SEC Approves Exemptions to Allow Central Coutnerparty for CDS Market

The Securities and Exchange Commission today approved temporary exemptions allowing LCH.Clearnet Ltd. to operate as a central counterparty for credit default swaps. Today's action is an important step in stabilizing financial markets by reducing counterparty risk and helping to promote efficiency in the credit default swap market.

"Today's announcement is an important step in our efforts to add transparency and structure to the opaque and unregulated multi-trillion dollar credit default swaps market," said SEC Chairman Christopher Cox. "These conditional exemptions will allow a central counterparty to be quickly up and running, while protecting investors through regulatory oversight. Although more needs to be done in this area legislatively, these actions will shine much-needed light on credit default swaps trading."

The Commission developed these temporary exemptions in close consultation with the Board of Governors of the Federal Reserve System (FRB), the Federal Reserve Bank of New York, the Commodity Futures Trading Commission (CFTC), and the U.K. Financial Services Authority.

The President's Working Group on Financial Markets has stated that the implementation of central counterparty services for credit default swaps was a top priority. In furtherance of this goal, the Commission, the FRB and the CFTC signed a Memorandum of Understanding in November 2008 that establishes a framework for consultation and information sharing on issues related to central counterparties for credit default swaps.

The temporary exemptions will facilitate central counterparties such as LCH.Clearnet and certain of their participants to implement centralized clearing quickly, while providing the Commission time to review their operations and evaluate whether registrations or permanent exemptions should be granted in the future. The conditions that apply to the exemptions are designed to provide that key investor protections and important elements of Commission oversight apply, while taking into account that applying all the particulars of the securities laws could have the unintended consequence of deterring the prompt establishment and use of a central counterparty.

Well-regulated central counterparties should help promote stability in financial markets by reducing the counterparty risks posed by the default or financial distress of a major market participant. This, in turn, should reduce the potential for disruption in financial markets attributable to credit default swaps. They should also promote operational efficiencies and transparency, which are

UBS Sued Over Lehman Principal Protected Notes

A law firm has filed a securities lawsuit against UBS Financial Services, Inc., a subsidiary of Zurich, Switzerland-based UBS AG (NYSE: UBS), as well as officers and directors of Lehman Brothers, based on financial losses suffered by investors who bought securities known as principal protection notes.

Lehman Brothers issued the notes in question with UBS and Lehman serving as the underwriters and sellers. The lawsuit was filed in the U.S. District Court for the Southern District of New York.

Principal protection notes purportedly provide investors with protection for some or all of the principal they invest as well as a potential for a return based on the performance of the underlying investment. But note-holders' investments effectively vanished in September when Lehman Brothers defaulted on the notes by filing the largest bankruptcy in U.S. history.

In this case, the plaintiff alleges that Lehman Brothers promised investors a complete return of principal even while the company knew its own financial situation was precarious. Lehman Brothers was maintaining inflated commercial and residential mortgage and real estate assets in addition to large amounts of leverage, and failed to take steps to lower its exposure to the weakening credit and mortgage markets or explain such risks to investors.

Judge Requires WaMu to Disclose Details of Certain Asset Sales

A federal bankruptcy judge on Tuesday denied a request by Washington Mutual Inc. to keep details of certain asset sales secret.

WaMu, which filed for Chapter 11 reorganization in September, wants to sell certain equity holdings and interests in venture capital funds to generate value for the company and its creditors. The Seattle-based thrift was the biggest bank to collapse in U.S. history, with about $307 billion in assets.

Washington Mutual Co.'s attorneys have sought permission to redact details of asset purchase prices from sale notices that would be sent to interested parties.

WaMu attorney David Berz told Judge Mary Walrath on Tuesday that disclosing pricing details could hurt the value the company might receive and "chill future transactions." Berz proposed pricing details be given only to WaMu's creditors committee, bondholders and the U.S. trustee, subject to confidentiality agreements.

But Joseph McMahon Jr., an attorney for the U.S. trustee, said the assets to be sold are not part of WaMu's core operations and do not meet the definition of confidential commercial information whose disclosure could give WaMu's competitors an unfair advantage.

UBS ARS Investors Consider Legal

Dec. 19, 2008 was when the settlement offer forcing UBS to repurchase auction-rate securities that it sold to investors prior to the collapse of the ARS market in February 2008 officially expired.

For investors who did not participate in the repurchase program, there are still some options available, however. They can continue to hold the illiquid securities until their maturity dates or they can file an arbitration claim to recover access to their funds.

Earlier this summer, state and federal investigations into UBS over sales of auction-rate securities revealed that the Swiss-based firm had misrepresented the securities as cash equivalents to investors. Regulators also discovered that UBS intentionally ramped up its corporate marketing efforts to dump auction-rate securities onto investors so that the company wouldn’t be left holding the bag when the ARS market eventually imploded in February.

In August 2008, in a deal struck with New York Attorney General Andrew Cuomo, Massachusetts Secretary of State William Galvin, the Securities and Exchange Commission (SEC), and other state regulators, UBS agreed to buy back nearly $20 billion in failed auction-rate securities from investors and pay a fine of $150 million to Massachusetts and New York.

UBS also faces additional allegations that seven of its executives sold approximately $21 million in personal auction rate holdings while continuing to push the instruments to investors.

Where Did The Madoff Money Go?

Federal investigators are likely to take months trying to answer that question as they dig through the disgraced investor's records and attempt to unravel what may be the biggest financial fraud in history.

But several theories are being discussed among financial experts and at Wall Street watercoolers, Palm Beach Country clubs and the offices of university accounting professors.

Among the theories: Madoff lost a bundle in bad investments; paid some of the money out to investors; stashed cash in foreign banks; and spent some on his lavish lifestyle. There is also the possibility he inflated his claim of $50 billion in losses.

"He has plenty of houses and yachts, but not certainly enough to account for all this money," said Aswath Damodaran, a professor of finance at New York University. "It is tough to really lose 100 percent."

Madoff, 70, a former Nasdaq stock market chairman, has become one of the most vilified people in America since news broke Dec. 11 that he allegedly had been running a giant Ponzi scheme, paying returns to certain investors out of the principal received from others.

The scam included a global roster of investors, from retirees on Long Island to the International Olympic Committee, to charities worldwide. So far, investors have said that they have lost more than $30 billion, according to an Associated Press calculation.

Drier's Co-Conspirator if Former NASD Registered Broker

Marc Dreier, the New York attorney arrested earlier this month and accused of a bizarre $380 million swindle, did not act alone.

Prosecutors arrested an alleged accomplice Monday night. Kosta Kovachev, a former broker registered with NASD, was charged with aiding Dreier in the sale of false promissory notes to unwitting hedge funds.

Kovachev allegedly posed as an executive of a New York real estate developer as Dreier tried to convince investors to purchase fake notes purportedly issued by that developer, prosecutors say. Court documents don't identify the company by name, but it is widely believed to be Solow Realty, once one of Dreier's biggest clients.

Dreier and Kovachev staged a meeting with one hedge fund investor in October at the offices of the developer, during which Kovachev acted as the real estate company's controller, according to the complaint by the U.S. attorney in Manhattan that was unsealed Tuesday. Kovachev answered the hedge fund employees' questions about financial records Dreier had produced. In the prosecution's case against Dreier, one of the allegations is that he fabricated financial statements as part of his scheme.

Reserve Fund Managers to Be Charged by SEC

Reserve Management Co., which is facing a slew of investor lawsuits after its money market fund fell below a key safety benchmark, said late Tuesday the Securities and Exchange Commission plans to charge the company and its management with violations of securities laws.

In September, Reserve Management, which pioneered the money market mutual fund nearly four decades ago, said its Reserve Primary Fund "broke the buck" -- its underlying assets fell below $1 for each investor dollar put in -- after its value fell sharply because of soured investments in Lehman Brothers Holdings Inc. It marked the first such investor exposure to money-market losses since 1994.

The fund, whose assets exceeded $62 billion in mid-September, is in the process of liquidating.

According to Reserve Management, last Thursday the staff of the SEC's Division of Enforcement informed the company's counsel that the SEC staff intends to recommend that the SEC bring an enforcement action against Reserve and three company executives: President Bruce Bent, Senior Vice President Bruce Bent II and Chief Operating Officer and Treasurer Arthur Bent III

Reserve Management and the three executives plan to defend themselves vigorously, the company said in a statement.

Each fund intends to cooperate fully with the SEC staff, the statement said.

Madoff Probe Widens

Investigators probing the alleged fraud carried out by Bernard Madoff are looking at a key lieutenant at the firm and have issued a subpoena to the accountant who audited the firm's financial statements, seeking documents going back to 2000, people familiar with the matter said.

Authorities are trying to determine who helped Mr. Madoff carry out what they say appears to be at least a 30-year scheme that may have caused at least $50 billion in losses. They are seeking information from the accounting firm that handled Mr. Madoff's audits for decades and are examining the role of Frank DiPascali, who dealt with client accounts and worked at Mr. Madoff's firm for more than 30 years, said a person familiar with the matter.

After Mr. Madoff's arrest on Dec. 11, investigators from the Securities and Exchange Commission showed up at the Madoff firm's headquarters in Manhattan and questioned Mr. DiPascali. He told the SEC he didn't know who was responsible for clearing and settling trades in the investment-advisory side of the firm, according to an SEC memorandum reviewed by The Wall Street Journal. He "responded evasively," the SEC memo said.

The 52-year-old Mr. DiPascali hasn't been charged with any wrongdoing.

