The authors explain how competitive Goldman is and how profits and risk management drive the firm. They go on to explain how difficult it will be for Goldman to handle the backlash of paying out huge bonuses in an environment of double digit unemployment rates.
For a long time, Goldman was by far the gold standard of investment firms. Much of the financial crisis stems from every other firm trying to be like Goldman and making huge, leveraged bets with proprietary capital. The difference has been that Goldman has always one stop ahead of the rest of the Street. Partly due to the “market color” it receives as an investment bank, prime broker, clearing firm, counter party, and trader, Goldman somehow is nimble enough to know when to stop on a dime and bet the other way. Merrill, Citi, Morgan and the rest could never do that. Merrill, especially, was three steps behind and was late to the CDO game just like it was late to the prop trading game and the internet craze.
Goldman is now in a bind. It’s entire business model is based upon paying employees who generate profits for the firm. It has generated huge profits using cheap money. Did the world really expect Goldman not to take advantage of the low cost of borrowing and two less competitors in the market place (Lehman and Bear)? Now, the press will hammer Goldman if the firm follows its normal course of business. But if the Goldman trader who’s P&L is up $20 million for the year gets stiffed on his bonus, he’s leaving for a hedge fund. It’s that simple.
Have no fear though, Goldman is smart enough to figure a way out that no other firm has thought of. And haters can continue to hate Goldman just like baseball fans outside of New York hate the Yankees.
]]>A receiver was appointed for Medical Capital. Most recently, the SEC filed its First Amended Complaint on November 9, 2009 and the Receiver filed his Fourth Status Report. Both documents are available on the Receiver’s website at http://www.medicalcapitalreceivership.com/
The FINRA press release states disclosure records for former brokers will be available on BrokerCheck beginning November 30. It goes on to state, “This is an important step for investors and for investor protection," said FINRA Chairman and CEO Richard Ketchum. "Individuals previously barred by FINRA and other regulators have surfaced in a number of recent frauds in other parts of the financial industry that cost unsuspecting investors millions of dollars. It has never been more critical for investors to research the backgrounds of the financial professionals they deal with than it is today."
This is an important addition to the publicly available regulatory records of former brokers. Often times, permanently barred brokers, traders and salesmen will attempt to work at unregistered entities such as hedge funds. It is difficult for potential investors to do due diligence on a hedge fund manager without the historical BrokerCheck information. In the past, if a registered representative was out of the business for more than two years, a public investor had no access to the broker’s disciplinary record.
BrokerCheck is available at www.finra.org/brokercheck
Now, financial fraud news is general business news. Just look how Vanity Fair has scored huge every month with one strong financial story after another (Madoff, Fairfield Greenwich, Marc Dreier, Goldman Sachs and Morgan Stanley survival, etc.). Here is a little a look at what I’m presently reading, for better or worse. Today, I’ll focus on newspapers.
I start with the Financial Times. Worldly, smart, a cut above the rest for global coverage of finance. I particularly like Gillian Tett’s column and Greg Farrell’s Street coverage. I read the NY Times business section (mostly because it’s attached to the Sports section, but that’s a whole other issue). Gretchen Morgenson, Jenny Anderson, and newly appointed wonder kid Andrew Ross Sorkin, are all strong. No one covers investor protection better than Gretchen. And I love Ben Stein. However, it’s too bad the Times won’t throw more resources at its Street coverage. I also read the Wall Street Journal daily, especially on breaking finance news issues. Kate Kelley’s coverage of Bear Stearns collapse was award winning stuff. When the Journal sends its entire squadron on a topic, no one can top its finance coverage. I used to read the Post’s coverage but since Roddy Boyd left, it’s not as interesting.
Since The Economist calls itself a newspaper, I’ll include it in this section. The most intelligent weekly by far. Their in depth, forward looking analysis is unparalleled. It’s a bit daunting however on a weekly basis (like The New Yorker).
Bankruptcy litigation is booming amidst the flood of major bankruptcies filed in the U.S. We have seen more and more battles between bankruptcy trustees and receivers against the major worldwide banks. Since many of these cases are filed by and defended by law firms which often represent bulge bracket investment banks and broker dealers, it will be interesting to see how many international law firms will be conflicted out of handling such cases.
