March 3, 2015

Master Limited Partnerships: Unsuitable for Some Investors?

Are master limited partners unsuitable for some investors? The term master limited partnership sounds like a complicated legal transaction. In fact, master limited partnerships or MLPs are complex investments that have become hugely popular in the last few years in this low interest rate environment. MLPs are tax exempt publicly traded companies that often own infrastructure in the energy field (pipelines, tanks, etc.). Individual and small institutional investors having be loading up on MLPs because they pay a large percentage of their income out to shareholders as distributions. According to Morningstar, investors added almost $12 billion in 2014 into mutual and exchange-traded funds which invest in MLPs. That's a huge amount of hard earned money looking for higher yields. The question is, do investors understand the real risks? We doubt it.

Brokers commonly market MLPs as low risk, higher yield securities. But that's not the case. An MLP is a publicly traded limited partnership with two types of partners: the general partner (or GP) who is responsible for managing the MLP and is compensated for performance; and the limited partner (or LP) who is the investor who provides the capital to the MLP and receives periodic income distributions. Unlike most partnerships, shares of MLPs can be bought or sold on a stock exchange. Just like any partnership, the problem with being a limited partner is that an LP has no role in the management of MLP. That's risk number one.

Risk number two is that most MLPs invest in the natural resources infrastructure. This is normally a risky space, especially with the swings on energy and commodity prices.

Risk number three is that the structure of an MLP mandates that most of the income be distributed to investors. This often forces MLPs to borrow funds to be able to pay dividends. The added risk is thus the leverage created by the MLP borrowing funds, especially in downturns in the economy.

Investors who do not want to take significant risks should learn as much as possible about MLPs. If you invested and lost money based upon misrepresentations regarding MLPs, feel free to contact our firm to learn more about MLPs and your options.

Here is an article from Bloomberg explaining some of the risks.

March 3, 2015

Former Barclays Brokers get Employee Forgivable Loans Knocked Out in FINRA Arbitration

A Miami-based FINRA arbitration panel has ruled that two former financial advisers of Barclays do not have to repay a total of over $3.8 million allegedly owed by them pursuant to promissory notes executed in connection with signing bonuses, despite the fact that they left the firm.

According to a recent report in the Wall Street Journal, the brokers, Ileana Delahoz Platt and Rafael Enrique Urquidi, joined Barclays in 2012 and received signing bonuses in the form of “forgivable loans”, which is a customary practice in the industry. These loans, evidenced by promissory notes, are typically forgiven over time provided the employee remains employed with the firm. However, shortly after Ms. Platt and Mr. Urquidi went to work at Barclays, the bank eliminated its business in the market where their clients were located, and, according to their attorney, the advisers could no longer service many of their clients, obliging them to leave the firm to seek out other employment.

In the FINRA arbitration proceeding, Ms. Platt and Mr. Urquidi sought compensatory and other damages, as well as a declaratory judgment that any amounts due under their loan agreements would be offset and that they would owe nothing under the promissory notes. Barclays, in a counterclaim, requested compensatory damages against the two advisers in the amounts it claimed were due and owing on the promissory notes at the time they left the firm.

The FINRA panel, in its award, denied Barclays’ counterclaim and held that Ms. Platt and Mr. Urquidi did not have to repay the loans. As is typical with FINRA awards, the panel did not provide a reasoned decision for its ruling. The award is noteworthy because it is often difficult for brokers to knock out 100% of a forgivable loan once they’ve left the firm.

Rich, Intelisano & Katz, LLP represents employees in the financial services industry in employment disputes, including compensation and bonus claims, wrongful termination claims and constructive discharge matters.

February 25, 2015

Brokers May Soon Be Subject to Fiduciary Duty to Their IRA Investors

A leaked White House memo supports imposing fiduciary duties on brokers in their dealings with IRA investors, as reported by the New York Times.

Current rules provide a weaker standard for brokers. The memo estimates that the absence of adequate investor safeguards penalizes IRA holders by as much as $17 billion per year. Hopefully, this development indicates that a rule imposing a fiduciary standard will be promulgated by the U.S. Labor Department soon. The securities industry has been vigorously fighting this requirement for years, some threatening to stop offering IRAs that would be subject to the rule. Of primary concern to investors are built in conflicts of interest that brokers often have in recommending IRA investments that may be lucrative to the broker but not right for the investor. The government should err on the side of investor protection in this dispute because the securities industry has the knowledge and resources to protect future retirees, whereas many investors lack the knowledge to protect themselves in the arena of complicated investment products.

February 19, 2015

Securities Arbitration Award Against Merrill Lynch Upheld

This week, the New Jersey Supreme Court denied the appeal of an arbitration award against Merrill Lynch by the Associated Humane Societies Inc. of Tinton Falls, N.J. In the original FINRA arbitration, the society alleged that certain of its investments were improper, it improperly sustained penalties and other charges when the investments were liquidated, its accounts were improperly managed and churned, and it was overcharged for management of its accounts. The society sought $10 million in punitive damages, $872,171 in compensatory damages and $544,299 in attorneys’ fees. After an 18-day hearing, the FINRA panel found in favor of the society, but awarded it only $168,103 in compensatory damages and $126,077 in punitives.