Investigators issued a subpoena to David Friehling, a New City, N.Y., accountant who audited the Madoff firm's financial statements, and are seeking documents related to the Madoff firm going back to Jan. 1, 2000, said a person familiar with the matter. He has until Dec. 29 to fulfill the request. Andrew Lankler, a lawyer for Mr. Friehling, declined to comment on his client's knowledge of the Madoff investment-advisory business.

Mr. Friehling, 49, who operates out of a small office about an hour north of New York City, took over the accounting firm from Jerry Horowitz, who did work for Mr. Madoff for decades. A lawyer for Mr. Horowitz didn't return requests for comment.

Investigators are beginning to understand how Mr. Madoff's alleged fraud took place. A person familiar with the situation said investigators believe Mr. Madoff initially had a trading strategy that failed, and that he had made very few, if any, stock or options trades for clients over the years. Instead, the operation consisted of taking money in from new clients and paying it out to existing clients, said people familiar with the matter.

Madoff Judge Orders Accounting By December 31

Disgraced money manager Bernard Madoff has been ordered to provide a written list by the end of the year of his assets and liabilities, a key step in finding what is left for investors after authorities said Madoff admitted squandering at least $50 billion.

U.S. District Judge Louis L. Stanton signed an order late Thursday requiring the 70-year-old Madoff to provide a verified accounting of all his assets, liabilities and property to the Securities and Exchange Commission.

The directive was contained in an order that preserves a freeze of Madoff's assets, a directive put in place a week ago after authorities first filed charges against the former Nasdaq stock market chairman.

FINRA Details Special Procedure for Auction Rate Consequential Damage Cases

The Financial Industry Regulatory Authority (FINRA) today announced details of a special arbitration procedure for investors seeking recovery of consequential damages related to their investments in Auction Rate Securities (ARS). Customers entitled to file for consequential damages under ARS-related settlements that firms have concluded with FINRA or the Securities and Exchange Commission (SEC) may use this special procedure.

Consequential damages equate to the harm investors suffered from their ARS transactions - such as opportunity costs or losses that resulted from investors' inability to access their funds because their ARS assets were frozen. Use of this special arbitration procedure is at the investor's sole option. Investors also have the option of bringing a case under standard arbitration rules or in any other forum where they may have the right to seek redress.

"This special arbitration procedure will provide swifter resolution at reduced cost for customers claiming consequential financial harm related to the sudden and widespread inability to liquidate auction rate securities into cash earlier this year. Firms will not be able to contest liability with respect to the illiquidity of ARS holdings or ARS sales," said Linda Fienberg, President of FINRA Dispute Resolution. "Investors who wish to pursue punitive and other damages as part of their claims can opt for the standard FINRA arbitration procedure."

As of the end of November, 275 ARS arbitrations claims have been filed in FINRA's Dispute Resolution forum under its standard arbitration procedure. Investors with pending claims against settled firms can switch to the special arbitration procedure as long as they are willing to limit their claims to consequential damages.

The SEC has announced final ARS settlements with Citigroup Global Markets, UBS Financial Services and UBS Securities, while FINRA has reached final settlements with WaMu Investments and First Southwest Company. The SEC has reached agreements in principle with Bank of America, Merrill Lynch, RBC Capital Markets and Wachovia. FINRA has reached agreements in principle with Mellon Capital Markets, City National Securities, Comerica Securities, Harris Investor Services, SunTrust Investment Services, SunTrust Robinson Humphrey and NatCity Investment, Inc. Formal settlements in those cases are expected to be announced soon. Additionally, FINRA is actively investigating an additional two dozen firms for ARS-related misconduct.

Under the special procedure, firms will pay all fees related to the arbitration, including filing fees, hearing session fees and all the fees and expenses of arbitrators. If investors do not opt for this special arbitration procedure, they retain the choice of other remedies, including initiating a regular FINRA arbitration claim.

Also under the special procedure, firms cannot contest liability related to the illiquidity of the ARS holdings, or to the ARS sales, including any claims of misrepresentations or omissions by the firm's sales agents. Further, the firm cannot use in its defense an investor's decision not to sell ARS holdings before the relevant ARS settlement date or the investor's decision not to borrow money from the firm if it made a loan option available to ARS holders.

With the special arbitration procedure, investors now have the option of selling their ARS holdings back to the firms under the regulatory settlements and, at the same time, pursuing consequential damages. Investors who wish to seek punitive damages or attorneys' fees have the option to do so under FINRA's standard arbitration procedures.

To speed the arbitration process under the special procedure, cases claiming consequential damages under $1 million will be decided by a single, chair-qualified public arbitrator. In cases with consequential damage claims of $1 million or more, the parties can, by mutual agreement, expand the panel to include three public arbitrators.

For investors who opt for the standard FINRA arbitration process, disputes will be heard by a typical three-arbitrator panel consisting of two public arbitrators and one non-public arbitrator. However, under rules created by FINRA four months ago, that non-public arbitrator cannot have been associated with ARS since Jan. 1, 2005.

That is, that non-public arbitrator cannot have worked for a firm that sold ARS, cannot have sold ARS him- or herself and cannot have supervised an individual who sold ARS since Jan. 1, 2005.

Also in the standard forum, ARS damage claims up to $50,000 will be heard by a single public arbitrator. In cases where damages claimed are over $50,000, the panel will consist of two public arbitrators and one non-public arbitrator who has had no association with ARS since Jan. 1, 2005

Full details about ARS arbitration procedures - for both regulatory settlement customers and FINRA's regular arbitration - can be found at http://www.finra.org/ArbitrationMediation/P116972

Obama to Appoint Mary Schapiro Chair of SEC

Mary Schapiro, a top brokerage regulator tapped to head the U.S. Securities and Exchange Commission, is likely to promote an overhaul of the nation’s financial-market regulations, including a possible merger of the SEC with the agency that oversees commodities trading.

President-elect Barack Obama announced Schapiro’s choice as SEC chairman at a Chicago news conference, saying she will provide “new ideas, new reforms and new spirit of accountability” at the SEC. Obama named Gary Gensler, a former U.S. Treasury undersecretary, to head the Commodity Futures Trading Commission, which oversees $5 trillion in trades.

Schapiro, 53, will inherit an agency that’s become a flashpoint for criticism of the government’s failure to prevent the financial-market meltdown. The SEC is under fire for not halting the collapse of two of the nation’s biggest investment banks and missing a $50 billion fraud.

SEC Statement on Madoff Investigation

Washington, D.C., Dec. 16, 2008 — Securities and Exchange Commission Chairman Christopher Cox issued the following statement today concerning its ongoing investigation in the case of SEC v. Madoff:

Since the Commission first took emergency action against Bernard Madoff and his firm, Bernard L. Madoff Investment Securities, LLC on Thursday, December 11, every necessary resource at the SEC has been dedicated to pursuing the investigation, protecting customer assets and holding both Mr. Madoff and others who may have been involved accountable.

SEC investigators are currently working with the trustee and other law enforcement agencies to review vast amounts of records and information involving Mr. Madoff and his firm. Those records are increasingly exposing the complicated steps that Mr. Madoff took to deceive investors, the public and regulators. Although the information I can share regarding an ongoing investigation is limited, progress to date indicates that Mr. Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.

Since Commissioners were first informed of the Madoff investigation last week, the Commission has met multiple times on an emergency basis to seek answers to the question of how Mr. Madoff's vast scheme remained undetected by regulators and law enforcement for so long. Our initial findings have been deeply troubling. The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action. I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them. Moreover, a consequence of the failure to seek a formal order of investigation from the Commission is that subpoena power was not used to obtain information, but rather the staff relied upon information voluntarily produced by Mr. Madoff and his firm.

In response, after consultation with the Commission, I have directed a full and immediate review of the past allegations regarding Mr. Madoff and his firm and the reasons they were not found credible, to be led by the SEC's Inspector General. The review will also cover the internal policies at the SEC governing when allegations such as those in this case should be raised to the Commission level, whether those policies were followed, and whether improvements to those policies are necessary. The investigation should also include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm.

The Commission believes strongly that it is vital that SEC investigators, examiners, and enforcement staff be above reproach while conducting their duties, in order to ensure the integrity and effectiveness of the SEC. In addition to the foregoing investigation, I have therefore directed the mandatory recusal from the ongoing investigation of matters related to SEC v. Madoff of any SEC staff who have had more than insubstantial personal contacts with Mr. Madoff or his family, under guidance to be issued by the Office of the Ethics Counsel. These recusals will be in addition to those currently required by SEC rules and federal law.

The Failure of Oppenheimer Champion Income

The OppenheimerFunds Inc. executive who oversaw big leveraged bets that backfired has left the company.

Senior Vice President Angelo Manioudakis, who headed the firm's Core Plus team, resigned Friday. The team managed more than $16 billion in individual-investor-oriented fund assets. Under Mr. Manioudakis, investments in the likes of mortgage-backed securities and credit-default swaps went awry.

Those woes fueled an 82% drop at its flagship junk-bond mutual fund, Oppenheimer Champion Income, one of the worst showings among the roughly 150 U.S. junk funds that invest in high yield, or below-investment-grade, bonds. The average junk-bond fund is down 32% in 2008.

The situation is a rare black mark for OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co. that recently had $195 billion in assets. OppenheimerFunds is no longer part of Oppenheimer & Co. But OppenheimerFunds owns Tremont Capital Management, an investment-management firm that put hundreds of millions of investors' dollars into funds overseen by Bernard Madoff, who, authorities said, admitted to carrying out a $50 billion Ponzi scheme.

