Monica Lindeen, the Montana commissioner of securities and insurance, issued a temporary cease-and-desist order Thursday against Donald Chouinard and his companies, DC Wealth Management Inc. and DC Associates Inc.
Lindeen's action, which also seeks fines and restitution with interest, follows an investigation prompted by consumer complaints. The case has been referred to federal authorities.
"We took an administrative action to put the public on alert about our allegations," said Lynne Egan, deputy securities commissioner. "We know he's actively seeking investors to pay old investors."
Chouinard did not return a phone message left at DC Wealth Management seeking comment. His home phone number was disconnected and there is no listing for DC Associates in Kalispell.
Chouinard has 15 days to respond to state officials if he wants a hearing on the matter.
State regulators also allege Chouinard made unauthorized trades on customers' accounts during the five years he worked as an independent broker for LPL Financial Corp., causing customers to lose money and generating nearly $250,000 in commissions for himself. He was fired in May.
Lindeen's office also alleges Chouinard was soliciting investments to be made through his companies while he worked for LPL.
"He was also making up bogus investment opportunities and steering his clients' money into these bogus investments," Egan said.
Chouinard is also accused of taking money from clients' accounts for day trading without accounting for it and misrepresenting the value of their portfolios.
Wednesday, September 30, 2009
Tuesday, September 29, 2009
SEC Charges Illinois Money Manager in Ponzi-like Scheme
On September 29, 2009 William A. Huber was charged by the Securities and Exchange Commission in connection with alleged illegal activities committed by the private wealth manager and his company, Hubadex Inc., based in Decatur, Illinois. The SEC states that Huber lied to investors, stating that funds he controlled held more than $40 million as of August 31, 2009, when in reality those funds held little over $3 million. The funds in question include: The Quarter Funds, L.P., The Symmetry Fund, L.P. and The Trimester Fund.
Further, it is alleged that Huber made Ponzi-like payments to investors, using newer investment funds as redemption payments to investors at inflated rates. This is in direct contradiction to the fact that he lost money on his trading throughout 2009. Rather than inform his clients of this fact, he stated that substantial returns had been realized. Huber then collected performance fees he did not earn based on those falsely stated returns.
Not only did Huber lie to his clients in this manner, but he went so far as to divert investor funds to further his personal life. With diverted funds he bought homes in Naples, Florida and La Jolla, California. During the furor created by the Bernie Madoff fiasco, Huber even went so far as to write a letter to his clients assuring them that he managed his funds honestly and that his funds in no way correlated to those managed by the infamous Madoff.
The SEC complaint alleges that Huber lied to SEC staff members during their investigation of his activities, reporting false account balances to the SEC and claiming hedge fund investments that did not exist.
The SEC's complaint charges Huber and Hubadex with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and seeks injunctive relief, disgorgement, prejudgment interest, civil penalties and the appointment of a receiver. The SEC's complaint also names Huber's wife, Ruthann Huber, and Huber's investment funds, The Quarter Funds, L.P., The Symmetry Fund, L.P. and the Trimester Fund, as relief defendants based on allegations that they received ill-gotten gains from Huber's fraud.
Further, it is alleged that Huber made Ponzi-like payments to investors, using newer investment funds as redemption payments to investors at inflated rates. This is in direct contradiction to the fact that he lost money on his trading throughout 2009. Rather than inform his clients of this fact, he stated that substantial returns had been realized. Huber then collected performance fees he did not earn based on those falsely stated returns.
Not only did Huber lie to his clients in this manner, but he went so far as to divert investor funds to further his personal life. With diverted funds he bought homes in Naples, Florida and La Jolla, California. During the furor created by the Bernie Madoff fiasco, Huber even went so far as to write a letter to his clients assuring them that he managed his funds honestly and that his funds in no way correlated to those managed by the infamous Madoff.
The SEC complaint alleges that Huber lied to SEC staff members during their investigation of his activities, reporting false account balances to the SEC and claiming hedge fund investments that did not exist.
