Convicted bank fraudster and political operative had two of his homes put on the market by the U.S. Marshals. The following excerpt is from the U.S. Marshals web site:
“WASHINGTON – Two N.Y. properties that belonged to convicted fraudster Hassan Nemazee have been listed for sale by a U.S. Marshals contractor. One of the properties, a New York City duplex, is listed at $28 million and is the highest-priced forfeited asset that the U.S. Marshals have ever listed for sale. Nemazee was convicted for a $292 million fraud scheme and is currently serving 12 years in a federal prison. “
Fraud seems to be a very well paying profession. I wonder why my high school guidance councilor never told me that if I became a fraudster my cribs would be worth more than a lot of small towns in America.
This is a photo of the National Register of Historic Places listing with reference number 7000063
Thursday, March 31, 2011
Tuesday, March 29, 2011
SEC VS FDA INSIDER IN INSIDER TRADING CASE
My father always said that “honesty was the best policy”. Perhaps people who work in government should write “Honesty is the best policy” on a chalk board 1,000 times. In the following case the SEC alleges that an FDA chemist practiced trading stocks illegally in advance of drug approval decisions being made public. Take a look at the following case excerpts from the SEC web site:
" Washington, D.C., March 29, 2011 – The Securities and Exchange Commission today charged a U.S. Food and Drug Administration (FDA) chemist with insider trading on confidential information about upcoming announcements of FDA drug approval decisions, generating more than $3.6 million in illicit profits and avoided losses.
The SEC alleges that Cheng Yi Liang illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies. Some announcements concerned the FDA’s approval of new drugs while others concerned negative FDA decisions. In each instance, he traded in the same direction as the announcement. Liang went to great lengths to conceal his insider trading. He traded in seven brokerage accounts, none of which were in his name. One belonged to his 84-year-old mother who lives in China.
In a parallel action, criminal charges filed by the Department of Justice against Liang were unsealed today.
“Liang victimized both the investors who were disadvantaged by his theft of inside information and the American citizens whose trust he violated by placing private gain above public good,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
Daniel M. Hawke, Chief of the SEC’s Market Abuse Unit, added, “The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives. Many government agencies like the FDA routinely possess and generate confidential market-moving information. Federal employees who misappropriate such information to engage in insider trading risk exposing themselves to potential civil and criminal charges for violating the federal securities laws.”
According to the SEC’s complaint filed in the U.S. District Court for the District of Maryland (Greenbelt Division), Liang works in the FDA’s Center for Drug Evaluation and Research. Beginning as early as July 2006, Liang purchased shares for a profit before 19 positive announcements regarding FDA decisions, shorted stock for a profit before six negative announcements, and sold shares to avoid losses before two negative announcements.
For example, the SEC alleges that Liang traded in advance of an FDA announcement approving Clinical Data’s application for the drug Viibryd. Liang accessed a confidential FDA database that contained critical documents and information about the FDA’s review of Clinical Data’s application, and then used that information to purchase more than 46,000 shares of Clinical Data at a cost of more than $700,000. After the markets closed on Friday, Jan. 21, 2011, the FDA issued a press release approving Viibryd. Clinical Data’s stock price rose by more than 67 percent the following Monday and Liang sold his entire Clinical Data position in less than 15 minutes for a profit of approximately $380,000.
The SEC alleges that Liang used the trading profits for his own personal benefit. Checks totaling at least $1.2 million were written from the accounts he used for trading to a bank account in his name, to him or his wife directly, or to credit card companies to pay off balances in accounts in his or his wife’s name. Nearly $65,000 worth of checks were written from the brokerage accounts to car dealerships to purchase vehicles later registered to Liang and his wife.
The SEC’s complaint alleges that Liang violated Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction against future violations, disgorgement of unlawful trading profits and losses avoided plus prejudgment interest, and a financial penalty. The SEC’s complaint names Liang’s wife Yi Zhuge and the account holders for the seven trading accounts he used – Liang’s mother Hui Juan Chen, his son Andrew Liang, Shuhua Zhu, Zhongshan Chen, and Honami Toda – as relief defendants for the purpose of recovering ill-gotten funds to which they have no legitimate claim. Criminal charges by the Department of Justice against Andrew Liang were unsealed today in the District of Maryland.
The SEC’s investigation was conducted by Deborah Tarasevich, Carolyn Welshhans, Owen Granke, and Ricky Sachar – members of the SEC’s Market Abuse Unit in Washington, D.C. The SEC’s litigation effort will be led by Matthew Martens and David Williams. The SEC thanks the Department of Justice’s Criminal Fraud Section, the Federal Bureau of Investigation, the Department of Health and Human Services Office of Inspector General, and the U.S. Attorney’s Office for the District of Maryland for their ongoing assistance in this matter. The SEC’s investigation is continuing.”
It looks like Mr. Liang has a lot of problems. It is of course critical that this is not just a single case that the Department of Justice decides to investigate regarding fraud committed by government employees, officials and political appointees and the politicians who appoint them.
" Washington, D.C., March 29, 2011 – The Securities and Exchange Commission today charged a U.S. Food and Drug Administration (FDA) chemist with insider trading on confidential information about upcoming announcements of FDA drug approval decisions, generating more than $3.6 million in illicit profits and avoided losses.
The SEC alleges that Cheng Yi Liang illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies. Some announcements concerned the FDA’s approval of new drugs while others concerned negative FDA decisions. In each instance, he traded in the same direction as the announcement. Liang went to great lengths to conceal his insider trading. He traded in seven brokerage accounts, none of which were in his name. One belonged to his 84-year-old mother who lives in China.
In a parallel action, criminal charges filed by the Department of Justice against Liang were unsealed today.
“Liang victimized both the investors who were disadvantaged by his theft of inside information and the American citizens whose trust he violated by placing private gain above public good,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
Daniel M. Hawke, Chief of the SEC’s Market Abuse Unit, added, “The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives. Many government agencies like the FDA routinely possess and generate confidential market-moving information. Federal employees who misappropriate such information to engage in insider trading risk exposing themselves to potential civil and criminal charges for violating the federal securities laws.”
According to the SEC’s complaint filed in the U.S. District Court for the District of Maryland (Greenbelt Division), Liang works in the FDA’s Center for Drug Evaluation and Research. Beginning as early as July 2006, Liang purchased shares for a profit before 19 positive announcements regarding FDA decisions, shorted stock for a profit before six negative announcements, and sold shares to avoid losses before two negative announcements.
For example, the SEC alleges that Liang traded in advance of an FDA announcement approving Clinical Data’s application for the drug Viibryd. Liang accessed a confidential FDA database that contained critical documents and information about the FDA’s review of Clinical Data’s application, and then used that information to purchase more than 46,000 shares of Clinical Data at a cost of more than $700,000. After the markets closed on Friday, Jan. 21, 2011, the FDA issued a press release approving Viibryd. Clinical Data’s stock price rose by more than 67 percent the following Monday and Liang sold his entire Clinical Data position in less than 15 minutes for a profit of approximately $380,000.
The SEC alleges that Liang used the trading profits for his own personal benefit. Checks totaling at least $1.2 million were written from the accounts he used for trading to a bank account in his name, to him or his wife directly, or to credit card companies to pay off balances in accounts in his or his wife’s name. Nearly $65,000 worth of checks were written from the brokerage accounts to car dealerships to purchase vehicles later registered to Liang and his wife.
The SEC’s complaint alleges that Liang violated Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks a permanent injunction against future violations, disgorgement of unlawful trading profits and losses avoided plus prejudgment interest, and a financial penalty. The SEC’s complaint names Liang’s wife Yi Zhuge and the account holders for the seven trading accounts he used – Liang’s mother Hui Juan Chen, his son Andrew Liang, Shuhua Zhu, Zhongshan Chen, and Honami Toda – as relief defendants for the purpose of recovering ill-gotten funds to which they have no legitimate claim. Criminal charges by the Department of Justice against Andrew Liang were unsealed today in the District of Maryland.
The SEC’s investigation was conducted by Deborah Tarasevich, Carolyn Welshhans, Owen Granke, and Ricky Sachar – members of the SEC’s Market Abuse Unit in Washington, D.C. The SEC’s litigation effort will be led by Matthew Martens and David Williams. The SEC thanks the Department of Justice’s Criminal Fraud Section, the Federal Bureau of Investigation, the Department of Health and Human Services Office of Inspector General, and the U.S. Attorney’s Office for the District of Maryland for their ongoing assistance in this matter. The SEC’s investigation is continuing.”
It looks like Mr. Liang has a lot of problems. It is of course critical that this is not just a single case that the Department of Justice decides to investigate regarding fraud committed by government employees, officials and political appointees and the politicians who appoint them.
Monday, March 28, 2011
ONLINE PAYDAY LENDER PONZI SCHEME ALLEGED IN UTAH
The following is a case brought by the SEC which alleges fraud by a Utah pay day firm. The commingled funds of investors and the company seemed to have been used to set up a Ponzi scheme. The following is an excerpt from the SEC web site:
“Washington, D.C., March 28, 2011 – The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of two online payday loan companies and their owner charged with perpetrating a $47 million offering fraud and Ponzi scheme.