Mr. Manioudakis, 42 years old, couldn't be reached for comment. He joined OppenheimerFunds in 2002 and was previously with a unit of Morgan Stanley Investment Management.

The firm earlier this month said it is bringing in Geoffrey Craddock as new director of risk management and asset allocation. Mr. Craddock, who formerly headed market risk management at Canadian bank CIBC, will monitor risk for OppenheimerFunds' stock and bond offerings.

Tremont Holdings Had $3.3 Billion With Madoff

Tremont Group Holdings Inc., a hedge-fund firm owned by OppenheimerFunds Inc., had $3.3 billion, or more than half its total assets, invested with Bernard Madoff, according to a person familiar with the matter.

Tremont’s Rye Investment Management unit had $3.1 billion, virtually all the money the group managed, allocated to Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million, or about 7 percent of its total assets, invested through its fund of funds group, Tremont Capital Management.

Tremont, which manages a total of $5.8 billion, would have made roughly $62 million this year peddling funds that are solely run by Madoff, who was arrested Dec. 11 after he allegedly confessed to running a “giant Ponzi scheme” that may have bilked investors out of $50 billion. Hedge funds that invested with the 70-year-old Queens, New York-native charged fees to their clients for the task of vetting the fund.

Judge signs order to protect Madoff investors

A federal judge has signed an order saying investors who may have been duped in one of Wall Street's biggest frauds need the protection of the Securities Investor Protection Act. Judge Louis Stanton also directed that proceedings to liquidate the assets of Bernard L. Madoff Investment Securities LLC be moved to bankruptcy court.

The order was signed Monday afternoon after the Securities Investor Protection Corp. submitted papers asking for the protection for investors.

Stanton assigned Irvin Picard to preside as trustee over the liquidation.

The order came just days after federal prosecutors charged Madoff with securities fraud, saying he had admitted squandering nearly $50 billion from investors in a massive Ponzi scheme.

Monday, December 15, 2008 -- Madoff Investor List Grows, Market End Lower

Investors sent stocks lower Monday as anxiety over the growing list of firms affected by investment manager Bernard Madoff magnified Wall Street's concerns about the health of the financial sector.

Stocks had traded mixed early on as investors were relieved to hear that President George W. Bush was working on providing short-term government help for the auto industry. The Senate's rejection of a $14 billion bailout for automakers last week had raised the possibility of a major bankruptcy, which some analysts say would result in as many as 3 million U.S. job losses next year.

But as that fear eased somewhat, it gave way to concerns about companies' exposure to Madoff's fund. Well respected in the investment community after serving as chairman of the Nasdaq Stock Market, Madoff was arrested Thursday for orchestrating what prosecutors say was a $50 billion Ponzi scheme to defraud investors.

Firms with exposure include HSBC Holdings PLC, Banco Santander, BNP Paribas, Royal Bank of Scotland Group PLC and hedge fund Man Group PLC. And the list of prominent investors keeps growing.

How to Avoid Investment Scams

Federal Bureau of Investigation

Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are - or pretend to be - members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme, by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster’s ruse.

These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies, and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.

Many affinity scams involve "Ponzi" or pyramid schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure. In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors - when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors discover that most or all of their money is gone.

How To Avoid Affinity Fraud

Investing always involves some degree of risk. You can minimize your risk of investing unwisely by asking questions and getting the facts about any investment before you buy. To avoid affinity and other scams, you should:

• Check out everything - no matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

• Do not fall for investments that promise spectacular profits or "guaranteed" returns. If an investment seems too good to be true, then it probably is. Similarly, be extremely leery of any investment that is said to have no risks; very few investments are risk-free. The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.

• Be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing, but legitimate investments are usually in writing. Avoid an investment if you are told they do "not have had the time to reduce to writing" the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential.

• Don’t be pressured or rushed into buying an investment before you have a chance to think about - or investigate - the "opportunity." Just because someone you know made money, or claims to have made money, doesn’t mean you will too. Be especially skeptical of investments that are pitched as "once-in-a-lifetime" opportunities, particularly when the promoter bases the recommendation on "inside" or confidential information.

• Fraudsters are increasingly using the Internet to target particular groups through e-mail spams. If you receive an unsolicited e-mail from someone you don’t know, containing a "can’t miss" investment, your best move is to pass up the "opportunity" and forward the spam to us at enforcement@sec.gov.

Recent Affinity Fraud Schemes

Affinity frauds can target any group of people who take pride in their shared characteristics, whether they are religious, ethnic, or professional. Senior citizens also are not immune from such schemes. The SEC has investigated and taken quick action against affinity frauds targeting a wide spectrum of groups. Some of our cases include the following:

"Church Funding Project" costs faithful investors over $3 Million

This nationwide scheme primarily targeted African-American churches and raised at least $3 million from over 1000 investing churches located throughout the United States. Believing they would receive large sums of money from the investments, many of the church victims committed to building projects, acquired new debt, spent building funds, and contracted with builders.

Baptist investors lose over $3.5 Million

The victims of this fraud were mainly African-American Baptists, many of whom were elderly and disabled, as well as a number of Baptist churches and religious organizations located in a number of states. The promoter (Randolph, who was a minister himself and who is currently in jail) promised returns ranging between 7 and 30%, but in reality was operating a Ponzi scheme. In addition to a jail sentence, Randolph was ordered to pay $1 million in the SEC’s civil action.

Ponzi scheme solicited elderly members of Jehovah’s Witnesses congregations
The SEC complaint alleges that the defendants operated a Ponzi scheme and used investor funds to pay lavish personal expenses. The defendants raised over $16 million from more than 190 investors nationwide. Many of the victims were elderly members of Jehovah’s Witnesses congregations and were promised returns of up to 75 percent.

Fraudulent real estate investment scheme directed at retirees

SEC charged various real estate investment companies and their principals with defrauding senior citizens and retirees out of $15 million by conducting transactions in which they issued promissory notes in real estate investments they owned and operated. To make the sales, the defendants made gross misrepresentations about the financial conditions of their investment companies.

125 members of various Christian churches lose $7.4 million

The fraudsters allegedly sold members non-existent "prime bank" trading programs by using a sales pitch heavily laden with Biblical references and by enlisting members of the church communities to unwittingly spread the word about the bogus investment.

$2.5 million stolen from 100 Texas senior citizens

The fraudsters obtained information about the assets and financial condition of the elderly victims who were encouraged to liquidate their safe retirement savings and to invest in securities with higher returns. In reality, the fraudsters never invested the money and stole the funds.

Bernard L. Madoff Arrested for Ponzi Scheme

Bernard L. Madoff, a legend among Wall Street traders, was arrested on Thursday morning by federal agents and charged with criminal securities fraud stemming from his company’s money management business.

The arrest and criminal complaint were confirmed just before 6 p.m. Thursday by Lev L. Dassin, the acting U.S. attorney in Manhattan, and Mark Mershon, the assistant director of the Federal Bureau of Investigation.

According to the complaint, Mr. Madoff advised colleagues at the firm on Wednesday that his investment advisory business was “all just one big lie” that was “basically, a giant Ponzi scheme” that, by his estimate, had lost $50 billion over many years.

Related accusations were made in a lawsuit filed by the Securities and Exchange Commission in federal court in Manhattan. That complaint accuses Mr. Madoff of defrauding advisory clients of his firm and seeks emergency relief to protect potential victims, including an asset freeze and the appointment of a receiver for the firm.

Auction Rate Securities Update - Citi and UBS Settlements Finalized

Citigroup Inc. and UBS finalized a Securities and Exchange Commission settlement regarding allegations that the banking giants misled investors in the freeze-up of the auction-rate securities market earlier this year.

Nearly $30 billion in securities will be repurchased under the deal, which still needs court approval, $7 billion by Citi and $22.7 billion by UBS.

Tens of thousands of customers will get all of their investment back, the agency noted, in what SEC Chairman Christopher Cox said were the largest settlements in the agency's history.

The companies in August agreed to settle with the agency, defusing a regulatory and legal showdown about sales practices for sales practices for securities that were touted as safe but then couldn't easily be sold and in some cases lost value after the auction-rate market froze in February.

Auction-rate securities are debt instruments whose interest rates are meant to be reset periodically at daily, weekly or monthly auctions. Auctions began failing in February, driving up interest rates on the securities while leaving investors locked into long-term investments that had been promoted as safe and liquid.

Four other banks have yet to finalize their deals with the SEC -- Bank of America Corp., Royal Bank of Canada, Merrill Lynch & Co. and Wachovia Corp. They agreed in recent months to repurchase nearly $25 billion, combined, of auction-rate securities.

Marc Dreier Charged by Federal Prosecutors

Marc Dreier, managing partner and founder of the 250-lawyer New York firm Dreier LLP, was charged by federal prosecutors with cheating hedge funds out of more than $100 million.

Dreier, who has represented publishing executive Judith Regan and U.S. radio broadcaster Clear Channel Communications Inc., was ordered detained by a magistrate judge in Manhattan federal court, where he faces securities and wire fraud charges. The judge will hold a bail hearing on Dec. 11.


“This is a very complex matter, and the facts are beyond the reach of a sound bite,” defense attorney Gerald Shargel said after the hearing. Dreier didn’t enter a formal plea to the charges yesterday. “He’s had a tough several days.”