The SEC's complaint charges Huber and Hubadex with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and seeks injunctive relief, disgorgement, prejudgment interest, civil penalties and the appointment of a receiver. The SEC's complaint also names Huber's wife, Ruthann Huber, and Huber's investment funds, The Quarter Funds, L.P., The Symmetry Fund, L.P. and the Trimester Fund, as relief defendants based on allegations that they received ill-gotten gains from Huber's fraud.
ATM Ponzi Scheme Ended
Federal authorities say two men are charged in New York with an $80 million Ponzi scheme involving automated teller machines.
One of the suspects was arrested Friday in Garner, N.C. Authorities say the other is expected to surrender in Manhattan on Monday on charges of wire fraud, and conspiracy to commit wire fraud.
The U.S. attorney in Manhattan and the FBI say the men solicited investments for ATMs, saying they would generate revenue from cash withdrawal fees.
The machines supposedly were to be placed in retail locations around the country, including convenience stores, gas stations, malls and hotels.
Most of the machines didn't exist, or were never owned by the men.
The alleged scheme occurred from 2005 to January 2008.
One of the suspects was arrested Friday in Garner, N.C. Authorities say the other is expected to surrender in Manhattan on Monday on charges of wire fraud, and conspiracy to commit wire fraud.
The U.S. attorney in Manhattan and the FBI say the men solicited investments for ATMs, saying they would generate revenue from cash withdrawal fees.
The machines supposedly were to be placed in retail locations around the country, including convenience stores, gas stations, malls and hotels.
Most of the machines didn't exist, or were never owned by the men.
The alleged scheme occurred from 2005 to January 2008.
Monday, September 28, 2009
Broker Charged With Ponzi Scheme Fraud
The Securities and Exchange Commission has charged a Michigan stock broker with fraud, alleging he acted as a salesman in an alleged $250 million Ponzi scheme the agency first exposed nearly two years ago.
The agency alleged Frank Bluestein lured elderly investors into the scheme after convincing many of them to refinance their homes. The SEC said Mr. Bluestein acted as the single-largest salesperson in the scheme operated by Edward May and his company E-M Management Co.
In November 2007, the SEC claimed Mr. May ran the long-running scam promising profits on lucrative telecommunication contracts with Las Vegas resorts and casinos. Authorities said the contracts didn't exist and the scheme dates back to at least 1998. That case is still in litigation, according to an SEC spokesman, who said the case is pending over monetary penalties.
In its latest charges connected to the case, the SEC said Mr. Bluestein specifically targeted potential investors who were retired or elderly and conducted "investment seminars" in Michigan and California to lure them into investing in E-M securities.
The complaint, filed in federal court in Michigan, alleged Mr. Bluestein raised about $74 million from more than 800 investors through the sale of the securities over a five-year period.
A lawyer representing Mr. Bluestein wasn't immediately available for comment.
The SEC further alleges Mr. Bluestein misrepresented to investors that the investments were low risk and misled investors about the compensation he was receiving from the offerings by failing to disclose that he received at least $2.4 million in commissions from Mr. May and E-M in addition to the $1.4 million in disclosed compensation he received from investor funds.
The agency alleged Frank Bluestein lured elderly investors into the scheme after convincing many of them to refinance their homes. The SEC said Mr. Bluestein acted as the single-largest salesperson in the scheme operated by Edward May and his company E-M Management Co.
In November 2007, the SEC claimed Mr. May ran the long-running scam promising profits on lucrative telecommunication contracts with Las Vegas resorts and casinos. Authorities said the contracts didn't exist and the scheme dates back to at least 1998. That case is still in litigation, according to an SEC spokesman, who said the case is pending over monetary penalties.
In its latest charges connected to the case, the SEC said Mr. Bluestein specifically targeted potential investors who were retired or elderly and conducted "investment seminars" in Michigan and California to lure them into investing in E-M securities.
The complaint, filed in federal court in Michigan, alleged Mr. Bluestein raised about $74 million from more than 800 investors through the sale of the securities over a five-year period.