In the Lehman v. Barclays case, Jones Day represents the Debtor, Lehman in the Barclays matter. Weil, Gotshal & Manges, is Lehman's lead bankruptcy counsel, but is not handling the Barclays litigation. Boies, Schiller & Flexner is representing Barclays. David Boies’ firm’s website states, “We have been described by The Wall Street Journal as a "national litigation power--house" and by the National Law Journal as "unafraid to venture into controversial" and "high risk" matters.” This certainly qualifies.
]]>The SEC’s complaint (available on its website) is indeed far more broad than the charges lodged by the U.S. Attorneys’ Office in Brooklyn. It also reaches all of the way back to the beginning of the High Grade Fund’s existence as opposed to just the late 2006, early 2007 time period the prosecutors focused on. The prosecutors’ standard of proof of “beyond a reasonable doubt” is much stiffer than the SEC’s and civil litigants’ standard of “by a preponderance of evidence.” In order for Messrs. Cioffi and Tannin to re-enter the securities industry, they will have to defend the SEC action as well.
]]>According to news reports, the statement of claim alleged that the funds were not managed conservatively and that Morgan Keegan misrepresented their volatility. Jim Kelsoe, the funds manager allegedly made numerous representations to the investor that the RMK funds were safe.
Morgan Keegan received a Wells notice in July from the SEC and the tide has seemingly changed in the arbitration forum. Our firm represent investors with RMK claims. According to a Morgan Keegan spokesman, despite the loss, Morgan Keegan will continue a vigorous defense of all claims. We shall see.
Morgan Keegan has now lost many FINRA arbitrations in the last six months related to the Regions Morgan Keegan funds which lost significant value in 2008. Many law firms around the U.S., including our firm, have been retained by investors who lost money in the Regions Morgan Keegan funds.
The funds were run by Jim Kelsoe, the chief-fixed income investment officer of the Memphis-based brokerage's Morgan Asset Management. The seven mutual funds include four Regions Morgan Keegan closed-end funds: Advantage Income Fund, High Income Fund, Multi-Sector High Income Fund and Strategic Income Fund; and three open-end funds: Regions Morgan Keegan Select Short Term Bond Fund, Intermediate Bond Fund and High Income Fund.
Morgan Keegan represented the Regions Morgan Keegan funds as low-risk bond funds. They turned out to be highly concentrated in subprime mortgage-backed securities and CDO's. The losses are astounding. For example, The Select High Income lost 75% through February 28, 2008 and the Select Intermediate Bond lost 84%.
It will be interesting to see if Morgan Keegan attempts to resolve some of the over 100 pending arbitrations now that they are consistently getting hammered.
Galleon Wiretaps Rattle Hedge Funds as Insider Trading Targeted
Oct. 26 (Bloomberg) -- First came the biggest bear market since the 1930s, then Bernard Madoff's $65 billion Ponzi scheme and the threat of increased regulation. Now hedge funds have a new concern: getting caught on tape as the government expands its use of wiretaps to ferret out insider trading.
Prosecutors, using secretly recorded phone conversations for the first time against hedge funds, alleged Oct. 16 that billionaire Raj Rajaratnam and five others made $20 million by swapping material inside information on companies such as Hilton Hotels Corp. and Google Inc. They may charge at least 10 more people soon, people familiar with the matter said last week.
Rajaratnam, founder of New York-based Galleon Group LLC, regularly talked to hundreds of contacts, including other traders, according to people who know him. His arrest rattled hedge-fund managers, who are questioning whether legitimate discussions caught on the tapped lines will draw scrutiny, say lawyers who've fielded such queries. A broader worry: whose phones are being monitored as prosecutors and U.S. Securities and Exchange Commission continue their probes?
"The word wiretap strikes fear in the hearts of everyone, even the innocent," said Brad Balter, who runs Balter Capital Management LLC, a Boston-based firm that allocates clients' money to hedge funds.
Ross Intelisano, an attorney with Rich & Intelisano LLP in New York, said he received a call from an executive at a $1 billion hedge fund who was considering hiring a company to test his firm's phones for listening devices. The client asked what to do if the firm found any. "Do we go to the police?" the executive asked, according to Intelisano.
The executive instructed his colleagues to be extra careful about what they say on the phone, not because they are breaking the law, but because they are fearful that any conversation about stocks could be misconstrued, Intelisano said.