The SEC alleges that John Scott Clark of Hyde Park, Utah, promised investors astronomical annual returns of 80 percent on their investments in his companies – Impact Cash LLC and Impact Payment Systems LLC. Investors were told their money would be kept in separate bank accounts and used to fund payday loans and other aspects of the companies’ operations. However, Clark instead commingled investor funds into a single pool and used them to make unauthorized investments, pay fictitious profits to earlier investors, and finance his own lavish lifestyle.
“Investors were promised extraordinary returns while Clark was actually diverting their money to make such extraordinary personal purchases as a fully restored classic 1963 Corvette Stingray,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “Clark recruited new investors through referrals from earlier investors who thought the Ponzi payments they received were actual returns on their investments and sought to share the lucrative opportunity with family and business associates.”
The SEC alleges that in addition to buying multiple expensive cars and snowmobiles, Clark stole investor funds to purchase a home theater, bronze statues and other art for himself.
According to the SEC’s complaint filed in U.S. District Court for the District of Utah, Clark lured at least 120 investors into his scheme. Besides word-of-mouth referrals from earlier investors, Clark also recruited investors by attending trade shows in various states, attending payday loan conferences, and paying salespeople to locate potential investors to meet with Clark. Clark paid one salesperson between more than a half-million dollars over a multi-year period to locate potential investors and attend payday loan conferences and trade shows.
The SEC alleges that from at least March 2006 to September 2010, Clark and the Impact companies raised funds from investors for the stated purposes of funding payday loans, purchasing lists of leads for payday loan customers, and paying Impact’s operating expenses. Impact did not distribute a private placement memorandum or any other document disclosing the nature of the investment or the risks involved to investors. The SEC’s complaint charges Impact and Clark with fraudulently selling unregistered securities.
According to the SEC’s complaint, Clark routinely altered investor account statements provided to him by Impact’s accounting department to create artificially high annual rates of return. The altered account statements with purported profits were then sent to investors. Account statements to customers showed annualized returns varying from 30 percent to more than 200 percent.
In addition to the asset freeze approved late Friday, the court has appointed a receiver to preserve and marshal assets for the benefit of investors. The SEC’s complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and financial penalties from Impact and Clark.”
When people are living well beyond their means that usually means one of two things: either they are borrowing their way into bankruptcy or they are stealing the money in some way.
“Washington, D.C., March 28, 2011 – The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of two online payday loan companies and their owner charged with perpetrating a $47 million offering fraud and Ponzi scheme.
The SEC alleges that John Scott Clark of Hyde Park, Utah, promised investors astronomical annual returns of 80 percent on their investments in his companies – Impact Cash LLC and Impact Payment Systems LLC. Investors were told their money would be kept in separate bank accounts and used to fund payday loans and other aspects of the companies’ operations. However, Clark instead commingled investor funds into a single pool and used them to make unauthorized investments, pay fictitious profits to earlier investors, and finance his own lavish lifestyle.
“Investors were promised extraordinary returns while Clark was actually diverting their money to make such extraordinary personal purchases as a fully restored classic 1963 Corvette Stingray,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “Clark recruited new investors through referrals from earlier investors who thought the Ponzi payments they received were actual returns on their investments and sought to share the lucrative opportunity with family and business associates.”
The SEC alleges that in addition to buying multiple expensive cars and snowmobiles, Clark stole investor funds to purchase a home theater, bronze statues and other art for himself.
According to the SEC’s complaint filed in U.S. District Court for the District of Utah, Clark lured at least 120 investors into his scheme. Besides word-of-mouth referrals from earlier investors, Clark also recruited investors by attending trade shows in various states, attending payday loan conferences, and paying salespeople to locate potential investors to meet with Clark. Clark paid one salesperson between more than a half-million dollars over a multi-year period to locate potential investors and attend payday loan conferences and trade shows.
The SEC alleges that from at least March 2006 to September 2010, Clark and the Impact companies raised funds from investors for the stated purposes of funding payday loans, purchasing lists of leads for payday loan customers, and paying Impact’s operating expenses. Impact did not distribute a private placement memorandum or any other document disclosing the nature of the investment or the risks involved to investors. The SEC’s complaint charges Impact and Clark with fraudulently selling unregistered securities.
According to the SEC’s complaint, Clark routinely altered investor account statements provided to him by Impact’s accounting department to create artificially high annual rates of return. The altered account statements with purported profits were then sent to investors. Account statements to customers showed annualized returns varying from 30 percent to more than 200 percent.
In addition to the asset freeze approved late Friday, the court has appointed a receiver to preserve and marshal assets for the benefit of investors. The SEC’s complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and financial penalties from Impact and Clark.”
When people are living well beyond their means that usually means one of two things: either they are borrowing their way into bankruptcy or they are stealing the money in some way.
Sunday, March 27, 2011
In the following excerpt released by the SEC web site an Idaho company has been charged with fraudulently raising funds for a nuclear power project:
“ Washington D.C., Dec. 16, 2010 — The Securities and Exchange Commission today charged a self-described power company in Idaho with fraudulently raising funds for a $10 billion nuclear power project. The SEC is seeking an emergency court order to freeze the assets of the company and two executives.
The SEC alleges that Alternate Energy Holdings Inc. (AEHI) has raised millions of dollars from investors in Idaho and throughout the U.S. and Asia while fraudulently manipulating its stock price through misleading public statements that conceal the secret profits reaped by its CEO Donald L. Gillispie and Senior Vice President Jennifer Ransom. Gillispie has touted the company as a tremendous investment opportunity that could rival Exxon Mobil in profitability, despite the fact that AEHI has essentially no revenue and minimal operations.
The SEC suspended trading in AEHI stock earlier this week.
“In light of AEHI’s ongoing efforts to raise funding while promoting itself through a daily deluge of press releases, we needed to take immediate action to get to the bottom of the company’s misleading statements,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Documents we have obtained to date indicate a scheme to personally enrich the CEO at the expense of investors.”
According to the SEC’s complaint filed today in federal district court in Boise, AEHI’s fundraising was facilitated by a scheme to drive up the company’s stock price, both through frequent press releases (at least 87 in 2010 alone) and efforts of paid stock promoters to manipulate the stock price. The SEC alleges that the company has made multiple misrepresentations, including claims that its executives had such confidence in AEHI that they had not sold a single share of company stock. Records obtained by the SEC show that Gillispie and Ransom have instead secretly unloaded extensive stock holdings and funneled the money back to Gillispie.
The SEC’s complaint also alleges that AEHI reported to the SEC and investors that Gillispie’s compensation was $133,000. However, Gillispie has actually reaped approximately six times that amount in 2010.
The SEC’s complaint charges AEHI, Gillispie, and Ransom with violations of the anti-fraud provisions of the federal securities laws, and names as relief defendants two companies controlled by Gillispie and Ransom (Executive Energy Consulting LLC and Bosco Financial LLC). In a motion filed simultaneously with the enforcement action, the SEC seeks emergency relief for investors including an asset freeze and a temporary restraining order enjoining the defendants from further violations of the securities laws.
The SEC acknowledges the assistance of the Idaho Department of Finance and FINRA in this matter. The SEC’s investigation is continuing.”
“Going Green” might be the next mortgage fraud/crisis. A lot of money is sloshing around out there for “Going Green” projects and where there is money there will be some if not a lot of fraud.
“ Washington D.C., Dec. 16, 2010 — The Securities and Exchange Commission today charged a self-described power company in Idaho with fraudulently raising funds for a $10 billion nuclear power project. The SEC is seeking an emergency court order to freeze the assets of the company and two executives.
The SEC alleges that Alternate Energy Holdings Inc. (AEHI) has raised millions of dollars from investors in Idaho and throughout the U.S. and Asia while fraudulently manipulating its stock price through misleading public statements that conceal the secret profits reaped by its CEO Donald L. Gillispie and Senior Vice President Jennifer Ransom. Gillispie has touted the company as a tremendous investment opportunity that could rival Exxon Mobil in profitability, despite the fact that AEHI has essentially no revenue and minimal operations.
The SEC suspended trading in AEHI stock earlier this week.
“In light of AEHI’s ongoing efforts to raise funding while promoting itself through a daily deluge of press releases, we needed to take immediate action to get to the bottom of the company’s misleading statements,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Documents we have obtained to date indicate a scheme to personally enrich the CEO at the expense of investors.”
According to the SEC’s complaint filed today in federal district court in Boise, AEHI’s fundraising was facilitated by a scheme to drive up the company’s stock price, both through frequent press releases (at least 87 in 2010 alone) and efforts of paid stock promoters to manipulate the stock price. The SEC alleges that the company has made multiple misrepresentations, including claims that its executives had such confidence in AEHI that they had not sold a single share of company stock. Records obtained by the SEC show that Gillispie and Ransom have instead secretly unloaded extensive stock holdings and funneled the money back to Gillispie.