The society appealed. A 3-judge appellate division panel upheld the award in October, finding that the FINRA panel did not abuse its discretion. Associated Humane Societies, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. L-4376-13 (Oct. 29, 2014). The New Jersey Supreme Court denied any further appeal on Feb. 17, 2015.

Though the society was ultimately disappointed with the size of the award, the decision shows the reluctance of courts to disturb FINRA arbitration awards.

Rich Intelisano & Katz LLP represents non-profit entities as well as other investors in securities arbitrations.

February 19, 2015

Brokers Must Consider New Market Realities When Determining the Suitability of Asset Allocation for Young Investors

Does the conventional wisdom regarding asset allocation hold up in today’s economy? The New York Times recently featured an article suggesting that a portfolio teeming with risky stocks, derivatives, and other exotic investments may, in fact, not be suitable for even young investors. The Times points out that these young investors experience higher rates of unemployment and are more likely to cash out their 401(k)’s and other investments when they switch jobs. An appropriate suitability analysis under FINRA Rule 2111 would take these factors into account. It is highly likely that many brokers are still using a one-size-fits-all asset allocation formula for their young customers.

Investors may have a variety of claims against such brokers who fail to take into account current market conditions, including unsuitable investment advice, fraudulent misrepresentations and omissions, and failure to supervise.

February 6, 2015

Rich, Intelisano & Katz Opens LA Office

Rich, Intelisano and Katz is proud to announce the opening of our new office in Los Angeles. The California practice will be headed by our new partner Scott Rahn, a former partner at Greenberg Traurig in LA. Scott's bio is here:

We look forward to working with Scott in California and to continue representing investors and employees from around the world in disputes with the financial industry.

October 25, 2013

UBS in Web of Puerto Rico Bond Funds Suffering Massive Losses

Puerto Rico bond funds have been suffering massive losses recently and regulators have already taken action. According to the SEC, UBS Financial Services of Puerto Rico Inc. (“UBS”) misled thousands of its retail investors in 23 of its closed-end mutual funds. While UBS has already spent more than $26 million to settle the SEC’s charges, investors are now starting to pursue their own actions against the institution to recover potentially millions in losses.

Starting in 2008, UBS began soliciting investors in its Puerto Rico bond funds by promoting the funds’ market performance and high premiums to net asset value as the result of supply and demand in a competitive and liquid secondary market. However, UBS knew about a significant “supply and demand imbalance” and internally discussed the “weak secondary market.” UBS misled investors, failing to disclose that it controlled the secondary market. In 2009, UBS withdrew its market support and sold its inventory to unsuspecting customers. At the same time, it failed to disclose that it was drastically reducing its inventory, and undercut customer orders so that UBS’s inventory could be liquidated first.

Investors may have a host of claims against UBS including fraudulent misrepresentations and omissions, unsuitable investment advice, and failure to supervise.

December 9, 2011

Bloomberg Update on $383M Client Case v. Citigroup

Below is a piece by Bloomberg on our firm's $383 million claim against Citigroup. There's more on this case on the firm's website at

Citigroup’s Mathur Said to Depart With Hybrid Traders as Pandit Cuts Jobs
By Donal Griffin - Dec 9, 2011

Citigroup Inc. (C), the third-biggest U.S. bank, is shrinking a team of traders who deal in “hybrid” products as Chief Executive Officer Vikram Pandit cuts Wall Street jobs, two people familiar with the matter said.

Samir Mathur, former head of hybrid trading, is leaving the New York-based firm and is in talks to join a hedge fund, according to one of the people, who asked to remain anonymous because the move hasn’t been announced. Other members of the desk who reported to him, including Yontcho Valtchev, Vivek Kapoor, Eric Kim, Sean Corrigan and Allison Niiya, also are leaving, the person said.

Mathur is among ex-members of the desk who are at the center of a dispute with Ghazi Abbar, a former customer from Jeddah, Saudi Arabia. Abbar claims he lost $383 million of his family’s fortune when Citigroup sold him products that later soured, even though the bank internally questioned his ability to properly manage some of them. Pandit, 54, is shrinking the desk as he cuts 4,500 jobs amid a revenue slump.

“It makes sense for Citigroup to reduce the size of its sales trading activities, particularly in developed markets,” Richard Staite, an analyst at Atlantic Equities LLP, wrote in a Dec. 7 note to clients. “We believe a shift away from trading toward lower-risk consumer and corporate banking may lead to a higher valuation multiple.”

Mathur follows Erwin Parviz, the former London-based head of hybrid structuring who left Citigroup in June, according to U.K. Financial Services Authority records.