The charges against Dreier, 58, a graduate of Harvard Law School and Yale College, came on the same day he was sued by Wachovia Corp. for defaulting on $12.6 million in loans. The U.S. says he lied to three unnamed hedge funds when he claimed to represent a New York real estate developer purportedly seeking to sell notes to investors. Dreier told the funds they could buy the notes at a deep discount from the developer and the original note purchasers, prosecutors said in a complaint.

One fund wired about $100 million to Dreier’s account in October after receiving phony financial documents written by the attorney, prosecutors said. Another fund allegedly wired about $13.5 million. The funds were based in New York, Toronto, and Greenwich, prosecutors said.

“The developer did not issue any of the notes,” according to the complaint. Dreier “has never been responsible for managing or selling notes on the behalf of the developer.”

Dreier faces a maximum 10 years in prison on the most serious charge.

Ex-Bear Stearns Fund Managers’ Brooklyn Trial Set for September

A federal judge in Brooklyn set a Sept. 28 trial date for two former Bear Stearns Cos. hedge-fund managers, the first stemming from a federal probe of the mortgage-market collapse.

“That’s a firm date,” U.S. District Judge Frederic Block told prosecutors Dec. 5 at a hearing in the office of Brooklyn U.S. Attorney Benton Campbell. Prosecutors told Block they don’t intend to expand their indictment against the men, Ralph Cioffi and Matthew Tannin.

Prosecutors previously said they intended to expand their indictment against the men, who were accused of misleading investors about the health of two hedge funds that failed. The implosion helped trigger the credit crunch and the eventual collapse and sale of Bear Stearns to JPMorgan Chase & Co.

Both defendants pleaded not guilty. They were also sued by the U.S. Securities and Exchange Commission.

The case is U.S. v. Cioffi, 08-00415, U.S. District Court, Eastern District of New York (Brooklyn).

LandAmerica Collapses

The collapse of title-insurance company LandAmerica Financial Group Inc. has left hundreds of real-estate investors scrambling to recover money in what was supposed to be a short-term and low-risk arrangement.

The investors, from retirees to a public company, had $400 million on deposit with the LandAmerica subsidiary to take advantage of a real-estate strategy known as a 1031 exchange. A 1031 exchange, named for a section of the U.S. tax code, lets investors delay capital-gains taxes on the proceeds from recently sold property, as long as the investor lets a third party hold the funds. They must reinvest the money in a new property within six months.

Investors had $400 million on deposit with a LandAmerica subsidiary and can't access the funds after the title-insurance company collapsed. Visitors walk past a company booth at a convention in October.

LandAmerica, a provider of title insurance for real-estate transactions, placed itself and its LandAmerica 1031 Exchange Services subsidiary into Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court in Richmond, Va., last week. It said a slowdown in the real-estate title-insurance business and a cash crunch associated with illiquid investments it made in the 1031 business made it unable to meet its obligations to hundreds of 1031 customers. LandAmerica is seeking the court's permission to sell the title-insurance business to its competitor, Fidelity National Title Insurance Co., while leaving the 1031 Exchange subsidiary to face likely liquidation.

In the filing, the company said it had put much of the money it was holding for real-estate investors into commingled accounts that invested in auction-rate securities that have become illiquid. LandAmerica had guaranteed the money. The auction-rate securities market seized earlier this year. LandAmerica informed customers in a letter last week that it had "taken every reasonable step possible to avoid" the illiquidity problem.

Washington State Files Against Wells Fargo

Wells Fargo & Co intends to fight plans by Washington state's banking regulator to impose a fine and seek restitution for customers it says were misled into buying auction-rate debt.

The Washington Department of Financial Institutions on Nov. 20 issued an order in which it concluded that San Francisco-based Wells Fargo misrepresented the debt as safe and the equivalent of money market funds, and failed to properly supervise or educate the salespeople who sold it.

Washington said it intends to order the bank to offer to buy back the debt at face value, and to pay a fine. Wells Fargo has the right to request a hearing to mount a defense before a penalty is imposed.

Auction-rate debt has rates that reset in periodic auctions. The $330 billion market seized up in February, leaving tens of thousands of investors either unable to sell the debt or able to sell it only at a loss.

Washington said Wells Fargo customers held $3.93 billion of auction-rate debt in February, and that many were still unable to access funds nine months later. The regulator also accused the bank of ignoring a subpoena for testimony by an employee.

Proposed FINRA Rule Change Relating to Expungements

Proposed Rule Change to Adopt Rule 12805 of the Customer Code and Rule 13805 of the Industry Code to Establish New Procedures for Arbitrators to Follow when Considering Expungement Relief

Financial Industry Regulatory Authority, Inc. ("FINRA") is filing with the Securities and Exchange Commission ("SEC" or "Commission") a proposed rule change to adopt Rule 12805 of the Code of Arbitration Procedure for Customer Disputes ("Customer Code") and Rule 13805 of the Code of Arbitration Procedure for Industry Disputes ("Industry Code") to establish new procedures that arbitrators must follow when considering requests for expungement relief under Rule 2130.

For more information, please click.

Securitization Gone Wild: A Year Marked With Losses

2008 is guaranteed to be remembered as the year in which investment firms and financial institutions disclosed nearly $700 billion in write-downs for mortgage-backed securities, leveraged loans and other assets that plunged in value. Wall-street was marked with losses connected to hard-to-value securities that reached unheard-of levels. Still, off-balance sheet financing may cause 2009 to give 2008 a run for its money.

For some time now, financial institutions have made profits hand over fist by financing business deals with off-balance sheet entities. In simple terms, off balance sheet refers to when companies transfer certain projects, investments or underperforming assets such as collateral debt obligations (CDOs), subprimemortgage securities or credit default swaps from the parent company to an offbalance- sheet subsidiary.

Once the assets have been removed from a company’s primary balance sheet, it gives the appearance that the parent is carrying less debt - and thereby less risk. And, because off-balance sheet entities are largely unregulated, there is no one to question otherwise.

As the concept of off-balance sheet financing gained favor with Wall Street, so too did massive leveraging. Collateral debt obligations, subprime securities, credit default swap contracts - all have increased exponentially in recent years. What Wall Street failed to consider as it took on these added risks was the possibility of failure, not to mention the systemic damage that the failure potentially could unleash on the nation’s financial system as a whole.

Case in point: Credit default swaps. Credit default swaps are privately negotiated contracts between two parties - a buyer and a seller. The buyer of a credit default swap pays a fee to the seller. In exchange for that fee, the seller agrees to cover the buyer’s losses in the event that the underlying financial instrument defaults. The problem is the credit-default swap market itself. It is a $60 trillion unregulated market where contracts are traded without any federal oversight to ensure buyers actually are capable of covering losses.

When credit markets began to freeze up this year, that’s exactly what happened to institutions like Bear Stearns, Lehman Brothers, American Insurance Group and Citigroup. At the time, all of the firms were holding high concentrations of mortgage-backed securities - the same assets they once used as collateral to get credit and had to now significantly mark down in value.

A domino effect ultimately took hold, as creditor institutions turned up the heat via margin calls on the institutions that wrote the credit default swap contracts. Unable to meet those calls, Bear Stearns, Lehman, AIG, Citigroup and others quickly found themselves in trouble. Some of the companies like Lehman filed for bankruptcy protection; others were forced into a firesale; and some turned to the federal government for a bail-out to the tune of billions of dollars.

Unfortunately, off-balance-sheet excesses already may have put countless countries on a path to failure. There are insurmountable outstanding debt obligations residing “off-balance sheet” today for nearly every Wall Street institution around. When reality finally sets in, and the off-balance-sheet assets come back on balance sheet, watch out. It could make the nation’s current fiscal crisis look like child’s play.

Convicted Enron Chief Executive Seeks Clemency

Imprisoned former WorldCom Inc chief Bernard Ebbers has joined the list of high-profile corporate defendants petitioning for clemency in the final days of President George W. Bush's term in office.

Ebbers, convicted of orchestrating an $11 billion accounting fraud, joins former publishing mogul Conrad Black and 1980s-era financier Michael Milken in seeking clemency.

The Justice Department said on Wednesday that Ebbers has submitted a petition for commutation of his 25-year sentence to the Office of the Pardon Attorney. The petition is under review, Justice Department spokeswoman Laura Sweeney said.

Black is also seeking commutation of his prison sentence, while Milken is petitioning for a presidential pardon.

The U.S. Constitution gives the president power to grant pardons that erase convictions and shorten prison sentences. With Bush to leave office on January 20, prominent and not-so prominent criminals are making their cases for clemency.

Securities Fraud Suit Against Countrywide to Proceed

Countrywide Financial Corp. investors, led by the New York State Common Retirement Fund, can proceed with a securities-fraud lawsuit against the mortgage lender and its former top executives.

U.S. District Judge Mariana Pfaelzer in Los Angeles denied some of the defendants' requests to dismiss the case and allowed the investors to refile their claims in most of the instances in which she granted dismissal requests.

The New York fund alleges that former Chief Executive Angelo R. Mozilo and other executives hid from it the fact that the company was fueling its growth by letting underwriting standards deteriorate.

Raymond James Could Be Hurt By Auction Rate Securities

Fallout from the sale of auction rate securities could hurt Raymond James Financial Inc., the company said in a regulatory filing.

Raymond James lacks the funding to buy back the securities it sold and if it had to do so, it could incur a loss, the company said in its annual report filed Friday with the Securities and Exchange Commission

Raymond James (NYSE: RJF), a financial services firm headquartered in St. Petersburg, is among a number of firms that sold the securities, which became nearly impossible to trade amid a worsening capital crunch.