The SEC’s complaint also alleges that AEHI reported to the SEC and investors that Gillispie’s compensation was $133,000. However, Gillispie has actually reaped approximately six times that amount in 2010.
The SEC’s complaint charges AEHI, Gillispie, and Ransom with violations of the anti-fraud provisions of the federal securities laws, and names as relief defendants two companies controlled by Gillispie and Ransom (Executive Energy Consulting LLC and Bosco Financial LLC). In a motion filed simultaneously with the enforcement action, the SEC seeks emergency relief for investors including an asset freeze and a temporary restraining order enjoining the defendants from further violations of the securities laws.
The SEC acknowledges the assistance of the Idaho Department of Finance and FINRA in this matter. The SEC’s investigation is continuing.”
“Going Green” might be the next mortgage fraud/crisis. A lot of money is sloshing around out there for “Going Green” projects and where there is money there will be some if not a lot of fraud.
Saturday, March 26, 2011
RADIO MAN FINED FOR FRAUD BY SEC
The following excerpt from the SEC blog outlines a case and the punishment for a businessman who is accoused fraud:
Washington, D.C., March 25, 2011 — The Securities and Exchange Commission today charged Houston-area businessman Daniel Frishberg with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm.
The SEC alleges that Frishberg's firm Daniel Frishberg Financial Services (DFFS) advised clients to invest in notes issued by Business Radio Networks (BizRadio), a media company founded by Frishberg where he hosts his own show under the nickname "The MoneyMan." Frishberg failed to tell his clients about BizRadio's poor financial condition or his significant conflicts of interest with the note offerings that helped fund his salary at BizRadio.
Frishberg agreed to settle the SEC's charges by paying a $65,000 penalty that will be distributed to harmed investors. He will be barred from future association with any investment adviser.
"Contrary to his obligations as an investment adviser, Frishberg approved risky investment recommendations to his clients without ensuring that the risks and conflicts were properly disclosed," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Frishberg personally benefitted from the questionable investments that were recommended to his clients."
According to the SEC's complaint filed in federal district court in Houston, at least $11 million in promissory notes were issued by BizRadio and Kaleta Capital Management (KCM), which is owned by Frishberg's associate Albert Fase Kaleta. Frishberg and Kaleta jointly controlled BizRadio.
The SEC charged Kaleta and his firm with fraud in 2009, and the court appointed a receiver to marshal the assets of KCM and relief defendants BizRadio and DFFS.
The SEC alleges that Frishberg authorized Kaleta to recommend the notes to DFFS clients, and clients were not provided with critical disclosures. Investors were not told of BizRadio's poor financial condition and the likely inability of KCM and BizRadio to repay the notes. Nor were investors informed about Frishberg's significant conflicts of interest in the note offerings because the proceeds funded his salary as a BizRadio talk show host.
The SEC alleges that Frishberg chose Kaleta to recommend the BizRadio notes even though he was aware of complaints about Kaleta's lack of truthfulness in sales presentations regarding other investments.
The SEC's complaint alleges that Frishberg violated Section 206(2) of the Investment Advisers Act of 1940 and aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act.
Without admitting or denying the SEC's allegations, Frishberg consented to the entry of a permanent injunction against these violations and to pay a $65,000 penalty. Frishberg consented to the establishment of a fair fund for the distribution of his penalty to harmed investors, and agreed to be barred from association with any investment adviser or certain other registered entities.”
Washington, D.C., March 25, 2011 — The Securities and Exchange Commission today charged Houston-area businessman Daniel Frishberg with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm.
The SEC alleges that Frishberg's firm Daniel Frishberg Financial Services (DFFS) advised clients to invest in notes issued by Business Radio Networks (BizRadio), a media company founded by Frishberg where he hosts his own show under the nickname "The MoneyMan." Frishberg failed to tell his clients about BizRadio's poor financial condition or his significant conflicts of interest with the note offerings that helped fund his salary at BizRadio.
Frishberg agreed to settle the SEC's charges by paying a $65,000 penalty that will be distributed to harmed investors. He will be barred from future association with any investment adviser.
"Contrary to his obligations as an investment adviser, Frishberg approved risky investment recommendations to his clients without ensuring that the risks and conflicts were properly disclosed," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Frishberg personally benefitted from the questionable investments that were recommended to his clients."
According to the SEC's complaint filed in federal district court in Houston, at least $11 million in promissory notes were issued by BizRadio and Kaleta Capital Management (KCM), which is owned by Frishberg's associate Albert Fase Kaleta. Frishberg and Kaleta jointly controlled BizRadio.
The SEC charged Kaleta and his firm with fraud in 2009, and the court appointed a receiver to marshal the assets of KCM and relief defendants BizRadio and DFFS.
The SEC alleges that Frishberg authorized Kaleta to recommend the notes to DFFS clients, and clients were not provided with critical disclosures. Investors were not told of BizRadio's poor financial condition and the likely inability of KCM and BizRadio to repay the notes. Nor were investors informed about Frishberg's significant conflicts of interest in the note offerings because the proceeds funded his salary as a BizRadio talk show host.
The SEC alleges that Frishberg chose Kaleta to recommend the BizRadio notes even though he was aware of complaints about Kaleta's lack of truthfulness in sales presentations regarding other investments.
The SEC's complaint alleges that Frishberg violated Section 206(2) of the Investment Advisers Act of 1940 and aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act.
Without admitting or denying the SEC's allegations, Frishberg consented to the entry of a permanent injunction against these violations and to pay a $65,000 penalty. Frishberg consented to the establishment of a fair fund for the distribution of his penalty to harmed investors, and agreed to be barred from association with any investment adviser or certain other registered entities.”
Wednesday, March 23, 2011
SHELIA BAIR SPEAKES
The following is an excerpt from the FDIC web site:
"Remarks by FDIC Chairman Sheila C. Bair to the ICBA National Convention, San Diego, CA
March 22, 2011
It is always a pleasure to address the annual meeting of the ICBA. I have addressed your meeting every year of my five year term at the FDIC, and I've always had an affinity for this group. You are fiercely independent in your core mission of defending the interests of the nation's community bankers.
As you know, I am also tenacious in defending the interests of the FDIC as it pursues its vital public mission of depositor protection and financial stability. Like me, you are frequently direct and pointed in your communications. You pride yourselves in your professionalism, and you influence opinion through reasoned public debate. Like me, you stay focused on your objectives. And you are never confused about who you represent. That has been a key to your considerable effectiveness in Washington.
You may not be aware of this, but my experience with community banking extends back into my early childhood. In fact one of those experiences helped prepare me for the Chairmanship of the FDIC. When I was in grade school, I loved accompanying my father to Citizens Bank in Independence Kansas each Friday afternoon when he would deposit the week's earnings from his medical practice. As I would stand with him in the teller line waiting for our turn at the window, I would always stare in fascination at the big, shiny steel door of the bank's vault. It had a huge, round metal handle with prongs like the steering wheel of a ship. I imagined that behind that door stood tall stacks of crisp green bills and piles of gleaming coins.
One Friday afternoon, as we entered the bank, I noticed that the vault door was open a crack. My heart raced. Someone had forgotten to close the door! Now was my chance to sneak a peak at the treasures within. As my father was pre-occupied in conversation with a friend, I slipped away from him and edged furtively to the vault door in rapt anticipation. But when I reached the vault and peeked expectantly into the small slit of an opening, I had the surprise of my life -- no crisp greenbacks, no bags of shiny coins -- just rows and rows of little metal drawers with numbers on them. "There's no money in the bank, there's no money in the bank" I shouted, racing back to my father to forewarn him that someone had been absconding with his and other bank depositors' hard-earned cash.
As you might imagine, this created quite a stir among the long line of customers waiting to deposit their week's earnings. The bank's President came rushing out of his office to find out what was causing all the commotion. After giving me a few somewhat forceful pats on the head, he assured me that everyone's money was quite safe. He then invited me and my father into his office for a quick tutorial on reserve banking. I didn't understand much of it, except for the idea that most of the depositors' money was loaned out to others to help them buy things like cars and homes, which I thought was nice.
So this was my first introduction to the community banking model, as well as the importance of depositor confidence. Ironic that a six-year-old who nearly instigated a bank run that day would later become Chairman of the Federal Deposit Insurance Corporation.
We have had quite a ride over these past five years. When I first came to the FDIC in June of 2006, I thought that my main challenges would be dealing with the Wal-Mart ILC application and implementing our new authorities under the Federal Deposit Insurance Reform Act to begin assessing risk based premiums on all banks.
To be honest, back then, I didn't really know where I stood on the issue of commercial ownership of banks. But I came quickly to understand that the Wal-Mart application, if approved, had the potential to radically transform the structure of the banking industry. This was a step that needed to be decided by Congress, not by the FDIC. This application risked embroiling the FDIC in a never-ending controversy which would divert it from its core public mission.