Calls Aren't Safe
"After the Bear Stearns case, e-mails aren't safe, and now phone calls aren't safe," Intelisano said. "From now on, people are going to be meeting for lunch."
Prosecutors used e-mails to build their case against former Bear Stearns Cos. hedge-fund mangers Ralph Cioffi and Matthew Tannin, who are currently on trial in Brooklyn for misleading investors about the health of two funds that collapsed in 2007. It's the biggest trial stemming from a U.S. probe of banks and mortgage firms whose losses in subprime loans and related securities total at least $396 billion.
For hedge-fund managers whose knowledge of wiretaps may have been limited to "The Wire," the HBO drama in which Baltimore police eavesdrop on drug dealers, electronic bugging is a new reality of their industry as U.S. Attorney Preet Bharara's new Complex Frauds Unit targets white-collar crime.
Prosecutors said they turned to wiretaps because of the ease with which hedge funds can hide when trades were based on illegal tips. At a bail hearing on Oct. 16, Assistant U.S. Attorney Josh Klein told a judge that Rajaratnam instructed others to fabricate "e-mail trails" that would explain why they executed corrupt trades.
"There were consistent endeavors to mask" the trades, Klein said in court.
The case against Rajaratnam, 52, who said last week he is innocent, is the largest since takeover investor Ivan Boesky and investment banker Dennis Levine were convicted in a crackdown two decades ago. Thirteen people were criminally charged in a series of schemes that investigators said stretched over five years, yielded $15 million in illegal profits and also involved employees at UBS AG and Bank of America Corp.
Cooperating Witness
Rajaratnam allegedly obtained nonpublic corporate information from a ring that included a cooperating witness. That witness was identified by a person familiar with the investigation as Roomy Khan, 50, who worked for Galleon in the late 1990s. Khan couldn't be reached for comment.
The other defendants are Rajiv Goel, who worked at Intel Capital as a director in strategic investments; Anil Kumar, who worked as a director at McKinsey & Co.; International Business Machines Corp. executive Robert Moffat; Mark Kurland, co-founder of New Castle Funds LLC, a former Bear Stearns Cos. hedge fund; and Danielle Chiesi, a former consultant at New Castle. Their attorneys have said their clients aren't guilty.
Quadrum Capital Management LLC, a New York-based hedge-fund firm started by Richard Grodin, has been subpoenaed as part of the investigation, according to a person familiar with the matter, who asked not to be identified because the information is private. Grodin, a former portfolio manager at Steven Cohen's SAC Capital Advisors LP, declined to comment.
The subpoena, reported Oct. 24 by the Wall Street Journal, is a request for information and doesn't imply wrongdoing on the part of Grodin or Stamford, Connecticut-based SAC. Before Quadrum, Grodin founded Stratix Asset Management. Cho Beng Lee, identified by the Wall Street Journal as a cooperating witness in the Galleon case, worked at Stratix as well as SAC. Lee and Grodin left SAC in early 2004, according to Jonathan Gasthalter, a spokesman for SAC.
Industry Recovery
The $1.4 trillion hedge-fund industry is recovering after posting a record loss averaging 19 percent in 2008, according to data compiled by Hedge Fund Research Inc. Funds have returned 17 percent this year, the Chicago-based firm's data show.
Confidence in the industry was shaken by the December arrest and subsequent conviction of Madoff, who victimized hedge funds and individual investors and whose fraud triggered renewed efforts by Congress and the SEC to regulate the private investment partnerships.
`Substantial Resources'
Former federal prosecutor Steven Peikin, who headed the securities fraud unit in the U.S. Attorney's Office in the Southern District of New York, said investigators have long relied on advanced techniques in battling white-collar crime. What's new is the focus on hedge funds and the use of labor- intensive phone taps, he said in an interview. Last year, 84 percent of the 1,891 authorized taps were used in drug-related cases, according to a report by the Administrative Office of U.S. Courts, which provides support to the federal judicial branch.
"It's a declaration that they want to submit substantial resources to this," Peikin, now an attorney at Sullivan & Cromwell LLP in New York, said of the use of wiretaps. "Preet is continuing a long and proud tradition."
