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
Wednesday, December 31, 2008
Tuesday, December 30, 2008
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.
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.
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.
Monday, December 29, 2008
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.
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.
Saturday, December 27, 2008
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.
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.
Friday, December 26, 2008
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.
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.
Thursday, December 25, 2008
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.
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.
Wednesday, December 24, 2008
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.
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.
Saturday, December 20, 2008
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.
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.
Friday, December 19, 2008
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
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
Thursday, December 18, 2008
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.
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.
Wednesday, December 17, 2008
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.
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.
Tuesday, December 16, 2008
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.
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.
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
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.
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.
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.
Friday, December 12, 2008
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.
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.
Thursday, December 11, 2008
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.
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.
Wednesday, December 10, 2008
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.
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.
Tuesday, December 9, 2008
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).
“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).
Thursday, December 4, 2008
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.
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.
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.
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.
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.
Wednesday, December 3, 2008
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.
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.
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.
Tuesday, December 2, 2008
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.
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.
Monday, December 1, 2008
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.
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.
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.
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