A lawyer representing Mr. Bluestein wasn't immediately available for comment.
The SEC further alleges Mr. Bluestein misrepresented to investors that the investments were low risk and misled investors about the compensation he was receiving from the offerings by failing to disclose that he received at least $2.4 million in commissions from Mr. May and E-M in addition to the $1.4 million in disclosed compensation he received from investor funds.
Friday, September 25, 2009
Due Diligence Lacking in Private Placement Deals
Recent failures of private placement deals, including notes issued by Medical Capital Holdings, has brought to light the issue of due diligence performed by broker-dealers. The issue that has been raised is that there is little to no pre-screening of private placement investment products by a regulatory body. This lack of regulatory oversight has exposed investors to far more risk in private placement offerings than could likely be imagined.
Broker-dealers often leave the analysis of securities products to third-party due-diligence firms. Such firms normally consist of attorneys who are paid by the issuer to write a report evaluating the viability of the issuer's deal. The potential for a conflict of interest is high as due diligence firms receive fees from the companies they must objectively vet. In addition to this, due-diligence firms often produce superficial reports that provide a perfunctory review of the issuers and their finances. This issue is compounded because many broker-dealers fail to read these reports.
Despite such concerns, both the market and investors' appetites for such deals have increased exponentially. Last year over 26,000 private placement offerings were filed with the Securities and Exchange Commission, which requires little information about this type of investment. This has led to a precipitous climate for investors, leading to large scale exposure, and in some cases fraud.
In July of this year the SEC charged Medical Capital Holdings Inc. with fraud in the sale of $77 million of private securities in the form of notes. Since then, a court appointed receiver has said that $543 million worth, or about 87%, of all the accounts receivable Medical Capital controlled are “nonexistent.”
There's no way to tally the potential cost to broker-dealers who sold clients Medical Capital deals. Investors have begun to file arbitration claims against the firms who sold the private placement products. Though broker-dealers worry of the damage done between them and their respective clients, the real damage has been to investors themselves.
Broker-dealers often leave the analysis of securities products to third-party due-diligence firms. Such firms normally consist of attorneys who are paid by the issuer to write a report evaluating the viability of the issuer's deal. The potential for a conflict of interest is high as due diligence firms receive fees from the companies they must objectively vet. In addition to this, due-diligence firms often produce superficial reports that provide a perfunctory review of the issuers and their finances. This issue is compounded because many broker-dealers fail to read these reports.
Despite such concerns, both the market and investors' appetites for such deals have increased exponentially. Last year over 26,000 private placement offerings were filed with the Securities and Exchange Commission, which requires little information about this type of investment. This has led to a precipitous climate for investors, leading to large scale exposure, and in some cases fraud.
In July of this year the SEC charged Medical Capital Holdings Inc. with fraud in the sale of $77 million of private securities in the form of notes. Since then, a court appointed receiver has said that $543 million worth, or about 87%, of all the accounts receivable Medical Capital controlled are “nonexistent.”
There's no way to tally the potential cost to broker-dealers who sold clients Medical Capital deals. Investors have begun to file arbitration claims against the firms who sold the private placement products. Though broker-dealers worry of the damage done between them and their respective clients, the real damage has been to investors themselves.
Thursday, September 24, 2009
NBA Star Grant Prevails in Morgan Keegan Case
Horace Grant, most famous for his time with the Chicago Bulls, won a $1.46 million arbitration award against Morgan Keegan & Co. for losses in bond mutual funds. The award, announced last Friday, represents nearly all of the unrealized losses Grant suffered as of January 2008.
Grant had alleged that Morgan Keegan, a Memphis, Tenn.-based broker, sold him four high-yield bond funds with more risk in them than he was told. Morgan Keegan marketed the funds as conservative investments appropriate for retirees who were looking to protect their principal.
In 2007, the four funds plummeted by an average of 58 percent, according to Grant's complaint filed in March 2008 with the Financial Industry Regulatory Authority (FINRA). Similar bond funds lost 6.9 percent that year, the complaint said.