Wiretaps conducted in 2008 intercepted an average of 2,707 conversations, according to the 2009 report from the U.S. courts office. Those conversations involved an average of 92 people. About one in five were incriminating.
Agents monitoring the calls are supposed to make an effort to listen and record only conversations that are related to the criminal conduct, said Eugene O'Donnell, a law professor at the City University of New York's John Jay College of Criminal Justice.
Stop Listening
If the subjects start talking about unrelated topics, agents are supposed to stop listening, though they will check back every few minutes, said O'Donnell, who is a former state prosecutor and has worked with wiretaps.
"In this type of investigation the lines won't be easy to discern," between criminal and innocent conversations, he said, since much of the talk will involve company news and opinions on stocks.
Rajaratnam's phones were tapped starting in March 2008. Over time, O'Donnell said the agents probably reduced the number of conversations they recorded once they determined that certain people weren't party to the alleged crime.
Hedge-fund managers won't have to wonder forever whether they've been captured on tape, lawyers said. Once the wiretap is completed, those who were recorded and aren't targets of an investigation are notified by mail. Suspects may get a visit from federal agents.
]]>The additional heat from the SEC may force Schwab to think about settling the many pending FINRA arbitrations against the firm. There is also a pending class action which was certified by a federal court in California in August. The litigation bills are growing.
In May 2007, the Schwab YieldPlus Fund had more than $13 billion in assets. The YieldPlus family of funds were short-term bond funds that the firm marketed as conservative investments. However, they lost significant value in 2008 because they were loaded up with mortgage-backed securities.
The press has not focused much on two just as important aspects of the prosecution’s case which should be easier to prove. First, according to the prosecutors, on the investor conference calls, the managers told investors that there was a lesser amount of investor redemptions in the High Grade Funds than there actually were. Here, the government can argue that Cioffi and Tannin clearly knew how much in redemptions were put in by investors yet they told investors a different number so investors wouldn’t run for the exits. The redemption amounts are undisputed facts and much less susceptible to defense spinning.
Second, the prosecutors allege that Cioffi and Tannin used their personal investments in the Funds as part of their pitch to investors, to invest in, and stay invested in the Funds. In early 2007, the government alleges Tannin told investors he was adding to his position. Also, Cioffi redeemed $2 million of his own personal monies in 2007 and did not notify investors. The government can argue that Tannin lied to investors about his own personal investments in order to keep them in the Funds. Also, that Cioffi, because he used his own personal investments in the Funds as a marketing tool, wilfully omitted his $2 million personal redemption in order to induce investors to stay in the Funds. The longer the Funds were alive, the better chance Cioffi and Tannin could continue to reap their multi million dollar annual bonuses.
Both of the these arguments are not as reliant on what Cioffi and Tannin believed when they wrote certain emails. Since it is unlikely that Cioffi and Tannin will testify at the criminal trial, the prosecutors may want to focus more on the redemption issues.
]]>These e-mails could be extremely helpful in the government's case against Tannin. His trial is set for Oct. 13. The prosecutors can use Tannin’s e-mails to show his knowledge and intent that Tannin and a co-defendant Ralph Cioffi misled clients about the funds.
The e-mails may also be helpful for the many investors who have pending securities arbitration cases against Bear Stearns (our firm has multiple, significant arbitrations pending at FINRA). Since the notebook and Tablet PC of Cioffi and Tannin have gone missing, Tannin's newly discovered personal e-mail diary may be investors only chance to look into Tannin's thoughts regarding the funds.
]]>Luckily, most of the auction rate securities cases have been filed as arbitrations at FINRA. The PSLRA pleading requirements do not apply. And there is a very small chance that a claimant in a FINRA arbitration will have his case knocked out by a pre-hearing motion to dismiss because FINRA recently changed its rules severely limiting the grounds to file such a motion.
The upshot is that if you're an investor, whether retail or institutional, and you're stuck holding an auction rate security that was misrepresented to you as a cash equivalent, your best bet is to file an arbitration at FINRA. It's private, less costly than a court litigation, and should resolve between 12 and 18 months. We represent auction rate investors worldwide. Also, PIABA, a bar association of attorneys who specialize in representing investors, is a good place to find counsel. The auction rate securities fiasco has been a huge burden on small and large conservative investors. Securities arbitration seems to be the only intelligent solution.