So we imposed a moratorium on ILC applications to give Congress time to act, and Wal-Mart eventually withdrew its application, making the issue somewhat moot. Dodd-Frank has now closed the so-called ILC loophole to bank holding company rules. So I am glad we imposed the moratorium, and I think that the end result was the right one.
Though community banks were obviously pleased by our early decision on the Wal-Mart application, you were a bit more mixed on our decision to move ahead with a new risk-based pricing system that would begin charging all banks something for their deposit insurance.
As most of you will recall, prior to 2006, the FDIC was essentially prohibited from charging CAMELS 1 or 2 banks for deposit insurance so long as the reserve ratio stayed above 1.25. This was a nice deal for the more than 95 percent of the industry which had the requisite high CAMELS rating. The downside, however, was that a number of new banks had been chartered which never had to pay anything for deposit insurance, an inherently unfair situation for older banks which had paid dearly to cover losses from the last bank and thrift crisis.
Another significant downside was that if the fund were to dip below 1.25, everyone would be whacked with a 23 basis-point assessment. When the deposit insurance reform law said we could start charging a premium to every institution, it also gave us the ability to manage the fund within a range. This would allow us to build reserves in the good times and provide a cushion against the need for pro-cyclical premium hikes during downturns. In addition, the law gave older banks a credit in recognition of past assessments, so the brunt of the initial assessment would fall on so-called "free riders."
I remember well the strongly-worded comment letters and tense meetings with newer banks, many of whom followed non-traditional strategies through internet deposits or affiliations with investment banks. They were not happy with us, and I recall many saying we had no need to build the fund because of the health of the industry and lack of bank failures.
Yes, they assumed, the good times would go on forever, so why in the world did we need more money? The rest, as they say, is history. We went ahead with the new assessment rate schedule, which was my first major rulemaking just two weeks into my tenure.
But as it turned out, it was too little, too late. As the crisis hit, bank failures mounted, and so did losses to the Deposit Insurance Fund. The low point was the fourth quarter of 2009, when the fund dipped to a negative balance of $20.8 billion. But the fund, like the banking industry, is healing, and I anticipate that it will achieve a positive balance before the end of the year.
So where are we now? Community banks' return on assets in 2010 was 0.33 percent, and 4 out of every 5 community banks operated at a profit. Noncurrent loans stood at 3.5 percent, with a net charge-off rate of 1.27 percent. This is a major improvement from the fourth quarter of 2009, when ROA was a negative 0.65 percent, and more than one in three community banks were unprofitable.
However, the current situation still pales in comparison to the robust earnings enjoyed by most banks during the so-called "golden age of banking" prior to the crisis. Now, as the industry is beginning to recover from the setbacks of the past few years, you are moving forward to a future which holds much promise but also considerable uncertainty.
As with previous crises, there has been significant consolidation over the past few years, and nearly 300 community banks have failed. As I've discused with you many times before, we at the FDIC have a keen appreciation for the unique role community banks play, not only in their local markets but also through the contributions they make to the national economy.
Quarter after quarter, throughout the crisis and ensuing recession, we saw you maintain and even modestly grow your loan balances as the largest institutions were pulling back dramatically. Small businesses, in particular, come to you for credit because you understand the local economy and you understand their particular credit needs. In the wake of the most severe recession since the 1930s, we need a thriving community banking sector to support the credit needs of local households and businesses.
I know that you have many concerns about the future of community banking and how it will be affected by the changes that are taking place as regulators implement Dodd-Frank. Yours is already one of the most heavily regulated industries in America. Congress just passed a 2,000 page bill mandating scores of new regulations. You are understandably wary of how the new law will be implemented, and even if you are not the target of its many reforms, you are concerned that there could be collateral damage to your industry.
I am not going to claim that we have always seen things the same way on every issue. We have not, and we should not. Our respective jobs are quite different. But I will say this: We at the FDIC are committed to a future regulatory structure that will support a vibrant, competitive community banking sector, that will assure a level playing field between large and small banks, and most importantly, that will put an end to the pernicious doctrine of too big to fail.
Throughout this crisis, we have consciously pursued policies to protect community banks and their customers from the fall out of the financial crisis—a crisis that was not of your making, to mute the impact of deposit insurance fund losses while maintaining the integrity of industy funding, to preserve continuation of community banking services in areas impacted by failing institutions, and to assure that financial reform measures take into account the potential impact on smaller banks.
We were early and strong advocates for interagency guidance addressing high-risk mortgages. We were among the first to see the dangers of these unaffordable mortgages to the broader banking sector -- indeed to the entire economy. We supported strong guidance in 2006 to tighten standards on so-called pick-a-pay loans, and successfully pushed for extending those standards to subprime hybrid loans in early 2007.
While commercial real estate lending was not the cause of the crisis, we could see in 2006 that poorly managed commercial real estate concentrations were becoming a growing threat to the deposit insurance fund. So we also supported heightened supervisory standards for CRE concentrations.
I know we disagreed on that guidance, but looking back it is clear that weak banks with high levels of CRE concentrations – especially construction and development concentrations – represent the lion's share of small bank failures. So this was not a case of overzealous regulation.
At the same time, going forward, I believe that supervisory policies need to reflect the reality that most community banks are specialty CRE lenders and that examiners need to focus on assuring quality underwriting standards and effective management of those concentrations. Though hundreds of small banks have become troubled or failed because of CRE concentrations, thousands more have successfully managed those portfolios. We need to learn from the success stories and promote broader adoption of proven risk-management tools for banks concentrated in CRE.
As the crisis unfolded, we worked with our fellow regulators and the Treasury Department to promote public confidence and system stability. Foreseeing the risk of increased failures from growing problems in the housing sector, we launched in 2008 an intensive public education campaign about deposit insurance. We used the occassion of our 75th anniversary to re-acquaint the general public about the FDIC's strong record in protecting insured bank deposits. Here again, our objective was to assure the stabiliy of insured deposits, the lifeblood of community banks, and in that we were successful.
However, as conditions deteriorated in the summer and fall of 2008, we witnessed growing volatility in uninsured deposits and a troubling trend of business accounts "fleeing" community banks for larger institutions perceived as too big to fail. For this reason, when we were asked by the Treasury Department and the Federal Reserve Board to develop a debt guarantee program which would have primarily benefited larger institutions, we also proposed an unlimited temporary guarantee for non-interest bearing transaction accounts. This program proved enormously successful in stabilizing these accounts and averting liquidity stress or failures in otherwise healthy community banks.
Throughout the crisis, we were determined not to turn to taxpayer borrowing but rather to manage our losses and liqudity needs through our industry-funded resources. In retrospect, given the understandable public backlash to TARP and the taxpayer bailouts, I am more convinced than ever that this was the right decision. At the same time, we used strategies to soften the impact of additional assessments on a distressed banking sector.
We worked with you to bolster public confidence in our resources by convincing Congress to substantially raise our borrowing line, ameliorating the need for a large special assessment. We also successfully secured legislation to make clear that any losses on the FDIC's debt guarantee program would be assessed on those holding companies availing themseves of that program, not insured banks.
We required prepayment of three years worth of premiums to make sure that our cash resources were adequate to cover bank failures, while allowing you to expense those premiums gradually over time.
And finally, we deployed resolution strategies to sell failing banks to other insured depositories, while providing credit support on futures losses from failed banks' troubled loans. This strategy has saved us $40 billion over losses we would have incurred if we had liquidated those banks. But perhaps more importantly, this strategy provided continuation of banking services in local areas served by the failed banks, frequently through the acquisition of a failed communty bank by a healthy one. Now, the system is on the mend. Bank failures peaked last year at 157. Profitability is returning, loan quality is improving, and borrower demand is starting to pick up somewhat with an improving economy.
Unfortunately, many of the obvious problems that led to this crisis -- excess leverage, unregulated credit derivatives, skewed incentives from securitization, too big to fail -- have yet to be fixed. And increasingly, regulators are being called to task for doing too much too fast, just as a few years go we were being pilloried for being asleep at the switch.
Do not misunderstand. Accountability and oversight are a good thing for the regulatory process. As a market-oriented Republican, I wholeheartedly concur that our regulations should be tightly focused on fixing what went wrong. But we must not lose sight of the fact that A lot went wrong and it does need to be fixed. Which brings me back to Dodd-Frank.
Dodd-Frank is not a perfect law. There are many things in it that I would like to change. But, on balance, it is a good law and one which I think will strengthen, not weaken, communtiy banks. Let's start with the basics.
If Dodd-Frank had not been enacted, deposit insurance limits would have reverted to $100,000. The transaction account guarantee would have expired. The too big to fail doctrine would have remained intact. A public still uncertain about the strength of smaller banks would have pulled their newly uninsured deposits and fled to the large, too big to fail institutions. This would have led to more small bank failures and higher costs for the deposit insurance fund.
So you would have lost large deposit accounts, and it is likely that your deposit insurance premiums would have gone up. But none of that happened.