The Morgan Keegan funds were battered by the meltdown in sub-prime residential mortgages, largely because they invested in risky debt-related securities and other mortgage-related holdings. Morgan Keegan failed to disclose the funds' large concentrations of such securities.
The brokerage firm, a unit of Regions Financial Corp., based in Birmingham, Ala., faces a flood of arbitration claims from investors related to its high-yield bond funds. Investors in the funds reportedly lost more than $2 billion in 2007.
Last year, complaints involving mutual funds outnumbered complaints involving stocks for the first time, according to FINRA. The phenomenon has continued this year, as last year's bear market demonstrated that mutual funds that invest in bonds or other fixed-income products are not necessarily less volatile than stocks.
Grant had alleged that Morgan Keegan, a Memphis, Tenn.-based broker, sold him four high-yield bond funds with more risk in them than he was told. Morgan Keegan marketed the funds as conservative investments appropriate for retirees who were looking to protect their principal.
In 2007, the four funds plummeted by an average of 58 percent, according to Grant's complaint filed in March 2008 with the Financial Industry Regulatory Authority (FINRA). Similar bond funds lost 6.9 percent that year, the complaint said.
The Morgan Keegan funds were battered by the meltdown in sub-prime residential mortgages, largely because they invested in risky debt-related securities and other mortgage-related holdings. Morgan Keegan failed to disclose the funds' large concentrations of such securities.
The brokerage firm, a unit of Regions Financial Corp., based in Birmingham, Ala., faces a flood of arbitration claims from investors related to its high-yield bond funds. Investors in the funds reportedly lost more than $2 billion in 2007.
Last year, complaints involving mutual funds outnumbered complaints involving stocks for the first time, according to FINRA. The phenomenon has continued this year, as last year's bear market demonstrated that mutual funds that invest in bonds or other fixed-income products are not necessarily less volatile than stocks.
Saturday, September 19, 2009
The Troubled Past of Medical Capital's Sidney Field
The head of troubled Tustin lender Medical Capital Holdings is a one-time "bad actor" in the auto insurance industry, interviews and documents show.
California insurance regulators sued Sidney M. Field for fraud in the early 1990s after revoking his license.
Last month the Securities and Exchange Commission filed a civil fraud suit against Medical Capital, Villa Park resident Field, 63, and his partner, Joseph J. "Joey" Lampariello, 55, of Newport Beach and Huntington Station, N.Y. The SEC alleged that Field and Lampariello cheated investors of $18.5 million. A receiver has taken over the business.
Medical Capital raised $2.2 billion from 20,000 investors over the past six years. It put investors' money primarily into unpaid bills, or receivables, from hospitals and doctors.
A brief biography contained in a March 2003 SEC filing says that Field "was the founder, past president and chairman of FGS, one of the largest insurance brokers in the United States with annual sales of over $200,000,000. Mr. Field sold his interest in that firm in 1990."
The Department of Insurance's lawsuit and news releases paint a much grimmer picture of Field's insurance career:
In February 1987, Field and several others allegedly arranged for Coastal Insurance Inc., which they controlled, to pay Field $17.5 million for FGS. Two years later, just before it slipped into insolvency, Coastal sold FGS back to Field for $206,000. Regulators called the deal a "sham transaction" that diverted cash from an ailing insurer to Field.
State insurance regulators revoked Field's insurance license in August 1987. Regulators warned both Field and Coastal that they would not license FGS if Field remained involved. Despite that warning, he allegedly continued to control FGS and to serve as a "de facto" director of Coastal, which sold auto insurance to bad drivers.
Under Field's supervision, FGS agents allegedly used a deceptive practice known as "sliming" to sell Coastal auto policies. They would alter the accident records of questionable drivers and falsify information about car values and commute mileage so applicants could qualify for insurance.
FGS also allegedly duped customers into paying interest rates of 21 percent to 40 percent when they financed their premiums.