Investment Banking

Planned layoffs will include about 900 from the division that contains trading and investment banking, a person familiar with the matter said last month.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment. Members of the hybrid team didn’t respond to phone messages, said they couldn’t comment or couldn’t be located for comment. Citigroup, with 267,000 employees worldwide as of Sept. 30, is the third-biggest U.S. bank by assets behind JPMorgan Chase & Co. and Bank of America Corp.

Mathur’s team traded hybrid derivatives, financial instruments that derive their values from different underlying assets. Buyers seek to profit from the performance of assets, such as a stake in a hedge fund, without directly owning them. The desk often sold products to large investment firms including Man Group Plc (EMG) and Tudor Investment Corp., people familiar with the matter said last month.
Taxpayer Bailout

Mathur helped to create one of Abbar’s transactions, according to an arbitration claim Abbar has filed with the Financial Industry Regulatory Authority. The bank denies the allegations and has sued Abbar to block the arbitration.

Mathur has worked as a trader for Citigroup since 1998, according to Finra records. He rose to become head of hybrid trading before the bank almost collapsed in 2008 and received a $45 billion taxpayer bailout.

Colleagues of Mathur’s also are Wall Street veterans, Finra records show. Valtchev had worked for Citigroup since 2005 after stints with Deutsche Bank AG and Barclays Plc (BARC), while Kapoor joined in 2007 after working at UBS AG, Credit Suisse Group AG (CSGN) and Standard & Poor’s. Niiya had worked for Citigroup since 2000, according to the records. While most are traders, Kim is an analyst.

December 1, 2011

American Lawyer Piece on Firm's Citigroup Case

Below is an American Lawyer piece which explains our clients' pending $383 million FINRA arbitration against Citigroup. It goes on to talk about how there are more and more large and complex cases at FINRA. It's true. As partner John Rich points out at the end of the article, our firm is involved in other multi-million dollar matters at FINRA. In fact, we handled the Bayou v. Goldman FINRA arbitration case which generated a $20.6 million award, and is mentioned in the article. We think FINRA arbitration will continue to attract sophisticated legal disputes because it is more efficient and timely than court litigation.

Too Big for Their Britches?

Nate Raymond

The American Lawyer


Just a few years ago, the Abbar family of Saudi Arabia could point to at least $383 million in investments managed by Citigroup Inc. Patriarch Abdullah Abbar and his son Ghazi had built the family fortune through an array of food import, travel, oil transport, and investment businesses. And beginning in 2006, they entrusted the bulk of their wealth to Citi.

Today the relationship has soured, and the money is almost gone. Both sides have lawyered up—the Abbars hired John Rich of Rich, Intelisano & Katz, and Citi retained Scott Edelman of Milbank, Tweed, Hadley & McCloy—and the legal battle is heating up. In August the Abbars filed a securities arbitration claim with the Financial Industry Regulatory Authority ­(FINRA), the U.S. securities industry's self-regulator. But while defendants often prefer the privacy arbitration affords, Citigroup wants to move the case into the courtroom.

The Abbar complaint is one of roughly 200 pending FINRA cases with at least $10 million at stake. The number of cases and the size of potential awards increased significantly after the stock market collapse in 2008. Before then, most FINRA cases involved small investors who were suing their brokers. But after the crash, richer investors flooded ­FINRA with claims that they were duped by large institutions. "The claims coming in now are substantially larger than what we had a few years ago," says Linda Fienberg, president of FINRA's dispute resolution unit.

The financial institutions, faced with hefty awards that are near impossible to overturn, have taken notice. Lawsuits by banks challenging the arbitrations are increasingly common, often contending that sophisticated investors are trying to twist FINRA's original definition of a brokerage customer to include their claims.

Established in 2007, FINRA is the result of a merger of two sets of self-regulatory organizations, the New York Stock Exchange's enforcement arm and the National Association of Securities Dealers. Cases number in the thousands annually, and currently 7,000 claims are pending, Fienberg says.

For most parties in FINRA cases, arbitration offers a quick and private venue to deal with securities claims. But the arbitration landscape changed when financial service firms began teetering. "There were some very large losses during that period," says Jonathan Harris, a commercial litigation partner at New York's Harris, Cutler & Houghteling.

Harris is counsel to Woodside, California, investment management firm Aurum STS Aggressive Trading LLC. During the fall of 2008, Harris and his cocounsel at Steptoe & Johnson contend that Société Générale breached agreements on warrants the bank issued to Aurum in 2003 and 2004, and unilaterally imposed new terms. Aurum filed an arbitration claim in June 2009 against SocGen, and in October a three-arbitrator panel awarded the company $61 million—the second-largest award this year. SocGen has said that it disagrees with the decision, but its lawyers at Latham & Watkins have not sought to vacate it.