The company has been named in a class action lawsuit similar to those filed against other brokerage firms, alleging securities violations. It is vigorously defending itself in the lawsuit and also cooperating with probes by the SEC, the New York Attorney General’s Office and the Florida Office of Financial Regulation, the filing said.

Raymond James is working with others in the industry to actively seek a solution to the securities’ illiquidity, including restructuring and refinancing the securities, which has met with some success, the filing said.

But the restructurings and refinancing could further cut clients’ holdings, the filing said.

FINRA Arbitration Claims on the Rise

According to the latest figures from the Financial Industry Regulatory Authority (FINRA), through October 2008, investment arbitration claims are up 49% from 2007. In addition, during the first 10 months of 2008, more cases have been already been filed than were filed in all of last year

Most brokerage agreements contain provisions that any disputes between the investor and the broker must be submitted to binding arbitration through FINRA, which oversees about 5,000 different firms throughout the United States

Stock broker arbitration claims are filed by investors who feel that misconduct or negligence of their broker or financial advisor caused them to suffer financial loss.

According to the latest figures released by FINRA, there have been 3,972 broker arbitration claims filed through the end of October 2008, compared with 2,672 through October 2007 and 3,238 filed for all of 2007.

The most common types of controversies involved in the stock broker arbitration claims filed this year include breach of fiduciary duty (2,263 cases), misrepresentation (1,577), breach of contract (1,309), negligence (1,244), and unsuitable recommendations (919).

The most common types of securities involved in the investor arbitration claims were mutual funds (811 cases), common stock (599), derivative securities (674), common stock (599), auction rate securities (264) and annuities (177).

When compared to 2007, the largest increases were seen in arbitration cases involving mutual funds, with more than twice as many cases filed so far this year involving mutual funds than in all of last year.

Following the collapse of the subprime mortgage market towards the end of 2007, a number of mutual funds have dropped substantially, leading to a number of stock broker arbitration claims over funds that were sold as relatively safe investment alternatives to cash or money market funds.

In particular, there have been a number of cases filed in recent months by investors who lost substantial portions of their investments placed in bond funds, like Schwab YieldPlus and Regions Morgan Keegan Bond Funds.

Sale of Lehman Bros. Principal Protected Notes Trouble for UBS

It seems as though another legal battle with investors in the works for Swiss-based investment bank UBS AG - this time over sales of Lehman Brothers Principal Protected Notes, which are now deemed essentially worthless.

Structured notes are financial instruments that combine derivatives - including a single security, a pool of securities, options, indices, commodities, debt issuances, foreign currencies, and credit swaps - with equity or fixed income investments. In the case of UBS, attorneys representing dozens of clients of the firm say the investment banking giant touted the structured notes, also known as guaranteed linked notes, as a low-risk, conservative investment designed to preserve capital with the potential for uncapped appreciation.

What UBS failed to tell investors was the fact that the notes in question actually were unsecured obligations of Lehman Brothers, leaving investors vulnerable to a considerable amount of risk. Apparently Lehman’s structured notes were sold just weeks before the firm declared bankruptcy on September 15, 2008 Moreover, the notes reportedly were being used by Lehman to help finance its own financial shortfalls from losses stemming to bad bets on subprime-related investments. That means investors unknowingly put themselves at the mercy of the credit of the issuer: If the issuer defaults, as in Lehman’s case, the investment becomes worthless.

UBS, the fifth-largest brokerage firm in the United States, sold about $1 billion of Lehman’s structured notes to investors. Many of them were retirees. Now, despite the fact investors were told that the Lehman Principal Protected Notes had “100 percent principal protection,” they can expect to receive pennies on the dollar for their investment. According to SecondMarket, a New York-based firm that provides a market for securities that are illiquid or barely trade, notes with full principal protection are trading at 10 cents to 14 cents on the dollar.

The latest revelation of UBS’ handling of the Lehman Brothers Principal Protected Notes adds to what has become a growing list of legal issues this year. Earlier in the summer, the company had to pay out nearly $1 billion related to charges over auction-rate securities sales. It also is being investigated by the Securities and Exchange Commission (SEC) for the sale of derivatives and investment contracts to state and local governments.

The trouble train for the investment bank doesn’t stop there as the Internal Revenue Service has also jumped on the UBS bandwagon and is looking into whether the firm improperly helped various U.S. clients evade taxes. Now state regulators are considering forming a task force to investigate brokerage firms that marketed and sold structured notes to investors.

Failure to Implement Risk Management Led to Citigroup’s Troubles

Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group and Lehman Brothers are all example of where the opposite proved to be true. Failing to live up to the “too big to fail” Wall Street theme, many of these companies were forced to resort to government rescues in the form of multibillion-dollar bailouts to prevent them from going under. Now Citigroup, once the nation’s largest financial institution, is joining the ranks, as well, after succumbing to more than $65 billion in losses.

The government’s plans to prop up Citigroup were revealed on Sunday, Nov. 23, and include an additional $20 billion of taxpayer money for the bank, along with a guarantee on more than $300 billion of the firm’s most risky assets. In exchange for the guarantee, Citigroup will issue $7 billion in preferred stock to the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC). So how did things get so bad for one of the country’s premiere financial services firms? In three words: reckless business bets.

Over the years, Citigroup created a multibillion-dollar business in mortgage backed securities and collateralized debt obligations (CDOs). As profits grew, Citigroup got bolder, taking more and more risks. At the same time, the company employed tricky accounting practices that allowed it to move troubled assets into off-balance-sheet trusts that could then market the debts to other institutions. Once the assets had been moved off Citigroup’s balance sheets, it made it appear the bank was carrying less risk.

Citigroup has suffered four quarters of consecutive multibilliondollar losses. It still holds $20 billion of mortgage-linked securities on its books, the majority of which have been marked down to between 21 cents and 41 cents on the dollar, according to a Nov. 22 article in the New York Times. But the worst may be yet to come. Citigroup has another $1.2 trillion that is held “off balance sheet.” When it begins to move those questionable assets back onto its books, get ready for a whole new firestorm of losses to ignite.

Morgan Keegan Bond Arbitration Cases Mount

Over 1,000 investors have filed FINRA arbitration cases against Morgan Keegan to recover losses suffered in a number of bond funds managed by the regional brokerage firm, some of which have lost up to 95% of their value since mid-2007. According to Investment News, Morgan Keegan could ultimately end up paying over $200 million to resolve these cases.

The Morgan Keegan arbitration claims allege that investors were not properly informed about the risk associated with the firm’s bond funds, and the extent to which the funds were invested in risky mortgage backed securities, primarily involving the subprime mortgage market which began to collapse in late 2007.

The Morgan Keegan bond funds, such as RMK Select High Income Fund, RMK Select Intermediate Bond Fund, RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Advantage Income Fund and RMK Strategic Income Fund, were sold to investors as relatively conservative investment options. However, the arbitration claims allege that the fund managers violated the objectives outlined in the prospectuses, and exposed investors to a level of risk which they would not have agreed to accept if they had been fully informed of the circumstances surrounding the assets held by the funds.

Although several Morgan Keegan class action lawsuits have been filed on behalf of all investors who purchased or acquired shares in the mutual funds, most investors are electing to pursue their claims as individual arbitration claims through the Financial Industry Regulatory Authority (FINRA). In most cases, lawyers expect these Morgan Keegan arbitration claims to be heard within 12 to 18 months, while the class action lawsuits could take years to resolve.

FINRA oversees nearly 5,000 brokerage firms throughout the United States, and most broker agreements require that individual disputes between investors and their brokers be resolved through FINRA arbitration. The securities arbitration panels are generally comprised of attorneys, accountants, retired judges, bankers, brokers and other professionals, but usually one one of them is considered an “industry” person.

The first Morgan Keegan arbitration award stemming from the losses associated with the crash of the subprime mortgage market last year was returned by a FINRA panel in August, 2008. The claim was filed on January 14, 2008, and the investor was awarded over 75% of his claimed investment losses.

A wave of arbitration claims against Morgan Keegan are expected to reach hearings later this year, with the rest currently scheduled for early 2009.

Galvin Charges Oppenheimer With Securities Fraud

Oppenheimer & Co. Inc. has been charged with fraud and unethical conduct in Secretary of the Commonwealth William F. Galvin's wide-reaching investigation into shady auction-rate securities dealings.

Galvin alleges that Oppenheimer customers in Massachusetts were unable to access nearly $56 million when the auction-rate securities market froze last February. Galvin's office said the charges against Oppenheimer are the first against a firm that may not have participated directly in fraudulent securities auctions, but sold the securities involved to its own customers.

The complaint demands that Oppenheimer return the money its customers put into the auction-rate securities market.

Galvin alleges that Oppenheimer misled and "betrayed the trust of their clients" by selling auction-rate securities as a safe, accessible investment even as the auction-rate securities market began to fail.

Galvin also accuses several Oppenheimer executives of cashing out their auction-rate securities two weeks before the market's collapse.

An auction-rate security is a long-term debt issue that allows buyers to take advantage of short-term rewards as its interest rate is set approximately every month.

Jury Convicts Art Patron of Securities Fraud

Alberto W. Vilar, the investor and music lover accustomed to opulent living, front-row opera seats and the gratitude of arts impresarios, now faces a more humble prospect: prison.

A federal jury in Manhattan on Wednesday convicted him of defrauding clients of his firm, Amerindo Investment Advisors, finding him guilty on all 12 counts. The jury also convicted his former business partner, Gary A. Tanaka, on 3 of the 12 counts.