The Department of Insurance sued Field for civil racketeering in August 1990 and again three years later, this time for fraud, after he filed bankruptcy. He paid $100,000 to settle the second lawsuit.
A few years later Field's new company, Medical Capital Holdings, was selling investments in medical receivables.
Under SEC rules, only people with at least $1 million in net assets or $200,000 in annual income could invest in Medical Capital. That should have limited the damage when the company began defaulting on principal payments a year ago and stopped paying interest in June.
California insurance regulators sued Sidney M. Field for fraud in the early 1990s after revoking his license.
Last month the Securities and Exchange Commission filed a civil fraud suit against Medical Capital, Villa Park resident Field, 63, and his partner, Joseph J. "Joey" Lampariello, 55, of Newport Beach and Huntington Station, N.Y. The SEC alleged that Field and Lampariello cheated investors of $18.5 million. A receiver has taken over the business.
Medical Capital raised $2.2 billion from 20,000 investors over the past six years. It put investors' money primarily into unpaid bills, or receivables, from hospitals and doctors.
A brief biography contained in a March 2003 SEC filing says that Field "was the founder, past president and chairman of FGS, one of the largest insurance brokers in the United States with annual sales of over $200,000,000. Mr. Field sold his interest in that firm in 1990."
The Department of Insurance's lawsuit and news releases paint a much grimmer picture of Field's insurance career:
In February 1987, Field and several others allegedly arranged for Coastal Insurance Inc., which they controlled, to pay Field $17.5 million for FGS. Two years later, just before it slipped into insolvency, Coastal sold FGS back to Field for $206,000. Regulators called the deal a "sham transaction" that diverted cash from an ailing insurer to Field.
State insurance regulators revoked Field's insurance license in August 1987. Regulators warned both Field and Coastal that they would not license FGS if Field remained involved. Despite that warning, he allegedly continued to control FGS and to serve as a "de facto" director of Coastal, which sold auto insurance to bad drivers.
Under Field's supervision, FGS agents allegedly used a deceptive practice known as "sliming" to sell Coastal auto policies. They would alter the accident records of questionable drivers and falsify information about car values and commute mileage so applicants could qualify for insurance.
FGS also allegedly duped customers into paying interest rates of 21 percent to 40 percent when they financed their premiums.
The Department of Insurance sued Field for civil racketeering in August 1990 and again three years later, this time for fraud, after he filed bankruptcy. He paid $100,000 to settle the second lawsuit.
A few years later Field's new company, Medical Capital Holdings, was selling investments in medical receivables.
Under SEC rules, only people with at least $1 million in net assets or $200,000 in annual income could invest in Medical Capital. That should have limited the damage when the company began defaulting on principal payments a year ago and stopped paying interest in June.
Friday, September 18, 2009
SEC to Tighten Rules Regarding Rating Agencies
On Thursday the Securities and Exchange Commission proposed rules intended to stem conflicts of interest and provide more transparency for credit rating companies. In addition to this they proposed banning "flash orders.” Flash orders give some traders a split-second edge in buying or selling stocks. The five members of the SEC, headed by Mary Shapiro, voted at a public meeting to propose these rules. The changes are open to public comment for 60 days.
Regulators say they also hope to spur more competition in the rating industry, with new entrants challenging the dominant firms. In addition, these rules are hoped to make trading practices more transparent.
Regulators say they also hope to spur more competition in the rating industry, with new entrants challenging the dominant firms. In addition, these rules are hoped to make trading practices more transparent.
Flash orders, a headline issue in recent weeks, has raised questions about transparency and fairness on Wall Street. Nasdaq OMX Group Inc., which operates the Nasdaq Stock Market, and the BATS exchange have voluntarily stopped using flash orders, which made up an estimated 3% of stock trading. The New York Stock Exchange has never used them.
The credit rating firms have been criticized for failing to identify risks in securities backed by subprime mortgages. They had to downgrade thousands of the securities last year as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and write-downs at big banks and investment firms.