Big awards like Aurum's have become more common in the wake of the subprime meltdown. Six of the ten largest securities arbitration awards were handed down during the last two years, according to Securities Arbitration Commentator Inc. In February 2009 FINRA awarded $406.6 million to ­STMicroelectronics N.V. in a fight with Credit Suisse Group AG, followed by a $80.8 million award to Kajeet Inc. against UBS AG in August 2010, and a $54.1 million payout to Colorado patent litigator Gerald Hosier and others in April 2011 over a squabble with Citigroup.

The largest award of 2011 involved options trading firm Rosen Capital Management LLC, which lost $90 million in fall 2008. Rosen's lawyers at Quinn Emanuel Urquhart & Sullivan blamed its prime broker Merrill Lynch & Co., Inc., which had placed ill-fated margin calls amid a crisis that had just weeks earlier thrown it into a government-brokered $50 billion sale to Bank of America Corporation. In July a three-arbitrator panel awarded Rosen $63.7 million. Merrill's lawyers at Wilmer Cutler Pickering Hale and Dorr moved in August to vacate the award.

Courts, though, rarely overturn arbitration awards. The Goldman Sachs Group, Inc. and its lawyers at Schulte Roth & Zabel unsuccessfully fought to vacate a $20.6 million FINRA award that resulted from the bank's alleged failure to detect fraud at the bankrupt hedge fund Bayou Group LLC. In November 2010 Manhattan federal district court judge Jed Rakoff denied Goldman's petition, saying that "having voluntarily chosen to avail itself of this wondrous alternative to the rule of reason, [Goldman] must suffer the consequences."

Banks are fighting over who is permitted to bring claims to ­FINRA. UBS's lawyers at Debevoise & Plimpton, with the backing of the Securities Industry and Financial Markets Association, argued that West Virginia University Hospitals, Inc., as an issuer, could not force the bank, as an underwriter, to arbitrate claims of more than $329 million in auction-rate securities. But in September the U.S. Court of Appeals for the Second Circuit rejected that narrow reading of who FINRA defines as a "customer."

In the Abbar case, Citigroup has similarly filed a lawsuit in Manhattan federal district court seeking to enjoin the arbitration. Milbank's Edelman, Citi's lawyer, declined to comment. But Citi in a statement says the Abbars were not clients of the U.S.–based broker-dealer Citigroup Global Markets Inc., so "their claims should not be subject to FINRA arbitration."

In the meantime, FINRA is adjusting to the bigger cases. In early 2012 it plans to implement a pilot program designed for cases with more than $5 million at stake, Fienberg says. The program, which will be tested in the Northeast and on the West Coast, will formalize the ways that FINRA ­allows parties to modify arbitration procedures. For example, parties could pick arbitrators who do not normally handle FINRA cases, such as former judges. Parties could agree to take depositions, which FINRA generally does not allow. And both parties would be able to pay arbitrators more than the $200 honorarium FINRA typically pays per hearing, a relief to some lawyers who worry about how the low pay might affect the complex cases.

And the Abbars' lawyer? Rich promises more cases from himself as well. "We have other multimillion-dollar cases in the works," he says. "This is not going to be an anomaly."

Top Five Securities Arbitration Awards
Sanchez et al. v. Enrique Perusquia $429.5M
STMicroelectronics N.V. v. Credit Suisse Securities (USA) LLC 406.6M
Kajeet Inc. v. UBS Financial Services Inc. 80.8M
212 Investment Corp. et al. v. Myron Kaplan 74.8M
Rosen Capital Partners LPv. Merrill Lynch Professional Clearing Corp. 63.7M
Source: Securities Arbitration Commentator Inc.

November 30, 2011

Bloomberg Piece on $383M Client Case v. Citigroup

Below is Bloomberg piece about our client's $383 million FINRA arbitration claim against Citigroup Global Markets, Inc. related to hedge funds, private equity, and derivatives.


Citigroup Saudi Deal Haunts Pandit
By Donal Griffin - Nov 30, 2011

Saudi businessman Ghazi Abbar, who claims in an affidavit he lost $383 million of his family’s fortune on investments with Citigroup Inc., was sold one of the transactions even though the bank questioned his ability to properly manage them, according to an internal memo.

The memo, an exhibit in arbitration proceedings with the Financial Industry Regulatory Authority, warned that Abbar didn’t have the risk-management capability of the large hedge funds that were typical clients of the bank’s “hybrid” desk, which in 2006 was trying to persuade him to move his family’s money into complex derivative securities.

Soured deals struck with wealthy clients are haunting Citigroup Chief Executive Officer Vikram Pandit. Finra awarded $54 million in April to customers of the New York-based bank’s municipal-bond hedge funds, and in February, Brazilian investor Bernardo Valentini sued the bank, claiming he lost more than $24 million on derivatives Citigroup told him had “no risk of loss.”