Dodd-Frank made permanent the $250,000 deposit insurance limit and provided a two-year extension of the transaction account guarantee. It attacked the doctrine of too big to fail by extending the FDIC's resolution process to large, systemically-important financial institutions. It subjected all financial institutions, large and small, bank and non-bank, to our resolution process, which imposes losses where they belong -- on shareholders and creditors -- not on taxpayers.
It also required that large financial entities have capital cushions at least as strong as those that apply to community banks. And it changed the assessment base so that instead of your premiums going up, they will be reduced by about 30 percent later this year. Why did this happen? You.
Instead of stridently opposing even the most modest of reforms, the ICBA stayed engaged. You maintained a constructive dialogue with the key sponsors of the legislation. You gave voice to the views of community banks, and Congress listened. Most of the other financial trade groups tried to stop reform. It didn't matter. A bill was going to pass. The ICBA realized the inevitability of the process. You kept a seat at the table, and you had an impact on the outcome.
I know you have many concerns about this legislation. I understand your concerns. It is a massive law, and you would be foolish not to take an active interest in the new regulations as they are developed. We are proceeding to implement the provisions of Dodd-Frank as transparently and expeditiously as possible.
We are going beyond the normal steps that we use in the rulemaking process. We are holding roundtables to discuss issues, and documenting meetings between senior FDIC officials and outside parties that are related to Dodd-Frank implementation. In addition, we continue to discuss issues related to Dodd-Frank during the visits by the state banking delegations to the FDIC and at meetings of our Advisory Committee on Community Banking.
So you will continue to have many venues to provide feedback to us as implementation moves forward. And I want you to know that we're paying close attention to the potential impact of the law on community banks.
On March 10, we sent a letter to Federal Reserve Chairman Bernanke commenting on the proposed rule on debit-card interchange fees. We are extremely concerned that community banks may not actually receive the benefit of the interchange fee limit exemption explicitly provided by Congress. In the comment letter, we urged the Board to use its authority under the Electronic Fund Transfer Act to address the practical implications of the proposal. The proposed rule assumes the creation of a two-tiered interchange structure, and failure to maintain a two-tiered structure could result in a loss of income for community banks, and higher banking costs for your customers.
We also urged the Board to expand its survey methodology to gain information on the costs incurred by issuers of all asset sizes; to include costs associated with anti-fraud protection; and to revise its fee cap proposal as appropriate.
Your concerns about the potential impact of the interchange fee provision are well-founded, and we are working hard to assure that you receive the protection promised by the law. At the same time, I would ask you to maintain an open-mind about the potential positive benefits of the new consumer protection agency. Many of the fears I have heard expressed about this new agency are not well-founded.
On the contrary, I believe that this agency holds the promise of doing tremendous good by simplifying consumer rules and disclosures, reducing compliance costs for you and making products easier to understand for your customers. I also think this agency can help level your competitive playing field by applying much-needed regulation and enforcement to non-bank mortgage originators and other providers of consumer credit.
Banking has come a long way since the days when I used to accompany my father to Citizen's Bank every Friday afternoon. We have just come through the worst financial crisis and most severe recession since the 1930s. I know these are uncertain times for you, when the economic environment remains difficult, and the regulatory outlook seems unclear.
I ask you to continue our dialogue, and to work with us to get the details right on the regulatory reforms now underway. It is my hope and belief that public dissatisfaction with impersonal, model-driven banking will bring more customers back to those institutions which bank the old-fashioned way – to banks who know their customers and tend to their individual banking needs – to banks run by hands-on executives willing to take some time to explain to a six-year-old why all the depositors' money isn't sitting in the vault.
Community banking is the foundation of our economy. The future belongs to you, and it depends on you. That is why I am asking you to support the reforms that are needed to restore financial stability and lay the foundation for a stronger U.S. economy in the years ahead. Thank you."
"Remarks by FDIC Chairman Sheila C. Bair to the ICBA National Convention, San Diego, CA
March 22, 2011
It is always a pleasure to address the annual meeting of the ICBA. I have addressed your meeting every year of my five year term at the FDIC, and I've always had an affinity for this group. You are fiercely independent in your core mission of defending the interests of the nation's community bankers.
As you know, I am also tenacious in defending the interests of the FDIC as it pursues its vital public mission of depositor protection and financial stability. Like me, you are frequently direct and pointed in your communications. You pride yourselves in your professionalism, and you influence opinion through reasoned public debate. Like me, you stay focused on your objectives. And you are never confused about who you represent. That has been a key to your considerable effectiveness in Washington.
You may not be aware of this, but my experience with community banking extends back into my early childhood. In fact one of those experiences helped prepare me for the Chairmanship of the FDIC. When I was in grade school, I loved accompanying my father to Citizens Bank in Independence Kansas each Friday afternoon when he would deposit the week's earnings from his medical practice. As I would stand with him in the teller line waiting for our turn at the window, I would always stare in fascination at the big, shiny steel door of the bank's vault. It had a huge, round metal handle with prongs like the steering wheel of a ship. I imagined that behind that door stood tall stacks of crisp green bills and piles of gleaming coins.
One Friday afternoon, as we entered the bank, I noticed that the vault door was open a crack. My heart raced. Someone had forgotten to close the door! Now was my chance to sneak a peak at the treasures within. As my father was pre-occupied in conversation with a friend, I slipped away from him and edged furtively to the vault door in rapt anticipation. But when I reached the vault and peeked expectantly into the small slit of an opening, I had the surprise of my life -- no crisp greenbacks, no bags of shiny coins -- just rows and rows of little metal drawers with numbers on them. "There's no money in the bank, there's no money in the bank" I shouted, racing back to my father to forewarn him that someone had been absconding with his and other bank depositors' hard-earned cash.
As you might imagine, this created quite a stir among the long line of customers waiting to deposit their week's earnings. The bank's President came rushing out of his office to find out what was causing all the commotion. After giving me a few somewhat forceful pats on the head, he assured me that everyone's money was quite safe. He then invited me and my father into his office for a quick tutorial on reserve banking. I didn't understand much of it, except for the idea that most of the depositors' money was loaned out to others to help them buy things like cars and homes, which I thought was nice.
So this was my first introduction to the community banking model, as well as the importance of depositor confidence. Ironic that a six-year-old who nearly instigated a bank run that day would later become Chairman of the Federal Deposit Insurance Corporation.
We have had quite a ride over these past five years. When I first came to the FDIC in June of 2006, I thought that my main challenges would be dealing with the Wal-Mart ILC application and implementing our new authorities under the Federal Deposit Insurance Reform Act to begin assessing risk based premiums on all banks.
To be honest, back then, I didn't really know where I stood on the issue of commercial ownership of banks. But I came quickly to understand that the Wal-Mart application, if approved, had the potential to radically transform the structure of the banking industry. This was a step that needed to be decided by Congress, not by the FDIC. This application risked embroiling the FDIC in a never-ending controversy which would divert it from its core public mission.
So we imposed a moratorium on ILC applications to give Congress time to act, and Wal-Mart eventually withdrew its application, making the issue somewhat moot. Dodd-Frank has now closed the so-called ILC loophole to bank holding company rules. So I am glad we imposed the moratorium, and I think that the end result was the right one.
Though community banks were obviously pleased by our early decision on the Wal-Mart application, you were a bit more mixed on our decision to move ahead with a new risk-based pricing system that would begin charging all banks something for their deposit insurance.
As most of you will recall, prior to 2006, the FDIC was essentially prohibited from charging CAMELS 1 or 2 banks for deposit insurance so long as the reserve ratio stayed above 1.25. This was a nice deal for the more than 95 percent of the industry which had the requisite high CAMELS rating. The downside, however, was that a number of new banks had been chartered which never had to pay anything for deposit insurance, an inherently unfair situation for older banks which had paid dearly to cover losses from the last bank and thrift crisis.
Another significant downside was that if the fund were to dip below 1.25, everyone would be whacked with a 23 basis-point assessment. When the deposit insurance reform law said we could start charging a premium to every institution, it also gave us the ability to manage the fund within a range. This would allow us to build reserves in the good times and provide a cushion against the need for pro-cyclical premium hikes during downturns. In addition, the law gave older banks a credit in recognition of past assessments, so the brunt of the initial assessment would fall on so-called "free riders."
I remember well the strongly-worded comment letters and tense meetings with newer banks, many of whom followed non-traditional strategies through internet deposits or affiliations with investment banks. They were not happy with us, and I recall many saying we had no need to build the fund because of the health of the industry and lack of bank failures.
Yes, they assumed, the good times would go on forever, so why in the world did we need more money? The rest, as they say, is history. We went ahead with the new assessment rate schedule, which was my first major rulemaking just two weeks into my tenure.
But as it turned out, it was too little, too late. As the crisis hit, bank failures mounted, and so did losses to the Deposit Insurance Fund. The low point was the fourth quarter of 2009, when the fund dipped to a negative balance of $20.8 billion. But the fund, like the banking industry, is healing, and I anticipate that it will achieve a positive balance before the end of the year.