One SEC proposal discussed Thursday is intended to bar companies from "shopping" for favorable ratings of their securities.
In addition, the rating firms would have to publicly disclose every entity that paid for a credit rating. They also would have to provide more information about income earned from companies they rate.
In a rule that was formally adopted Thursday, the companies will have to disclose the history of their ratings actions back to mid-2007.
In California, Atty. Gen. Jerry Brown launched an investigation into the three big credit rating firms, Standard & Poor's, Moody's Investors Service and Fitch Ratings, to determine what role they might have played in the collapse of the financial markets. Brown said he had subpoenaed the three firms to determine whether they violated state law in giving high ratings to relatively unstable assets.
In July, the California Public Employees' Retirement System sued the companies, saying the three ratings firms had lured the fund into bad investments. The nation's largest public pension fund blames them for more than $1 billion in investment losses.
The SEC commissioners took their action during a week when memories of the collapse of Lehman Bros. a year ago were fresh in Washington.
SEC Sues Tony Morrison and Texas Securities Partners
On September 15, 2009, the United States Securities and Exchange Commission (Commission) filed a civil action against Tony E. Morrison and Texas Securities Partners LLC (TSP). In its complaint, the Commission alleges that from January 2005 through June 2008, TSP, at Morrison's direction, sold fractional interests in oil and gas offerings. According to the complaint, TSP raised $12.7 million from over 500 investors nationwide by making material misrepresentations regarding past performance, expected returns, and risk. More specifically, the complaint alleges that TSP representatives told investors: (i) a previous offering provided a $30 million return to investors; (ii) the investment would pay out 80% to 120% cash-on-cash return in the first year; (iii) no project had resulted in a dry hole; and (iv) the investment was a "sure thing." The complaint further alleges that contrary to these statements, none of TSP's offerings returned investor principal or profit and three of the wells resulted in dry holes. In addition, the complaint alleges that TSP's offerings were not registered with the Commission and were not otherwise exempt from registration.
Thursday, September 17, 2009
Others Sued In Medical Capital Blowup
The two trustees of Medical Capital Holdings Inc.'s private placements, Wells Fargo & Co. and The Bank of New York Mellon Corp., have been sued by investors seeking class action status.
This suit is the latest unwelcome news for Medical Capital investors and the financial-services companies that did business with the firm: In July, the Securities and Exchange Commission charged Medical Capital, which had raised $2.2 billion in private placements from investors since 2003, with fraud. At the same time, the Financial Industry Regulatory Authority Inc. conducted a sweep of broker-dealers looking for information about the sale of the private placements.
The new lawsuit alleges that executives with Medical Capital, which issued five private placements in the form of special-purpose corporations, “used the trustee-controlled accounts as their personal piggy banks,” according to the suit, which was filed last Friday in federal court in Santa Ana., Calif.
Wells Fargo and Bank of New York Mellon served as trustees of the special-purpose corporations and “were paid substantial fees,” the complaint alleges.
The lawsuit claims that Medical Capital executives siphoned off fees of nearly $325 million that they spent on lavish perks, including a 118-foot yacht.
All five of the Medical Capital special-purpose corporations are now in default to investors after failing to make interest and principal payments on almost $1 billion in notes.
A number of leading independent broker-dealers sold the Medical Capital offerings, and investors have started to file arbitration claims against those firms.
Medical Capital of Tustin, Calif., is a medical-receivables financing company that purchased account receivables from health care providers at a discount and then collected on the debts.
Last week, the court-appointed receiver raised more questions about the quality of Medical Capital's assets. For example, $543 million, or about 87% of all the accounts receivable controlled by Medical Capital, are “nonexistent,” according to the receiver
This suit is the latest unwelcome news for Medical Capital investors and the financial-services companies that did business with the firm: In July, the Securities and Exchange Commission charged Medical Capital, which had raised $2.2 billion in private placements from investors since 2003, with fraud. At the same time, the Financial Industry Regulatory Authority Inc. conducted a sweep of broker-dealers looking for information about the sale of the private placements.