As the foreman of the jury pronounced the first verdict, the 67-year-old Mr. Vilar blinked once but remained stone-faced throughout the recitations of “guilty,” looking down at the table in front of him. Outside the courtroom, when Mr. Vilar was asked what had gone wrong, he said softly, “I don’t know.”

His lawyer, Herald Price Fahringer, promised an appeal. “We’re deeply disappointed in the jury’s verdict,” he said. “We expect to be fully vindicated on appeal.”

The verdict came after a two-month trial and three and a half days of often heated deliberations. Raised voices were heard inside the jury room at one point. A juror sniffled as she left the courtroom. One juror said there was name-calling during deliberations, Bloomberg News reported.

The two men were charged in a 12-count indictment alleging conspiracy and securities fraud, investment adviser fraud, mail fraud, wire fraud, making false statements and money laundering. Mr. Tanaka, 65, was found guilty of conspiracy, securities fraud and investment adviser fraud.

Massachusetts Sues Oppenheimer for Auction-Rate Sales Fraud

Massachusetts Secretary of State William Galvin filed a complaint yesterday against Oppenheimer & Co., alleging the firm sold auction-rate securities fraudulently.

Galvin wants Oppenheimer to buy back about $56 million of the securities it sold to investors in Massachusetts. He also seeks to revoke the broker-dealer registration license of Albert Lowenthal, Oppenheimer's chief executive officer, who he says sold his personal holdings of the securities two weeks before the market collapsed in February.

Update -- Lehman Bros. Principal Protected Notes

WHICHEVER way you look at it, an investment fund or note that trumpets a 'protected' stamp is very clever marketing. As recent events have painfully shown, it is a misnomer and the description should be banned from fund or investment product literature.

Protected and guaranteed unit trusts first made their debut in 2000 when the market was rocked by the bursting of the technology bubble. Fund managers who offered them raised billions of dollars, the bulk of which have since matured to a mixed record by now - that is, most of them delivered the capital and no more after 3-5 years.

At worst, those that set out to protect or guarantee 70-90 per cent of investors' capital - on the grounds that a lower level of guarantee allows the manager to take on more risk and deliver more returns - finished at just what they set out to secure. That outcome is disappointing. Who would be happy with just 70-90 per cent of his capital after 3-5 years, when a deposit would have delivered the full capital plus an interest rate, albeit piffling? What's more, the outcome is actually a loss when a sales charge is factored in.

The subscription rate of capital-protected unit trusts in fact pales in comparison with retail structured notes, as investors took to notes even more feverishly. Notes, as you would know by now, are hardly regulated, if at all. Unlike unit trusts, there appears to be no minimum credit rating for underlying securities; little disclosure of what exactly the funds are invested in; and absolutely no disclosure of fees. That opened the marketing floodgates.

But first, back to basics on the distinction between protected and guaranteed products. A protected fund or note relies on the strength of the underlying securities or bonds to deliver an investor's capital. This suggests that the most robust of products would go for the highest AAA-rated securities.

To call itself guaranteed, on the other hand, a fund or note needs an institution to underwrite the maturity value.

A crisis situation like today's illustrates just how illusory protection really is. And the flimsiness of the structure was engendered not only by product manufacturers (fund managers and investment banks) but also by relatively loose regulation.

On the product side, structuring a protected fund in the last few years was a challenge because of the low interest rate environment, particularly in Singapore dollars. So, fund managers and banks trawled from lower-quality credits - with at least minimum investment-grade ratings - to put together a basket that would in aggregate deliver an attractive yield. This included reaching into complex structured debt which also fetched higher yields because of their implicit risks.

The big question - even at that time - was whether there was enough cushion in terms of credit quality to secure investors' principal. As we can see now from various structured products whose mark-to-market values are alarmingly low, the answer is clearly no.

As for regulation, the Monetary Authority of Singapore's (MAS) code for collective investment schemes typically sets a concentration limit of 10 per cent for a single security for unit trusts. With lobbying from the fund management industry, this was loosened for structured funds to one-third. This was arguably something that worked against investors' interests. Diversification helps to preserve principal.

Lehman Brothers Bankruptcy Update

Lehman Brothers Holdings Inc. may complete billions of dollars in trades and unwind transactions that were pending two months ago when it filed the biggest bankruptcy in history, under an accord with European affiliates.

The deal gives the firm access to information systems in Europe, which it said were "sealed off" by its bankruptcies on both sides of the Atlantic. Without the accord, the New York- based company said it "cannot execute trades or even obtain information on current positions," key requirements for paying creditors owed more than $613 billion.

Lehman Brothers International Europe, which ran Lehman's London-based prime brokerage, had about 3,500 asset managers, including hedge funds, as clients. The customers haven't known the status of their positions since Lehman's bankruptcy on Sept. 15 froze at least $65 billion in brokerage assets.

Amerindo Co-Founders Stole $20 Million, U.S. Says

Alberto Vilar and Gary Tanaka, co-founders of Amerindo Investment Advisors Inc., stole $20 million from clients, even cutting and pasting one investor's signature to transfer money from her account, prosecutors said.

Vilar and Tanaka, "drowning in a sea of debt" after their investments in computer and Internet companies plummeted in value beginning in 2000, stole from clients to keep Amerindo afloat and to cover Vilar's personal expenses, Assistant U.S. Attorney Marc Litt told jurors Nov. 12 in closing arguments in the federal fraud and conspiracy trial in Manhattan.

Prosecutors claim Vilar and Tanaka's victims included Lily Cates, the mother of actress Phoebe Cates. When a bank threatened to auction Vilar's luxury Manhattan co-op in 2003 because of missed mortgage payments, the men used Cates's cut- and-taped signature to steal $250,000 from her brokerage account at Bear Stearns, Litt said.

"That's about as fraudulent as it gets -- cutting and taping a client's signature on a document," Litt argued to the 12 jurors and three alternates.

Vilar, 67, and Tanaka, 65, are charged with 12 counts of conspiracy, securities fraud, investment-adviser fraud, mail fraud, wire fraud, money laundering and lying to the U.S.

Securities and Exchange Commission. They face as long as 20 years in prison if convicted of the most serious charges.

Update on Lehman Principal Protection Note Investigation

On September 15, 2008 Lehman Brothers Holdings filed for bankruptcy protection, leavinf investors who previously purchased the company’s 100% Principal Protection Notes (PPNs) unprotected and at a loss. Funnily enough it was Lehman’s own marketing brochures that touted the notes as providing “100 percent principal protection.” Little did they realize that the value of the notes was contingent on Lehman’s own solvency, meaning that when Lehman filed for bankruptcy, many of their investor’s notes subsequently went into default.

In the wake of the bankruptcy, a class action was filed on November 6, 2008 on behalf of individuals who purchased Lehman Principal Protection Notes (PPNs) from UBS Financial Services, Inc. The complaint alleges that UBS brokers made false and misleading statements that omitted key facts about the risks connected to the Lehman notes.

“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney.

Lehman Principal Protection Note Investigation; Aidikoff, Uhl & Bakhtiari and Co-Counsel Recommend Investors Consider All Legal Options

On November 6, 2008 a class action, was filed on behalf of persons who purchased Lehman Principal Protection Notes (PPNs) from UBS Financial Services, Inc. Following Lehman Brothers’ bankruptcy filing on September 15, 2008, PPNs are now in default causing the holders of PPNs to become senior unsecured creditors in the Lehman bankruptcy proceeding.

Aidikoff, Uhl & Bakhtiari recommends investors consider all of their legal options in the wake of Lehman’s bankruptcy and the filing of the PPN class action.

“Investors should be aware of the pending class action,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “The class case has certain pitfalls that investors need to be aware of in selecting an attorney. In our opinion, most investors will fare better by filing individual arbitrations.”

Important Facts to Consider Prior to Joining A Lehman Principal Protection Note Class Action

• The pending Lehman Principal Protection Note class action Class Period is between May 30, 2006 and September 15, 2008. Investors who made purchases prior to May 30, 2006 are not represented and will have no right to recovery in the Class Action.

• In the case of Lehman Principal Protection Notes, many investors sought safe, liquid, cash investments but were sold a product that was, in reality, much different. Such investors will have viable claims based on the investment's unsuitability. Because a suitability claim is dependent on an individual’s circumstances, this claim cannot be prosecuted on a class wide basis.

• Investors with significant losses in PPNs are unlikely ever to be made whole in a Class Action. Class action representation may be attractive where individual losses are small so that any one investor may not have an economic interest in pursuing the case. However, investors who have lost more than $100,000 should strongly consider pursuing their rights on an individual basis.

• Class actions are filed by attorneys seeking to represent all investors who have suffered a common wrong or purchased the same investment. Classes in securities cases are typically represented by the investor with the largest claim at stake. This often means that state pension funds or institutional investors will choose the attorneys and will be the ones who work on the strategy of the case. The interests of the class representative may not always be aligned with your interest; a specific example of this potential conflict is the inability to pursue suitability claims.

• Class actions sometimes create hurdles to recovery for individual investors including depositions and motion practice which are generally not permitted in securities disputes decided before FINRA. The FINRA arbitration process can be completed in approximately 12 months, recovery through a class action may take several years.

Government won't buy troubled bank assets

The government has abandoned the original centerpiece of its $700 billion rescue effort for the financial system and will not use the money to purchase troubled bank assets.

Treasury Secretary Henry Paulson said Wednesday that the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans and student loans.