So where are we now? Community banks' return on assets in 2010 was 0.33 percent, and 4 out of every 5 community banks operated at a profit. Noncurrent loans stood at 3.5 percent, with a net charge-off rate of 1.27 percent. This is a major improvement from the fourth quarter of 2009, when ROA was a negative 0.65 percent, and more than one in three community banks were unprofitable.
However, the current situation still pales in comparison to the robust earnings enjoyed by most banks during the so-called "golden age of banking" prior to the crisis. Now, as the industry is beginning to recover from the setbacks of the past few years, you are moving forward to a future which holds much promise but also considerable uncertainty.
As with previous crises, there has been significant consolidation over the past few years, and nearly 300 community banks have failed. As I've discused with you many times before, we at the FDIC have a keen appreciation for the unique role community banks play, not only in their local markets but also through the contributions they make to the national economy.
Quarter after quarter, throughout the crisis and ensuing recession, we saw you maintain and even modestly grow your loan balances as the largest institutions were pulling back dramatically. Small businesses, in particular, come to you for credit because you understand the local economy and you understand their particular credit needs. In the wake of the most severe recession since the 1930s, we need a thriving community banking sector to support the credit needs of local households and businesses.
I know that you have many concerns about the future of community banking and how it will be affected by the changes that are taking place as regulators implement Dodd-Frank. Yours is already one of the most heavily regulated industries in America. Congress just passed a 2,000 page bill mandating scores of new regulations. You are understandably wary of how the new law will be implemented, and even if you are not the target of its many reforms, you are concerned that there could be collateral damage to your industry.
I am not going to claim that we have always seen things the same way on every issue. We have not, and we should not. Our respective jobs are quite different. But I will say this: We at the FDIC are committed to a future regulatory structure that will support a vibrant, competitive community banking sector, that will assure a level playing field between large and small banks, and most importantly, that will put an end to the pernicious doctrine of too big to fail.
Throughout this crisis, we have consciously pursued policies to protect community banks and their customers from the fall out of the financial crisis—a crisis that was not of your making, to mute the impact of deposit insurance fund losses while maintaining the integrity of industy funding, to preserve continuation of community banking services in areas impacted by failing institutions, and to assure that financial reform measures take into account the potential impact on smaller banks.
We were early and strong advocates for interagency guidance addressing high-risk mortgages. We were among the first to see the dangers of these unaffordable mortgages to the broader banking sector -- indeed to the entire economy. We supported strong guidance in 2006 to tighten standards on so-called pick-a-pay loans, and successfully pushed for extending those standards to subprime hybrid loans in early 2007.
While commercial real estate lending was not the cause of the crisis, we could see in 2006 that poorly managed commercial real estate concentrations were becoming a growing threat to the deposit insurance fund. So we also supported heightened supervisory standards for CRE concentrations.
I know we disagreed on that guidance, but looking back it is clear that weak banks with high levels of CRE concentrations – especially construction and development concentrations – represent the lion's share of small bank failures. So this was not a case of overzealous regulation.
At the same time, going forward, I believe that supervisory policies need to reflect the reality that most community banks are specialty CRE lenders and that examiners need to focus on assuring quality underwriting standards and effective management of those concentrations. Though hundreds of small banks have become troubled or failed because of CRE concentrations, thousands more have successfully managed those portfolios. We need to learn from the success stories and promote broader adoption of proven risk-management tools for banks concentrated in CRE.
As the crisis unfolded, we worked with our fellow regulators and the Treasury Department to promote public confidence and system stability. Foreseeing the risk of increased failures from growing problems in the housing sector, we launched in 2008 an intensive public education campaign about deposit insurance. We used the occassion of our 75th anniversary to re-acquaint the general public about the FDIC's strong record in protecting insured bank deposits. Here again, our objective was to assure the stabiliy of insured deposits, the lifeblood of community banks, and in that we were successful.
However, as conditions deteriorated in the summer and fall of 2008, we witnessed growing volatility in uninsured deposits and a troubling trend of business accounts "fleeing" community banks for larger institutions perceived as too big to fail. For this reason, when we were asked by the Treasury Department and the Federal Reserve Board to develop a debt guarantee program which would have primarily benefited larger institutions, we also proposed an unlimited temporary guarantee for non-interest bearing transaction accounts. This program proved enormously successful in stabilizing these accounts and averting liquidity stress or failures in otherwise healthy community banks.
Throughout the crisis, we were determined not to turn to taxpayer borrowing but rather to manage our losses and liqudity needs through our industry-funded resources. In retrospect, given the understandable public backlash to TARP and the taxpayer bailouts, I am more convinced than ever that this was the right decision. At the same time, we used strategies to soften the impact of additional assessments on a distressed banking sector.
We worked with you to bolster public confidence in our resources by convincing Congress to substantially raise our borrowing line, ameliorating the need for a large special assessment. We also successfully secured legislation to make clear that any losses on the FDIC's debt guarantee program would be assessed on those holding companies availing themseves of that program, not insured banks.
We required prepayment of three years worth of premiums to make sure that our cash resources were adequate to cover bank failures, while allowing you to expense those premiums gradually over time.
And finally, we deployed resolution strategies to sell failing banks to other insured depositories, while providing credit support on futures losses from failed banks' troubled loans. This strategy has saved us $40 billion over losses we would have incurred if we had liquidated those banks. But perhaps more importantly, this strategy provided continuation of banking services in local areas served by the failed banks, frequently through the acquisition of a failed communty bank by a healthy one. Now, the system is on the mend. Bank failures peaked last year at 157. Profitability is returning, loan quality is improving, and borrower demand is starting to pick up somewhat with an improving economy.
Unfortunately, many of the obvious problems that led to this crisis -- excess leverage, unregulated credit derivatives, skewed incentives from securitization, too big to fail -- have yet to be fixed. And increasingly, regulators are being called to task for doing too much too fast, just as a few years go we were being pilloried for being asleep at the switch.
Do not misunderstand. Accountability and oversight are a good thing for the regulatory process. As a market-oriented Republican, I wholeheartedly concur that our regulations should be tightly focused on fixing what went wrong. But we must not lose sight of the fact that A lot went wrong and it does need to be fixed. Which brings me back to Dodd-Frank.
Dodd-Frank is not a perfect law. There are many things in it that I would like to change. But, on balance, it is a good law and one which I think will strengthen, not weaken, communtiy banks. Let's start with the basics.
If Dodd-Frank had not been enacted, deposit insurance limits would have reverted to $100,000. The transaction account guarantee would have expired. The too big to fail doctrine would have remained intact. A public still uncertain about the strength of smaller banks would have pulled their newly uninsured deposits and fled to the large, too big to fail institutions. This would have led to more small bank failures and higher costs for the deposit insurance fund.
So you would have lost large deposit accounts, and it is likely that your deposit insurance premiums would have gone up. But none of that happened.
Dodd-Frank made permanent the $250,000 deposit insurance limit and provided a two-year extension of the transaction account guarantee. It attacked the doctrine of too big to fail by extending the FDIC's resolution process to large, systemically-important financial institutions. It subjected all financial institutions, large and small, bank and non-bank, to our resolution process, which imposes losses where they belong -- on shareholders and creditors -- not on taxpayers.
It also required that large financial entities have capital cushions at least as strong as those that apply to community banks. And it changed the assessment base so that instead of your premiums going up, they will be reduced by about 30 percent later this year. Why did this happen? You.
Instead of stridently opposing even the most modest of reforms, the ICBA stayed engaged. You maintained a constructive dialogue with the key sponsors of the legislation. You gave voice to the views of community banks, and Congress listened. Most of the other financial trade groups tried to stop reform. It didn't matter. A bill was going to pass. The ICBA realized the inevitability of the process. You kept a seat at the table, and you had an impact on the outcome.
I know you have many concerns about this legislation. I understand your concerns. It is a massive law, and you would be foolish not to take an active interest in the new regulations as they are developed. We are proceeding to implement the provisions of Dodd-Frank as transparently and expeditiously as possible.
We are going beyond the normal steps that we use in the rulemaking process. We are holding roundtables to discuss issues, and documenting meetings between senior FDIC officials and outside parties that are related to Dodd-Frank implementation. In addition, we continue to discuss issues related to Dodd-Frank during the visits by the state banking delegations to the FDIC and at meetings of our Advisory Committee on Community Banking.
So you will continue to have many venues to provide feedback to us as implementation moves forward. And I want you to know that we're paying close attention to the potential impact of the law on community banks.
On March 10, we sent a letter to Federal Reserve Chairman Bernanke commenting on the proposed rule on debit-card interchange fees. We are extremely concerned that community banks may not actually receive the benefit of the interchange fee limit exemption explicitly provided by Congress. In the comment letter, we urged the Board to use its authority under the Electronic Fund Transfer Act to address the practical implications of the proposal. The proposed rule assumes the creation of a two-tiered interchange structure, and failure to maintain a two-tiered structure could result in a loss of income for community banks, and higher banking costs for your customers.