The new lawsuit alleges that executives with Medical Capital, which issued five private placements in the form of special-purpose corporations, “used the trustee-controlled accounts as their personal piggy banks,” according to the suit, which was filed last Friday in federal court in Santa Ana., Calif.
Wells Fargo and Bank of New York Mellon served as trustees of the special-purpose corporations and “were paid substantial fees,” the complaint alleges.
The lawsuit claims that Medical Capital executives siphoned off fees of nearly $325 million that they spent on lavish perks, including a 118-foot yacht.
All five of the Medical Capital special-purpose corporations are now in default to investors after failing to make interest and principal payments on almost $1 billion in notes.
A number of leading independent broker-dealers sold the Medical Capital offerings, and investors have started to file arbitration claims against those firms.
Medical Capital of Tustin, Calif., is a medical-receivables financing company that purchased account receivables from health care providers at a discount and then collected on the debts.
Last week, the court-appointed receiver raised more questions about the quality of Medical Capital's assets. For example, $543 million, or about 87% of all the accounts receivable controlled by Medical Capital, are “nonexistent,” according to the receiver
Wednesday, September 16, 2009
Securities Lawyer Files Lawsuit In Response To Auction-Rate Securities Loss
Nuveen Investments, Merrill Lynch, Citigroup, Deutsche Bank, and Mesirow Financial came under fire last year after Howard Kastel, a retired securities lawyer, filed a suit against them for $2-million in losses that he and his wife suffered as a result of recommendations to invest in auction-rate securities. According to the lawsuit filed in August of 2009, Howard and Joan Kastel alleged that they suffered at the hand of a “fraudulent scheme” in which the markets associated with the securities were negligently negotiated.
The lawsuit says that in August and September 2007 Mesirow Financial purchased 88 shares of auction-rate preferred securities for the Kastels’ account. The shares, which cost $25,000 per share, were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicagobasedbroker-dealer, at auctions conducted by Deutsche Bank. As reported in an Aug. 26 article by Investment News, Merrill Lynch and Citigroup participated in the auction, as well.
When the $330 billion auction-rate securities market suddenly froze up in February 2008, the Kastels’ were unable to access their cash. According to their lawsuit, they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple.
The Kastels are suing Mesirow, Nuveen and Merrill Lynch for approximately $6-million. In addition, they are seeking compensation for emotional distress. Prior to the collapse of the ARS market, thousands of retail and institutional investors purchased auction-rate securities on the premise they were cash equivalents.The markets were subject to a major crash in 2008 after which the Kastels discovered that their investments had lost near enough all of their value.
Shortly following the filing of lawsuits by state and federal regulators, a number of investment firms and Wall Street Banks began negotiations to buy back a substantial amount of the securities from retail investors which were estimated cost billions of dollars, while other firms decided to maintain their stance and refused at any attempts to buy back investor losses.
The lawsuit says that in August and September 2007 Mesirow Financial purchased 88 shares of auction-rate preferred securities for the Kastels’ account. The shares, which cost $25,000 per share, were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicagobasedbroker-dealer, at auctions conducted by Deutsche Bank. As reported in an Aug. 26 article by Investment News, Merrill Lynch and Citigroup participated in the auction, as well.
When the $330 billion auction-rate securities market suddenly froze up in February 2008, the Kastels’ were unable to access their cash. According to their lawsuit, they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple.
The Kastels are suing Mesirow, Nuveen and Merrill Lynch for approximately $6-million. In addition, they are seeking compensation for emotional distress. Prior to the collapse of the ARS market, thousands of retail and institutional investors purchased auction-rate securities on the premise they were cash equivalents.The markets were subject to a major crash in 2008 after which the Kastels discovered that their investments had lost near enough all of their value.
Shortly following the filing of lawsuits by state and federal regulators, a number of investment firms and Wall Street Banks began negotiations to buy back a substantial amount of the securities from retail investors which were estimated cost billions of dollars, while other firms decided to maintain their stance and refused at any attempts to buy back investor losses.
