ocurred because Merrill Lynch was giving investment advice based on their loyalty to certain large investment banking clients, rather than the best financial interests of individual investors.  Though the public investigation was settled out of court, it spurred a number of private law class action lawsuits against Merrill Lynch.  The suit eventually goes 2nd Circuit, where Sonia Sotomayor is sitting as judge.

So in other words, Merrill Lynch was allegedly in bed with a series of investment bankers, which manipulated the price of stocks.  When the stock prices fell, many investors (Including plaintiff, Dabit) lost the value of their stocks, and the brokers lost their commissions when investors look elsewhere.

Sounds like Merrill Lynch has breached their duty to the people who use them to invest, right?  Can they sue?  Short answer, yes, with a “but”.  The “but” is that in 1998, congress passed the Securities Litigation Uniform Standards Acts.  The effect of the law was to preempt certain class actions alleged under state law from being filed in either state or federal court if the cause of action was “in connection with the purchase or sale” of securities. The main purpose of the law suit was to prevent people from filing frivolous lawsuits against large companies with “deep pockets”, which would have the effect of tying up the judicial system.

When the case came to her, Judge Sotomayor took the opinion that the law did not bar standing for all lawsuits in connection with the sale or purchase of securities, even though the act specifically said it did bar standing.  Citing a 30 year-old case, written long before the Securities Litigation Uniform Standards act,  she opined that the law still allowed for class action law suits to be filled by those who suffered direct loss due to the purchase or sale of securities.  Blue Chip Stamps v Manor Drug Stores, 421 US 723 (1975).

In other words, she took an activist position in favor of an interpretation that would have allowed the suit to go forward, in spite of specific language in the law that would have barred it.

Her ruling was overturned unanimously with the Supreme Courts opinion being authored by one of the most liberal Justices on the Supreme Court, John Paul Stevens.