Paulson said 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

On the issue of using the $700 billion bailout package to provide help to ailing auto companies, Paulson said the administration preferred an approach that would accelerate support to that industry from other legislation Congress passed this fall.

UBS and Lehman Sued For Misreprsentation of Lehman Principal Protection Notes

A buyer of sophisticated bonds of Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) sued executives of the bankrupt investment bank and underwriter UBS Financial Services Inc on Friday, claiming they misrepresented the risks of the securities.

The lawsuit filed in U.S. District Court in Manhattan seeks class action status on behalf of holders of Lehman Principal Protection Notes who stand to lose all or most of their investments since the 185-year-old investment bank went bankrupt on Sept. 15.

The notes, purchased by the plaintiff, identified as investor Stephen P. Gott, between May 30, 2006 and Sept. 15 of this year are in default since Lehman filed for bankruptcy.

GMAC Debt Rating Cut to "CC" by Fitch

Fitch Ratings on Tuesday downgraded GMAC LLC's issuer default and senior unsecured debt ratings further into junk, citing continued operating losses at the General Motors Corp. financing arm.

Fitch cut the ratings to "CC" from "B+" and placed them on negative watch, meaning they could be lowered further. About $72 billion of unsecured debt is affected.

Fitch said the lower ratings also reflect GMAC (nyse: GJM - news - people )'s consideration of a debt swap and its exploration of becoming a bank holding company to take advantage of the Treasury Department's $700 billion financial rescue plan.

As Lehman Structured Notes Fail, Investor Claims Rise

Lehman, meanwhile, had sold more than $900 million worth of retail structured products in the U.S. this year through late September, ranking it among the top 10 issuers of the products, according to StructuredRetailProducts.com. Many of these offerings were designed to return investors' full principal at maturity. Now, small investors holding Lehman-issued structured products are waiting to see what they can recover through the bankruptcy proceedings, hiring their own lawyers to make claims against the brokers who sold them the products, or selling their holdings for pennies on the dollar through secondary markets, industry experts say. Firms representing Lehman in its bankruptcy didn't respond to requests for comment on the status of the products.

Dump GMAC SmartNotes

As reported by Smart Money:

As Washington scrambles to save General Motors (GM: 2.92, -0.44, -13.09%), the politics behind any bailout means small investors will ultimately be the ones who get left behind. On Capitol Hill protecting jobs, propping up the economy and punishing greedy corporate executives are the catch-phrases du jour. Guarding the interests of mom-and-pop stakeholders garners little more than lip service.

In a world of more market access and individual retirement responsibility, many small investors took a broker's advice and bought into the GM story. And we're not talking about the auto maker's stock, which has lost 94% of its value over the last decade. These investors thought they were taking the safe and conservative route by purchasing GMAC SmartNotes. It turns out this unsecured debt is neither safe nor conservative -- nor very smart.

GMAC, once a wholly owned unit of General Motors, is the largest lender to GM's car dealers. In 2006, GM sold a 51% stake to private-equity group Cerberus Capital Management. That was back when GMAC was a strong source of profits for GM.

But today GMAC, which also has a home-mortgage arm in addition to its auto-lending business, has gone the way of other financial firms caught up in the housing and credit bubble. GMAC lost a net $2.5 billion in the third quarter, more than the $1.6 billion it lost a year earlier, and warned that its home-mortgage unit is on the verge of collapse. Its debt is well into junk territory.

DBSI Commences Voluntary Chapter 11 Bankruptcy Proceeding

DBSI Inc, which together with its subsidiaries comprises a network of real estate and non-real estate entities throughout the country, commenced a voluntary chapter 11 proceeding in the United States Bankruptcy Court for the District of Delaware on November 10, 2008.

DBSI's businesses have been significantly impacted by the recent turmoil in the real estate financial and credit markets, the general deterioration of the economy and the historic declines in the stock market. These problems were exacerbated recently by the actions of the various parties and, in the last week, the commencement of legal actions that DBSI submits are without merit and only serve to impede DBSI’s efforts to effectively address its financial difficulties.

As a result of these circumstances, DBSI determined that it had no alternative but to commence a voluntary chapter 11 proceeding in order to implement its plan for an orderly restructuring to maximize value for all parties-in-interest and to immediately stay the efforts of parties desiring to pursue their own individual interests.

IMF: Subprime Losses Could Hit $1 Trillion

Alan Greenspan, the former head of the U.S. Federal Reserve, went on television Tuesday to say that despite the ongoing troubles roiling world markets increased financial regulation is a terrible idea. This was especially noteworthy because earlier in the day the International Monetary Fund said it estimates losses related to subprime troubles might be in the neighborhood of one trillion dollars. No matter how the crisis will be addressed, something sure-fire needs to happen, and fast.

The IMF said in its bi-annual assessment of global financial markets, that market turmoil related to the credit crisis could result in potential aggregate losses of $945 billion; this number exceeds the highest prior estimate by $345 billion. The Street's consensus is that the subprime saga has cost $170 billion to date.

GMAC Debt Crisis Mounting

The 300 bankers gathered at New York's Waldorf-Astoria Hotel last May faced a stark choice: Accept Sam Ramsey's plea to restructure $60 billion of GMAC LLC's debt or risk pushing the lending arm of General Motors Corp., the largest U.S. automaker, to the brink of insolvency.

"There was not room for slippage," said Ramsey, 49, a former Bank of America Corp. executive who joined Detroit-based GMAC in September and became chief risk officer two months later. He pulled it off as banks led by New York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC and its Residential Capital LLC mortgage unit with the biggest restructuring package since the credit-market rout began a year ago.

Whether that's enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody's Investors Service cut GMAC's credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters.

Pennies on the Dollar for Lehman Principal Protection Notes

In what could become just the tip of a legal iceberg for UBS, Lehman Brothers and others over sales of Lehman Principal Protection Notes, a class-action lawsuit has been filed in the United States District Court for the Southern District of New York. Among the claims that the plaintiff, Stephen P. Gott, alleges: UBS, Lehman and officers and executives of both companies intentionally misstated key facts to investors about the Lehman Principal Protection Notes, as well as omitted information regarding certain risks.

The complaint further contends that UBS marketed and sold Lehman Principal Protection Notes as an investment suitable for investors who wanted to protect their entire principal investment. When Lehman Brothers filed for bankruptcy on Sept. 15, 2008 it subsequently defaulted on many of the notes. As a result, investors now face the distinct possibility of losing all or a substantial part of their investments.

On page nine of the complaint, which was formally filed Nov. 6, the plaintiff also asserts that Lehman Brothers actually used proceeds from the Principal Protection Notes for its own general business purposes, including funding other corporate operations that were suffering financially.

In addition to UBS, Lehman Principal Protected Notes were marketed and sold by several other brokerage firms, including Citigroup, Merrill Lynch and Wachovia. In each instance, the notes were touted as “conservative” investments. In reality, however, they were structured products that combined fixed-income investments with derivatives, leaving investors looking for conservative investments open to considerable - and unexpected - risk.

For these investors, Lehman Principal Protection Notes and their so-called advertised benefit of 100% principal protection translate into pennies on the dollar. Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

GMAC SmartNotes Losses

GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills.

GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about three-quarters of their value.

"An investment like this is totally unsuitable for the retail investor," said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. "You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that."

GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.

Swiss Clients Dump Lehman Structured Products, Swiss Regulator to Investigate

Exchange Traded Funds volumes traded on the Swiss Stock Exchange soared in October to a record 95.4% against the previous month, and 183.6% on the year to reach SFr7.6bn, according to numbers released by the SWX.

In contrast, demand for structured products has fallen, as investors pile out of these investments as the credit crunch bites.

Structured products and warrants raised SFr5.8bn on the SWX in October, down nearly 13% year-on-year and 14% month-on-month.

Yesterday, the Swiss banking regulator said it is investigating the sales of structured products by the failed investment bank Lehman Brothers to clients at Credit Suisse and other banks.

Clients in Switzerland have complained about heavy losses from structured products issued by Lehman, which collapsed earlier this year, according to a Dow Jones Newswires report.

PIMCO Bond Funds Halt Dividend Payment

Pimco High Income Fund said it is postponing payment of a dividend because the value of the fund's portfolio securities fell below a key threshold due to current market conditions.

The fund was scheduled to make a payment Monday of 12.1875 cents per share to shareholders of record as of Oct. 11. Allianz Global Investors Fund Management LLC manages the fund.

The company also said it is suspending the declaration of its next dividend, which would have been paid in December.

The dividends are being suspended based on a company rule that requires a postponement of payments if the fund's auction rate preferred shares minimum asset coverage falls below 200 percent. Because of the ongoing credit crisis and decline in equity markets, the value of the fund's portfolio securities fell below the threshold leading to a suspension of dividends.

Credit Default Swaps

A window into the vast, murky world of credit-default swaps opened on Tuesday — and the view was a bit surprising.

The market for the instruments, which have played a significant role in the financial crisis, seems to be smaller than many analysts believed. And countries, not just companies, are often the subject of contracts that are used to protect investors against losses from defaults or simply to make bearish bets.

That, anyway, is the impression given by a report released by the Depository Trust and Clearing Corporation that ostensibly provides the most data yet on this market. But the report does not shed any new light on which entities have sold protection through swaps and whether they have enough capital to meet their obligations, a crucial concern for policy makers.

The depository corporation, which clears swaps and other financial transactions, said that it had cleared swaps providing coverage on $33.6 trillion in debt. In other words, investors have bought (or sold) protection on bonds and other debt totaling that much, an amount that is slightly greater than the $30.8 trillion of American bonds outstanding.