We also urged the Board to expand its survey methodology to gain information on the costs incurred by issuers of all asset sizes; to include costs associated with anti-fraud protection; and to revise its fee cap proposal as appropriate.
Your concerns about the potential impact of the interchange fee provision are well-founded, and we are working hard to assure that you receive the protection promised by the law. At the same time, I would ask you to maintain an open-mind about the potential positive benefits of the new consumer protection agency. Many of the fears I have heard expressed about this new agency are not well-founded.
On the contrary, I believe that this agency holds the promise of doing tremendous good by simplifying consumer rules and disclosures, reducing compliance costs for you and making products easier to understand for your customers. I also think this agency can help level your competitive playing field by applying much-needed regulation and enforcement to non-bank mortgage originators and other providers of consumer credit.
Banking has come a long way since the days when I used to accompany my father to Citizen's Bank every Friday afternoon. We have just come through the worst financial crisis and most severe recession since the 1930s. I know these are uncertain times for you, when the economic environment remains difficult, and the regulatory outlook seems unclear.
I ask you to continue our dialogue, and to work with us to get the details right on the regulatory reforms now underway. It is my hope and belief that public dissatisfaction with impersonal, model-driven banking will bring more customers back to those institutions which bank the old-fashioned way – to banks who know their customers and tend to their individual banking needs – to banks run by hands-on executives willing to take some time to explain to a six-year-old why all the depositors' money isn't sitting in the vault.
Community banking is the foundation of our economy. The future belongs to you, and it depends on you. That is why I am asking you to support the reforms that are needed to restore financial stability and lay the foundation for a stronger U.S. economy in the years ahead. Thank you."
Sunday, March 20, 2011
SEC ALLEGES HIGH TECH PUMP AND DUMP: IS THIS 1999 AGAIN?
Back in the 1990’s when technology stocks crashed it was found that many tech companies were in fact just sham organizations that had no workable business models. The companies existed only to sell stock to investors with the proceeds of the stock sales going to the corporate executives. At the end of the 1990’s most of these sham companies just folded and the executives cashed out billions of dollars.
Back in the 1990’s most of the sham companies had businesses based upon the high speed communications technologies like the internet. In the case below the Sec alleges that a technology company created a pump-and-dump fraud based on the current popular tech fad based upon saving the envirorment. It seems everyone wants a new magical technology to save the enviorment when sacrifices like driving a little less or adjusting environmental controls a few degrees is just too hard.
The following is an excerpt from the SEC website which explains in detail the formula for a recent alleged pump-and-dump scheme:
“Washington, D.C., Feb. 18, 2011 — The Securities and Exchange Commission today charged a group of seven individuals who perpetrated a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming.
The SEC alleges that the group included stock promoters, traders, and a lawyer who wrote a fraudulent opinion letter. The scheme resulted in more than $7 million in illicit profits from sales of stock in CO2 Tech Ltd. at artificially inflated prices. Despite touting impressive business relationships and anti-global warming technology innovations, CO2 Tech did not have any significant assets or operations. The company was purportedly based in London, and its stock prices were quoted in the Pink Sheets.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the scheme was perpetrated through Red Sea Management Ltd., a Costa Rican asset protection company that laundered millions of dollars in illicit trading proceeds out of the United States on behalf of its clients. The U.S. Department of Justice today announced related criminal charges against six of the individuals.
“This group of illicit stock promoters sought to hide their scheme behind offshore entities, but their misconduct was exposed by the excellent cooperation of law enforcement agencies here and abroad,” said Cheryl Scarboro, Associate Director in the SEC’s Division of Enforcement.
According to the SEC’s complaint, the fraudulent pump-and-dump scheme in CO2 Tech stock occurred from late 2006 to April 2007 through the efforts of the following individuals:
Jonathan R. Curshen, a Sarasota, Fla., resident who founded and led Red Sea.
David C. Ricci and Ronny Morales Salazar of San Jose, Costa Rica, who were Red Sea stock traders.
Ariav “Eric” Weinbaum and Yitzchak Zigdon of Israel, who were Red Sea clients.
Robert L. Weidenbaum of Coral Gables, Fla., a stock promoter who operates a company called CLX & Associates.
Michael S. Krome of Lake Grove, N.Y., a lawyer who allegedly wrote a fraudulent opinion letter.
The SEC’s complaint alleges that CO2 Tech falsely touted business relationships that the company had not formed, including a relationship with the Boeing Company. In fact, there were no communications, correspondence or understandings between CO2 Tech and Boeing.
The SEC alleges that Weinbaum and Zigdon initiated the pump-and-dump of CO2 Tech by utilizing the services of Krome, who issued a fraudulent opinion letter to enable them to have the restrictive legend removed from their CO2 Tech stock certificate. This provided them nearly full control over the freely tradeable shares of CO2 Tech stock. Weinbaum then hired Red Sea to sell massive quantities of CO2 Tech stock to the investing public through its web of nominee brokerage accounts. Zigdon caused the materially false and misleading information about CO2 Tech to be disseminated in press releases and on CO2 Tech’s website.
According to the SEC’s complaint, Weinbaum hired Weidenbaum to redistribute the false information through websites, spam e-mails and fax blasts. Weidenbaum enlisted a group of stock promoters who then executed illegal “matched orders” with Red Sea’s nominee brokerage accounts in order to “jump-start” the market and increase the price of the stock. As a result of the false media campaign and the illegal matched orders, the market price of CO2 Tech stock increased 81 percent increase in one day and trading volume increased 1,573 percent.
The SEC alleges that after Weinbaum hired Red Sea, he directed Red Sea stock traders Ricci and Salazar to sell the stock. Ricci and Salazar placed multiple layered orders to sell CO2 Tech stock – thereby creating the false appearance that the market for the stock was deeper than it actually was. This coordinated misconduct enabled stock sales at artificially inflated prices for profits of more than $7 million at the expense of unsuspecting investors.
The SEC’s complaint alleges that Curshen, Ricci, Salazar, Weinbaum, Zigdon, and Krome violated Section 5(a), (c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Weidenbaum is charged with aiding and abetting Weinbaum and Zigdon’s violations of Exchange Act 10(b) and Rule 10b-5. Without admitting or denying the allegations in the complaint, Ricci settled the SEC’s charges by agreeing to an injunction against future violations of these provisions and a penny stock bar.
In the related criminal action, charges brought by the Justice Department’s Criminal Division were unsealed against Curshen, Krome, Salazar, Weidenbaum, Weinbaum, and Zigdon. The defendants are charged in the Southern District of Florida variously with conspiracy to commit securities, mail and wire fraud; wire fraud; mail fraud; violating the securities regulation laws and obstruction of justice.
The SEC acknowledges the assistance of the Fraud Section of the Criminal Division of the U.S. Department of Justice, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service. The SEC also acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) and several foreign law enforcement agencies that provided substantial support to the investigation, including the Costa Rican Police, British Columbia Securities Commission, Israel Securities Authority, United Kingdom Financial Services Authority, and The City of London Police.”
The list of organizations and governments cooperating in the above case is quite impressive. This was relatively a small case in case of the amount of money involved. At least comparing this case with the alleged trillion dollars or more defrauded from investors worldwide by large banking and insurance organizations in the recent real estate crash. The moral being: Help to steal millions of dollars and you will be prosecuted. Help to steal trillions of dollars and you will get a job advising the president and congress on how to write and enforce regulatory laws. In fact, you might even get a job in the cabinet.
Back in the 1990’s most of the sham companies had businesses based upon the high speed communications technologies like the internet. In the case below the Sec alleges that a technology company created a pump-and-dump fraud based on the current popular tech fad based upon saving the envirorment. It seems everyone wants a new magical technology to save the enviorment when sacrifices like driving a little less or adjusting environmental controls a few degrees is just too hard.
The following is an excerpt from the SEC website which explains in detail the formula for a recent alleged pump-and-dump scheme:
“Washington, D.C., Feb. 18, 2011 — The Securities and Exchange Commission today charged a group of seven individuals who perpetrated a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming.
The SEC alleges that the group included stock promoters, traders, and a lawyer who wrote a fraudulent opinion letter. The scheme resulted in more than $7 million in illicit profits from sales of stock in CO2 Tech Ltd. at artificially inflated prices. Despite touting impressive business relationships and anti-global warming technology innovations, CO2 Tech did not have any significant assets or operations. The company was purportedly based in London, and its stock prices were quoted in the Pink Sheets.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the scheme was perpetrated through Red Sea Management Ltd., a Costa Rican asset protection company that laundered millions of dollars in illicit trading proceeds out of the United States on behalf of its clients. The U.S. Department of Justice today announced related criminal charges against six of the individuals.
“This group of illicit stock promoters sought to hide their scheme behind offshore entities, but their misconduct was exposed by the excellent cooperation of law enforcement agencies here and abroad,” said Cheryl Scarboro, Associate Director in the SEC’s Division of Enforcement.