“The case is a setback in Pandit’s vision of delivering financial services with a higher sense of responsibility to customers,” said David Knutson, a credit analyst with Legal & General Investment Management in Chicago. “As each issue bubbles up, analysts or providers of capital to the firm have to say, ‘OK, what other tape bombs are lying in the dusty lines of Citi’s balance sheet?’”
Citigroup’s Lawsuit

Citigroup denies Abbar’s allegations, saying in a lawsuit that he was a sophisticated investor who knew the risks when he turned over control of his hedge-fund investments to the bank in exchange for derivatives that mimicked their performance. The bank has sued its former client in federal court in Manhattan to block the arbitration, arguing Finra has no jurisdiction because the deals were handled outside the U.S.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment further.

According to the Finra claim, Citigroup had never before sold the investment idea to individual investors like Abbar, 56, whose family made its fortune in Saudi Arabia importing food and building businesses linked to tourism, aviation, cold storage, ship bunkering and oil. The hybrid team, which also arranged loans when clients wanted to leverage their bets, made about $200 million for the New York-based bank in 2007, people familiar with matter said.

Based in Jeddah, a port city on the Red Sea about 50 miles from Mecca, the Abbars were among the largest merchants in Saudi Arabia, with annual revenue of about $500 million, according to the internal memo. Family members had served in senior positions under the kingdom’s late rulers, kings Faisal and Saud, according to the memo.
Pandit Meeting

Citigroup executives lined up to court Abbar, who oversaw the family’s investments, according to the Finra complaint. Pandit, 54, met with Abbar after joining Citigroup in 2007 as part of the company’s effort to maintain a relationship with the family. So did Chief Operating Officer John Havens, former wealth management boss Sallie Krawcheck and current global markets head Francisco “Paco” Ybarra, according to the complaint.

Abbar moved about $350 million of his family’s wealth to Citigroup from Deutsche Bank AG (DBK) in 2006, and Citigroup rewarded the banker who persuaded Abbar to make the shift, Mohanned “Ned” Noor, with a trip to Hawaii, according to the claim. Abbar was introduced to the hybrid desk, which was growing under Pandit’s predecessor, Charles “Chuck” Prince. Prince was trying to boost revenue by taking more trading risk.
Burns, Mathur

The hybrid group was run by Richard Burns, a London-based Citigroup veteran, according to two people familiar with the group who asked not to be named because they aren’t authorized to speak about the matter. Burns oversaw structuring and trading of hybrid derivatives, securities whose values are tied to different kinds of underlying assets. Samir Mathur was head of hybrid trading for the group.

Abbar wanted a “simple loan structure” to finance some of the family’s hedge-fund investments, he claims. Over meals in restaurants in London and New York, the hybrid team persuaded Abbar to instead transfer control of some of those assets to Citigroup, according to one of the people familiar with the matter. The desk then created the hybrid derivative that would mimic the performance of those funds.

Abbar claims he invested $383 million in the product and a separate private-equity financing deal, which included funds he injected after his initial transfer from Deutsche Bank. Both transactions collapsed after markets plunged in late 2008.
Tiger Management

Abbar had more experience with hedge funds than most. He began investing his family’s fortune after he graduated with a master’s degree in business administration from Harvard University in 1978. He built close relationships with hedge-fund managers such as Julian Robertson of Tiger Management LLC and joined the board of one of the Tiger funds in 1997, according to Fraser Seitel, a spokesman for Tiger Management. Abbar said he also had relationships with Stephen Cohen, founder of SAC Capital Partners LP, billionaire Paul Tudor Jones and Louis Moore Bacon.

Still, as an individual, he was an unusual client for the desk, which typically dealt with large hedge funds and so-called fund of funds firms that make bets on other investment funds. Customers included Man Group Plc (EMG), the world’s biggest hedge fund; Tudor Investment Corp., Tudor Jones’s hedge fund; and Saudi Arabian financial-services firm Saad Group, according to the people familiar with the matter. Abbar didn’t have those firms’ resources, the bank said in the memo.
Operates ‘Alone’

“The Client is not like the typical fund of funds client the desk is used to dealing with,” according to the memo. “The Client does not maintain the extensive risk, due diligence and operational infrastructure that exists at most of the larger fund of funds. While Ghazi is experienced with alternative investments, he operates more or less alone with advice from his friends and industry contacts.”

Abbar’s lack of risk management concerned some Citigroup executives before he bought the product, according to one person familiar with the deal. Members of the hybrid desk concluded that his financial experience gave him the ability to manage the risks, and the bank approved the deal.

“Ghazi has the ability to understand the risks and rewards of the transactions,” Citigroup wrote in the internal memo.

After the deal went through, members of the hybrid team were encouraged to sell similar products to other wealthy individuals, according to the person, who didn’t want to be named because the matter is private.
Hedge Funds

Abbar’s hedge-fund investment collapsed in 2008 as Lehman Brothers Holdings Inc. failed and funds around the world plunged. The Eurekahedge Hedge Fund Index dropped almost 12 percent in the second half of the year, Bloomberg data show. Many investors who used derivatives to multiply their bets were wiped out, according to Satyajit Das, author of “Extreme Money: Masters of the Universe and the Cult of Risk” (FT Press, 2011).