Last month, the International Swaps and Derivatives Association estimated that nearly $47 trillion in swaps were outstanding as of June. That number might include transactions not cleared by the depository corporation.

Citigroup and JPMorgan Sued by Louisiana Pension Funds

Two Louisiana pension funds filed lawsuitas against Citigroup and JPMorgan Chase in the wake of the subprime fallout and 2008 credit crunch. The Louisiana Sheriffs’ Pension and Relief Fund and the Louisiana Municipal Employees’ Retirement System allegesd that Citigroup and JPMorgan misled investors in more than $29 billion of Citigroup’s securities offerings dating back to May 2006.

The proposed class-action lawsuits also name former Citigroup chairman Charles Prince and more than a dozen underwriters of the securities offerings, including units of Bank of America Corp., Goldman Sachs Group Inc., UBS AG, Barclays PLC, Deutsche Bank AG and Fortis.

The complaint, which was filed Oct. 1 in New York State Supreme Court in Manhattan, contends that Citigroup “harmed investors by causing a significant decline in the value of the securities purchased in or traceable to a series of securities offerings.”

The suit also claims that Citigroup failed to disclose its “massive exposure to losses from its mortgage-related assets” and failed to write down the assets to properly reflect their true value.

The success of public pension funds depends on the entities that serve as the steward of the fund’s assets. In a number of instances that are just now coming to light, that work has been severely flawed. Meanwhile, pension fund managers continue to reassure retirees and current employees that their funds are safe and the assets sufficient to pay benefits for several years.

The truth is that it depends on the quality and quantity of the securities contained in the fund’s portfolio, as well as the valuation model used to determine the value of the assets. Many portfolios of large pension funds include a high concentration of hard-to-value and difficult-to-sell assets, including mortgage-related securities and other collateralized pools of debt. These investments do not readily trade on the secondary market. Therefore, the value assigned to them simply does not reflect their actual value.

Moody's Sued for False Ratings

Moody's Corp. directors and officers were sued by shareholders and accused of deliberately overrating asset-backed securities at the world's second-largest credit-rating company.

The Louisiana Municipal Police Employees Retirement System filed the so-called derivative suit yesterday in New York on behalf of the company, naming Moody's as a nominal defendant

The pension system claimed that, as a result of misconduct, "trillions of dollars of highly risky securities were sold to investors that should never have seen the light of day."

U.S. House investigators last week released e-mails saying Moody's employees told executives that issuing dubious ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue."

BofA Sues Bear Stearns For Hedge Fund Blow Up

Bank of America Corp on Wednesday sued Bear Stearns and two former hedge fund managers who were indicted in June in the first major federal case stemming from the subprime mortgage crisis.

The lawsuit in U.S. District Court in Manhattan accused Bear Stearns, which was sold in March to JPMorgan Chase & Co., and three of its officers of "egregious misconduct" in a $4 billion transaction structured and marketed by Bank of America and other financing transactions in 2007.

It named Ralph Cioffi and Matthew Tannin, the former managers who were charged on June 19 with conspiracy and securities fraud related to the demise of their two funds. The pair were also charged by the Securities and Exchange Commission.

In May 2007, Bank of America, at the request of Bear Stearns Asset Management, structured and marketed a $4 billion transaction known as a "CDO-squared", the suit said. A CDO is a collateralized debt obligation, and the transaction involved mortgage-backed assets pooled and structured to support the sale of certain securities.
The lawsuit said that over several months Bear Stearns and its employees, including the three named in the complaint, concealed substantial withdrawal requests from Bank of America, hedge fund investors and other creditors.

Bayou Hedge Fund Founder Sentencing Delayed

A plea hearing for Samuel Israel, the convicted founder of hedge-fund firm Bayou Group LLC charged with bail jumping, was delayed until next year while he undergoes 90 days of medical and psychological evaluation, the U.S. said.

Israel is accused of faking his suicide and fleeing the day he was to begin a 20-year sentence for his federal conviction in a $400 million fraud. His last plea hearing on Sept. 16 was delayed so he could continue treatment for drug abuse.

"The judge ordered 90 days of medical evaluation rather than him pleading today," said Herb Hadad, a spokesman for Manhattan U.S. Attorney Michael Garcia in White Plains, New York, federal court. Last month, U.S. District Judge Kenneth Karas barred Israel from entering a plea for the second time. In August, the judge said Israel couldn't enter a plea after the hedge fund manager claimed his addiction to methadone may have impaired his judgment. Israel said at the time his ability to understand the proceedings was "60 to 70 percent."

Schwab Yield Plus and Other Toxic Cash Funds

Funds that have stumbled badly:

Schwab YieldPlus
lost a staggering 33.7% of its value

Fidelity Ultra-Short Bond
fell 10.5%

SSgA YieldPlus and Evergreen Ultra Short Opportunities have been liquidated, and more are expected to close.

In an effort to boost yields many of these portfolios invested in securities that were backed by subprime mortgages. And when the subprime market imploded last year, the funds began sinking into the red.

TD Ameritrate - Reserve Yield Plus Frozen

TD Ameritrade, which reports fourth-quarter results Oct. 23, also faces nervous investors.

The broker's decision to use its own money to prop up the Reserve Primary Fund is rippling through the rest of the sector as clients of other firms worry about money-market redemptions. Some brokers may take similar steps if clients' funds in outside money-market funds are threatened.

In the meantime, investors in Reserve Yield Plus, another money-market fund run by Reserve Management, have been unable to withdraw money due to solvency issues. TD Ameritrade customers hold a large portion of Yield Plus shares. And TD Ameritrade is yet to cover the losses in this fund as it did for the larger Primary Fund.

The company said in June that a rate cut would hurt profit. Shares fell 7% on Thursday after the Fed and six other world banks cut rates to encourage lending. For the moment, the Treasury Department's recent move to insure money-market funds is helping allay investor fears, says Zecco's Dalporto.

Ex-Bear Stearns Manager Interfered With Probe, Prosecutor Says

The implosion of New York-based Bear Stearns helped trigger the credit crunch and the eventual collapse and sale of the investment bank to JPMorgan Chase & Co. The government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total almost $450 billion.

At a court hearing Friday in Brooklyn, New York, for the former managers of Bear Stearns, Ralph Cioffi, 52, and Matthew Tannin, 46, Assistant U.S. Attorney Patrick Sinclair said prosecutors were “aware of instances where the defendant here has attempted to influence the statements of potential witnesses in the course of the Bear Stearns internal investigation.” Sinclair wouldn't identify which of the two former managers he was referring to, when asked after the hearing.

Sinclair argued for postponing the SEC case, saying it could hamper prosecutors and investigators in the criminal proceeding. He repeated the government's intention to file additional criminal charges by December.

“We know how much of a diversion of time that can be,” Sinclair said, referring to disputes over evidence in civil cases. He said this case is especially complicated because it involves “discovery from some of the largest financial institutions undergoing the most major crisis that they have ever faced before.”

Lawyers for both men yesterday urged U.S. District Court Judge Block to let the civil case go forward. They noted that no trial date has been set in the criminal case. “The SEC has chosen to bring its case, which should mean that it's prepared to go forward,” Susan Brune, one of Tannin’s lawyers, told Block. “The government has been investigating this case for a year. They have had a massive ability to get unilateral access to all of the witnesses.”

Marc Weinstein, a lawyer for Cioffi, said the government hasn't turned over any evidence related to Barclays PLC, the London-based bank referenced anonymously in SEC charging documents as a victim of the defendants' scheme. “There are allegations in here that our clients hoodwinked a major financial global institution, yet they don't have a single page to turn over directly from their file,” he said.

Barclays, the U.K.'s third-biggest bank, claimed in a lawsuit it filed last year in federal court in New York that it was misled by Cioffi and Tannin about the health of Bear Stearns's so-called enhanced fund managed.

Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, left Bear Stearns amid inquiries by prosecutors and the SEC into whether he withdrew $2 million from the funds four months before their collapse in July while at the same time persuading Barclays to double its stake.

The former hedge-fund manager was charged with one count of insider trading based on the $2 million redemption, prosecutors said. Both he and Tannin, who have pleaded not guilty, face as long as 20 years in prison if convicted of conspiracy. Cioffi faces an additional 20-year term if found guilty of insider trading. Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer.

The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
In March, three months after Cioffi left Bear Stearns, the 85-year-old firm was purchased by New York-based JPMorgan for about $1.4 billion in stock. Bear Stearns, worth almost $25 billion in January 2007, was pushed to the brink of insolvency when speculation about a cash-shortage prompted customers and lenders to flee.

Schwab Yield Plus: Charles Schwab Stumbles

Charles Schwab Corp's (SCHW.O) third-quarter profit beat expectations, but shares of the largest U.S. online brokerage slipped in a tumbling market on Wednesday as investors worried about a declining stable of assets under management.

The revenue Schwab derives from assets was hit by recent market turmoil. However, the company still managed to add new client assets, and the market turmoil also boosted a key trading measure in September.

The company's stock was down 1 percent, outperforming its two closest peers. The shares dropped 10 percent on Tuesday.

Because Schwab's business model relies more heavily than its rivals on asset management, worries persist that its managed assets will drop further along with the market.

The results also included an $8 million charge related to a lawsuit centered on its ultra-short YieldPlus bond funds. The suit, filed this year, claims the company misled investors or omitted information in marketing the funds, which were exposed to subprime mortgages.