Tuesday, September 1, 2009
CIT Internotes Cause Investor Losses
Wall Street appears to have parlayed bankruptcy fears at CIT Group into a trading bonanza Friday. And surprise, surprise, it came at the expense of mom-and-pop investors.
Hundreds of millions of dollars in CIT Internotes — bonds marketed directly to small-time investors and particularly the elderly — changed hands Friday as rumors of a bankruptcy at CIT panicked small-time investors. In their haste, they left tens of millions of dollars on the table, which were scooped up by bond trading desks, brokers and sophisticated investors.
CIT Internotes were the most actively traded bonds in the U.S. markets Friday, by a huge margin, according to TRACE data collected by retail electronic bond-trading platform BondDesk Group. Traders and brokers took out an average of 6.34% in commissions on each trade — the difference between where the bonds were bought and sold - garnering millions in revenue. That compares with an average of 1.06% on all other trades for the day.
In addition the notes were trading well below the prices garnered for equivalent bonds sold to sophisticated investors. For instance, one issue CIT Internotes due 2016 changed hands Friday at an average of 42 cents on the dollar, while equivalent debt held by large investors traded at 52 cents on the dollar, according to Tradeweb.
To be sure, deals targeted at institutional investors come in large sizes and are easier to buy and sell than offerings targeted at small investors. Therefore, brokers and traders are able to charge more for their services, which amounts to finding another buyer, who is in a position to demand a discount.
Bond trading is a zero sum game, meaning someone paid for Wall Street’s profits. In this case, those people are small bondholders.
Internotes are issued by large firms on a weekly basis and then distributed to small investors through a network of broker-dealers and banks throughout the country. Current active issuers include household names like GE Capital, Goldman Sachs and John Deere Capital, according to Internote underwriter Incapital.
Internotes, specifically, are marketed to elderly investors. One of their key features is a so-called “death put,” which allows the heirs of a bondholder to sell the bonds back the company that issues them at face value if the owner dies.
The feature is meant to limit risk to the bond owner’s family, but it doesn’t consider that the company itself might disappear before the investor does.
Hundreds of millions of dollars in CIT Internotes — bonds marketed directly to small-time investors and particularly the elderly — changed hands Friday as rumors of a bankruptcy at CIT panicked small-time investors. In their haste, they left tens of millions of dollars on the table, which were scooped up by bond trading desks, brokers and sophisticated investors.
CIT Internotes were the most actively traded bonds in the U.S. markets Friday, by a huge margin, according to TRACE data collected by retail electronic bond-trading platform BondDesk Group. Traders and brokers took out an average of 6.34% in commissions on each trade — the difference between where the bonds were bought and sold - garnering millions in revenue. That compares with an average of 1.06% on all other trades for the day.
In addition the notes were trading well below the prices garnered for equivalent bonds sold to sophisticated investors. For instance, one issue CIT Internotes due 2016 changed hands Friday at an average of 42 cents on the dollar, while equivalent debt held by large investors traded at 52 cents on the dollar, according to Tradeweb.
To be sure, deals targeted at institutional investors come in large sizes and are easier to buy and sell than offerings targeted at small investors. Therefore, brokers and traders are able to charge more for their services, which amounts to finding another buyer, who is in a position to demand a discount.
Bond trading is a zero sum game, meaning someone paid for Wall Street’s profits. In this case, those people are small bondholders.
Internotes are issued by large firms on a weekly basis and then distributed to small investors through a network of broker-dealers and banks throughout the country. Current active issuers include household names like GE Capital, Goldman Sachs and John Deere Capital, according to Internote underwriter Incapital.
Internotes, specifically, are marketed to elderly investors. One of their key features is a so-called “death put,” which allows the heirs of a bondholder to sell the bonds back the company that issues them at face value if the owner dies.
The feature is meant to limit risk to the bond owner’s family, but it doesn’t consider that the company itself might disappear before the investor does.
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