The leverage used to increase derivatives bets “is like playing Russian roulette with six bullets in the chamber,” said Das, who isn’t familiar with Abbar’s case.

The failed investments erased the “considerable family wealth” the Abbars had placed with the bank and damaged relationships within the family, according to the claim. Citigroup now stands to gain $70 million as it sells off the hedge-fund assets at the center of the product, Abbar alleges.
‘Nuclear’ Products

“A lot of these highly leveraged, highly structured products, I analogize them to nuclear power,” said John Lovi, an attorney with Steptoe & Johnson LLP who handles cases involving derivatives and isn’t involved in the Abbar case. “There’s no doubt that it’s complicated and you better have your best and brightest on it and be watching it closely because when it goes bad, it goes really bad.”

The collapse of the deal came as Citigroup itself was posting record losses caused by the financial crisis and its investments in collateralized debt obligations, another form of derivative. The bank lost a total of $29.3 billion in 2008 and 2009 and took a $45 billion taxpayer bailout. Senior executives allowed their hunt for more revenue to eclipse proper risk management, according to a 2008 Federal Reserve Bank of New York inspection report.

Pandit, who took the top job in December 2007, disbanded part of the hybrid team in 2008 and began to wind down the structuring side of the business, the people said. He has since begun an effort to convince investors that the bank’s culture has changed to one of “responsible finance.”
New Team

“We have a new management team, a new governance structure,” Pandit said in a video on the bank’s website, called “We’re completely focused around the client. Each and every one of our businesses is structured and always thinks about what is it that my clients need and how do I make sure I deliver all of Citi to each and every one of my clients.”

Citigroup advanced $1.44, or 5.7 percent, to $26.68 at 10:46 a.m. in New York trading. The shares slid 47 percent this year through yesterday, compared with a 32 percent drop in the 24-company KBW Bank Index. (BKX)

Abbar is seeking $383 million. The largest award ever granted by Finra was $406.6 million for STMicroelectronics NV against Credit Suisse Group AG (CS) in 2009, according to Finra records.

Citigroup was on the wrong side of the largest award for individual investors in April, when Finra ruled in favor of a group of wealthy, Aspen, Colorado-based customers’ $54 million claim, the records show. The clients said Citigroup misled them about the level of risk tied to investments in the bank’s municipal-bond hedge funds.
‘Guaranteed’ Investment

In a suit brought in Manhattan federal court, Brazilian client Bernardo Valentini claims he lost more than $24 million on derivatives the bank told him were “guaranteed.” He was convinced of the merits of the deal by two Citigroup private bankers, who visited his office in Curitiba and said they “wanted to get to know him,” he said in the court filings. Citigroup denied the allegations.

Banks that sell complex derivatives to wealthy customers often face complaints when the deals don’t work out as planned, said Das, the banker turned author.

“Clients are always good winners,” Das said. “The moment they lose money, they suffer a 100-point drop in IQ.”
Food Imports

Today, Abbar runs the largest of the family’s businesses, Abbar Cold Stores, which imports frozen foods, fresh fruits and cheeses into Saudi Arabia, according to John Rich, an attorney in New York with Rich, Intelisano & Katz LLP, which represents the family.

Some of the executives mentioned in the case have since left Citigroup, including Ned Noor, the Geneva-based private banker who persuaded Abbar to move his money to the bank in the first place. He declined to comment on Abbar’s claims.

Richard Burns and Samir Mathur continue to work in derivatives for Citigroup. They also declined to comment.

The Abbar case is Citigroup Global Markets Inc. v. Abbar, 11-CV-6993; the Valentini case is Valentini et al v. Citigroup Inc. (C) et al, 11-CV-01355. Both cases are in U.S. District Court, Southern District of New York (Manhattan).

November 23, 2011

Private Shares Market - Little Disclosure

Last week, we wrote about private shares fraud and how we think there may be significant litigation and/or arbitration in the future in this space. Today's NY Times has a very good Dealbook piece (below) by the "Deal Professor" about the lack of disclosure in the private shares markets of SharesPost and SecondMarket. The most important sentence: "The lack of information combined with this illiquidity contributes to the volatility and mispricing of shares." That's spot on. We're talking about large investments in unregistered shares within an unregulated market. Major exposure to potential fraud. Major.

November 22, 2011, 4:37 pm
Private Markets Offer Valuable Service but Little Disclosure
Harry Campbell

Information is the lifeblood of capital markets. In the movie “Wall Street,” Gordon Gekko demanded confidential information from a young would-be Master of the Universe, Bud Fox, played by Charlie Sheen. The value of stocks is based on information, which is why securities laws are intended to ensure that all investors have at least minimum amounts of information.

Private, closed markets like SharesPost and SecondMarket aid in the cause of market transparency, providing platforms to trade shares of companies that have yet to go public. At the same time, the limited amount of information available to investors in these markets raises some questions. Regulators, which have been looking at these markets, may be right to be concerned.

Both SharesPost and SecondMarket, to be sure, are aimed at sophisticated investors, who can buy shares in up-and-coming companies, mainly Internet start-ups, before their initial public offerings. The two markets have cut their teeth on connecting buyers and sellers in hot pre-I.P.O. tech companies like Facebook and Groupon.

Yet gaining entry to both markets is simple. Before trading or being allowed full access to the market’s platforms, a user must first register and attest to being an accredited investor under the securities laws. This generally means that the user must have an individual income greater than $200,000 a year or a net worth of more than a million dollars. Lying on the Internet is easy, though, as anyone who has ever been on a dating site knows.

Both SharesPost and SecondMarket review the potential buyer’s declaration to ensure that these standards are met, including requiring government identification, but neither appears to ask for tax returns or require independent verification of a person’s salary and net worth. After being certified, an investor can bid to buy shares of these companies.

The problem is that potential buyers sometimes have little information on which to base their purchase. Public companies are required to make copious disclosures to the Securities and Exchange Commission, including audited financials that are reviewed by the S.E.C. The agency recently prompted Groupon and Zynga to revise their accounting disclosures before their I.P.O.’s.

SecondMarket changed its business model in 2010 to require companies to provide two years of audited financials and other information to potential bidders. The exception is Facebook, the most actively traded stock on SecondMarket. For Facebook, there is no information requirement. Shareholders fly blind, relying on anything they can glean from almost anywhere but the companies themselves.

SharesPost does not appear to provide the information that SecondMarket requires. SharesPost strives to fill this gap by arranging to have privately prepared research reports posted on its site. But without full information, the research providers cannot do any better than buyers in accurately pricing stocks. The result is volatility.

Facebook’s value on SharesPost has fluctuated wildly. In January, Facebook shares traded at a price that gave it an implied market value of more than $141 billion . Less than one month later, Facebook shares traded at an implied value of about $71 billion. Four days later it was at about $87 billion. Since that time, Facebook shares have traded in a range that values the company at $73 billion to $87 billion.

This summer, Groupon was reportedly trading on the private markets at an implied market valuation of about $20 billion. Groupon is now trading at a value of about $13 billion.

The problem is not just overvaluation. In January, Bloomberg News reported that shares of LinkedIn were trading on the private markets at $30 apiece, valuing the Internet company at $2.51 billion. LinkedIn is now public and trading at a market valuation of about $6.7 billion.

SharesPost appears to provide more market information than SecondMarket. It posts all of the prices of its trades and has enlisted research providers to assist investors.

One of the largest research providers on SharesPost traditionally was Global Silicon Valley Partners.

Brad Flynt, a law student at the University of Georgia School of Law, has written an unpublished paper questioning the independence of Global Silicon Valley Partners.

The research provider is affiliated with the Global Silicon Valley Corporation, a publicly traded company that is active in purchasing shares on the private markets. G.S.V.C. is headed by Michael Moe, who is also a director of SharesPost.

Last spring, Global Silicon Valley Partners published a research note that estimated Facebook shares at $22.24 to $22.57 apiece, valuing Facebook at $52.3 billion to $53.1 billion. About this time G.S.V.C. purchased 225,000 shares of Facebook at $29.28, valuing Facebook at roughly $68 billion.

This raises conflict-of-interest issues because Global Silicon Valley Partners set a low valuation target at the same time its affiliates, Mr. Moe and G.S.V.C., were buying shares at a higher one.

In an interview, Mr. Moe said that Global Silicon Valley Partners was now defunct and that, though this was not disclosed in the research reports, Global Silicon Valley Partner’s research was always independently prepared by Candlestick Advisers, a consulting and advisory firm based in India.

Mr. Moe said that there was no economic relationship between Candlestick and G.S.V.C. but rather a personal one between himself and Candlestick’s owners. According to Mr. Moe, Candlestick is compensated by SharesPost for its research reports but neither he nor G.S.V.C. received money from Candlestick. SharesPost declined to comment on the relationship between Mr. Moe, G.S.V.C. and its research providers, instead referring me back to Mr. Moe. Candlestick Advisers did not reply to a request for comment.

It all raises questions about what exactly shareholders know and how they know it on these markets.

SharesPost appears to be trying to do the right thing by putting more information out there. Given the lack of information on the companies itself, however, this is a roll of the dice. And there needs to be more disclosure about these research providers that would explain their motivations and compensation.

This is also an illiquid market. Except for trades in Facebook, shares of other private companies appear to be infrequently bought and sold. Twitter and Zynga do not appear to be available for purchase on SecondMarket. The last trade in Zynga on SharesPost was on Sept. 9. Twitter appears to have traded only once this year on SharesPost. The lack of information combined with this illiquidity contributes to the volatility and mispricing of shares.

The S.E.C. thus faces a quandary. These private markets offer an increasingly desirable service by providing an outlet to sell shares in companies that do not want to subject themselves to the increased regulation and scrutiny that comes with being public.

But it is too often all or nothing in terms of information. Congress is considering a number of bills intended to make trading in these markets easier, and the S.E.C. is also reviewing its rules governing private markets. Congress may also want to consider enacting requirements for companies with shares actively trading on these markets to disclose sufficient information to allow informed trading. SecondMarket has already taken a step in the right direction but could do more and provide data on purchases and sales.

Investors will otherwise remain in the dark, gambling without information.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

November 18, 2011

Private Shares Fraud - Just the Beginning?

Private shares fraud? We've been talking about it internally for months. Unregulated space where investors buy and sell private shares often of pre-IPO companies such as Groupon and Facebook. We think the potential fraud claims will occur in the pricing of the private shares. The seller, perhaps a company insider, plays around with valuations. But the Dealbook story posted below of John Mattera is an old school fraud. He allegedly stole people's money by promising to sell them his personal private shares in high flying pre-IPO companies. Here's the problem for his "investors": may be no one to collect from. Mattera likely going to jail. His fund is finished. Good luck trying to sue and collect from the unregistered Long Island firm and/or its principals and the escrow service. What a shame. Private share investors need to be careful out there. Even in the more legitimate secondary private share markets run by larger firms. Due diligence is king.

DealBook - A Financial News Service of The New York Times
November 17, 2011, 4:32 pm
Manager Who Claimed to Own Facebook Shares Charged With Fraud
John A. Mattera was arrested in Florida on Thursday.

It may be the new, new thing in fraud.

John A. Mattera, 50, a Florida-based investment manager, was arrested Thursday on charges of running an $11 million, two-year fraud that falsely promised investors access to coveted shares of Groupon, Facebook and other private companies.

Mr. Mattera, the head of the Praetorian Global Fund, claimed to own more than a million shares each of Facebook and Groupon, according to a complaint filed in Federal District Court in Manhattan. He represented to investors that those holdings, bought on the private markets, would surge in value after the companies went public, the complaint said. Prosecutors allege the fund didn’t have such investments.

Instead, Mr. Mattera used millions of dollars of investor money to finance his lavish lifestyle, the complaint alleges. Among Mr. Mattera’s expenses: more than $245,000 for home furnishings and interior design services, more than $11,000 for tailored clothing and more than $17,000 for “boat-related expenses.”

Prosecutors have charged Mr. Mattera with one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, one count of wire fraud and one count of money laundering. The Securities and Exchange Commission is also taking civil action against Mr. Mattera.

“As alleged, John Mattera duped investors into believing they had bought rights to shares of coveted stock in Facebook and other highly visible and attractive companies which had not yet gone public,” Preet S. Bharara, the United States attorney in Manhattan, said in a statement. “With today’s charges, his charade is exposed and he will be held to account for his alleged crimes.”

Carl F. Schoeppl, Mr. Mattera’s lawyer in the criminal case, declined to comment.

The charges against Mr. Mattera come as investors clamor for shares of newly public Internet companies, a frenzy that echoes the early days of the last dot-com boom in the 1990s. Getting into a company early can be lucrative. Groupon, the daily deals site, jumped more than 30 percent on its first day of trading.

To attract clients, Mr. Mattera allegedly enlisted the help of Joseph Almazon, an unregistered broker with Spartan Capital Partners on Long Island, who solicited investments for Mr. Mattera’s Praetorian funds using LinkedIn advertisements that offered customers “the opportunity to buy pre-I.P.O. shares” in Facebook, Groupon, Twitter, Zynga and other companies. Mr. Almazon promised that “unlike most of the other investment banking firms, we let you sell your shares right at the open” — referring to the first day the company goes public, according to the civil action.

After investors signed up, their money was transferred to an escrow service headed by John R. Arnold. Mr. Arnold, in turn, passed the money along to himself and to Mr. Mattera, as well as to accounts registered to Mr. Mattera’s mother and wife, the complaint said.

Mr. Mattera is no stranger to the law. In 2009, he was accused by the Securities and Exchange Commission of evading registration requirements by backdating certain promissory notes. He paid a penalty of $140,000 and was barred from trading penny stocks, shares of smaller public companies that are worth less than $1 apiece.

Three of the current criminal charges against Mr. Mattera, who was arrested at his home in Fort Lauderdale, Fla., on Thursday, carry a maximum sentence of 20 years in prison each. He faces a maximum sentence of five years on the conspiracy charge.

Mr. Mattera and his associates “exploited investors’ desire to get an inside track on a wave of hyped future I.P.O.s,” George S. Canellos, the S.E.C.’s New York regional director, said in a statement. “Even as investors believed their funds were sitting safely in escrow accounts, Mattera plundered those accounts to bankroll a lifestyle of private jets, luxury cars, and fine art.”