According to the SEC’s complaint, the fraudulent pump-and-dump scheme in CO2 Tech stock occurred from late 2006 to April 2007 through the efforts of the following individuals:
Jonathan R. Curshen, a Sarasota, Fla., resident who founded and led Red Sea.
David C. Ricci and Ronny Morales Salazar of San Jose, Costa Rica, who were Red Sea stock traders.
Ariav “Eric” Weinbaum and Yitzchak Zigdon of Israel, who were Red Sea clients.
Robert L. Weidenbaum of Coral Gables, Fla., a stock promoter who operates a company called CLX & Associates.
Michael S. Krome of Lake Grove, N.Y., a lawyer who allegedly wrote a fraudulent opinion letter.
The SEC’s complaint alleges that CO2 Tech falsely touted business relationships that the company had not formed, including a relationship with the Boeing Company. In fact, there were no communications, correspondence or understandings between CO2 Tech and Boeing.
The SEC alleges that Weinbaum and Zigdon initiated the pump-and-dump of CO2 Tech by utilizing the services of Krome, who issued a fraudulent opinion letter to enable them to have the restrictive legend removed from their CO2 Tech stock certificate. This provided them nearly full control over the freely tradeable shares of CO2 Tech stock. Weinbaum then hired Red Sea to sell massive quantities of CO2 Tech stock to the investing public through its web of nominee brokerage accounts. Zigdon caused the materially false and misleading information about CO2 Tech to be disseminated in press releases and on CO2 Tech’s website.
According to the SEC’s complaint, Weinbaum hired Weidenbaum to redistribute the false information through websites, spam e-mails and fax blasts. Weidenbaum enlisted a group of stock promoters who then executed illegal “matched orders” with Red Sea’s nominee brokerage accounts in order to “jump-start” the market and increase the price of the stock. As a result of the false media campaign and the illegal matched orders, the market price of CO2 Tech stock increased 81 percent increase in one day and trading volume increased 1,573 percent.
The SEC alleges that after Weinbaum hired Red Sea, he directed Red Sea stock traders Ricci and Salazar to sell the stock. Ricci and Salazar placed multiple layered orders to sell CO2 Tech stock – thereby creating the false appearance that the market for the stock was deeper than it actually was. This coordinated misconduct enabled stock sales at artificially inflated prices for profits of more than $7 million at the expense of unsuspecting investors.
The SEC’s complaint alleges that Curshen, Ricci, Salazar, Weinbaum, Zigdon, and Krome violated Section 5(a), (c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Weidenbaum is charged with aiding and abetting Weinbaum and Zigdon’s violations of Exchange Act 10(b) and Rule 10b-5. Without admitting or denying the allegations in the complaint, Ricci settled the SEC’s charges by agreeing to an injunction against future violations of these provisions and a penny stock bar.
In the related criminal action, charges brought by the Justice Department’s Criminal Division were unsealed against Curshen, Krome, Salazar, Weidenbaum, Weinbaum, and Zigdon. The defendants are charged in the Southern District of Florida variously with conspiracy to commit securities, mail and wire fraud; wire fraud; mail fraud; violating the securities regulation laws and obstruction of justice.
The SEC acknowledges the assistance of the Fraud Section of the Criminal Division of the U.S. Department of Justice, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service. The SEC also acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) and several foreign law enforcement agencies that provided substantial support to the investigation, including the Costa Rican Police, British Columbia Securities Commission, Israel Securities Authority, United Kingdom Financial Services Authority, and The City of London Police.”
The list of organizations and governments cooperating in the above case is quite impressive. This was relatively a small case in case of the amount of money involved. At least comparing this case with the alleged trillion dollars or more defrauded from investors worldwide by large banking and insurance organizations in the recent real estate crash. The moral being: Help to steal millions of dollars and you will be prosecuted. Help to steal trillions of dollars and you will get a job advising the president and congress on how to write and enforce regulatory laws. In fact, you might even get a job in the cabinet.
Wednesday, March 16, 2011
FDIC CHAIRMAN'S SPEECH AT ABA GOVERNMENT RELATIONS SUMMIT
The following speech given by the FDIC Chairman was excerpted from the FDIC web site:
"Remarks by FDIC Chairman Sheila C. Bair to the ABA Government Relations Summit, Washington, DC
March 16, 2011
Good morning. I am pleased to have the opportunity to join you for this year’s ABA Government Relations Summit.
We are, in many ways, at a crossroads in terms of the future of the commercial banking industry -- how it is regulated, and whether it will in fact fulfill its promise as an engine of growth for the U.S. economy. The past few years have taught all of us some painful lessons.
In 2008, our financial markets and institutions came literally to the brink of systemic collapse. Despite a massive infusion of federal support, our economy still experienced its worst recession since the 1930s. Economists tell us that the recession ended almost two years ago, and it’s true that overall business activity has continued to trend higher since then.
But 13.7 million people remain officially unemployed, and millions more are underemployed. Six million Americans have been officially out of work for more than six months. The banking industry is indeed recovering, but that process remains incomplete.
Problem loans are declining, as are loan-loss provisions. But bankers remain concerned about rebuilding their earnings capacity in the wake of the crisis. And many of you are pointing to heightened regulatory oversight as a primary source of concern in the earnings outlook.
We have heard:
that higher capital standards will reduce lending and economic growth,
that restrictions on capital markets activities will push business overseas, and
that the impending Dodd-Frank reforms are both creating unresolved uncertainty for banks and moving along too fast for comfort.
This may be my last opportunity to speak with you before the end of my term in June.
I would like to take this opportunity to discuss with you what I think are some real challenges facing the banking industry, and how the industry can play a more constructive role in the economic recovery and the reform process. Despite the sometimes heated rhetoric about the direction of regulation, I think bankers, regulators, and the public really do share many of the same goals and concerns for the future.
Short-Term Challenges and the Long-Term Economic Future
First, I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not – and should not be – the main goal of our national economic policy.
Yes, as we found out in the Fall of 2008, banking is critically important to the ability of our economy to function. And in the wake of the crisis, it looks like bank lending will have to be an even more important ingredient in financing economic activity than it was just a few years ago.
But, in policy terms, the success of the financial sector is not an end in itself, but a means to an end – which is to support the vitality of the real economy and the livelihood of the American people. What really matters to the life of our nation is enabling entrepreneurs to build new businesses that create more well-paying jobs, and enabling families to put a roof over their heads and educate their children.
In our national economic life, your contribution as bankers, and ours as regulators, can only be measured against this yardstick. And let’s be completely honest – in the period that led up to the financial crisis we did not get the job done. FDIC-insured institutions booked record earnings in each of the first six years of the last decade.
But in the recession that followed, the U.S. economy lost over 8-and-a-half million jobs, of which only about 1.2 million have been regained in the recovery. There are almost two million fewer private-sector jobs in this country today than there were in December 1999, eleven years ago. More than nine million residential mortgages have entered foreclosure in the past four years, and the backlog of seriously past due mortgages stands at more than two-and-a-half million.
The lesson for policymakers is that having a profitable banking industry, even for years at a time, is not sufficient on its own to support the long-term credit needs of the U.S. economy. Instead, the industry also needs to be stable, and its earnings must be sustainable over the long term. This, quite simply, is why regulatory changes must be made.
Is the Problem Regulation – or Confidence?
While it is clearly recovering, our economy continues to face some significant challenges.
The balance sheets of households, depository institutions, state and local governments and the federal government all suffered serious damage as a result of the recession. All of these sectors are taking steps to repair that damage, but in some cases it will be a long, painful process.
In some respects we have seen a dramatic improvement in investor confidence and the functioning of financial markets. Credit spreads are down, stock prices are up, and lending standards have eased a little. We’re finding that troubled institutions have recently been better able to raise capital or find an acquirer before failure, and we have also been getting better bids for failed banks that have good retail franchises.
But not every part of our financial system is working the way it is supposed to.
The issuance of private mortgage-backed securities last year was just $60 billion, the same as in 2009 and down almost 95 percent from the peak years of 2005 and 2006. Let’s be clear – the collapse in this market is not the result of actual or anticipated regulatory intervention. Instead, it is the result of a crisis of confidence on the part of investors who lost hundreds of billions of dollars in the mortgage crisis.
And this is not the only area of lending where volume has declined sharply.
The issuance of non-mortgage asset-backed securities is down by well more than half. And in the last three years, the volume of loans for the construction and development of real estate, or C&D loans, held by FDIC-insured institutions also has fallen by half. Net charge-offs of C&D loans during this period now exceed 10 percent of the loans that were on the books at year-end 2007.
There are some who continue to point to over-zealous regulators as the reason for rising charge-offs and declining balances in C&D portfolios. But the truth is that small and mid-sized institutions held record-high concentrations of these loans when U.S. real estate markets began their historic slide in 2006 and 2007. Regulators have done what they can in the wake of the crisis to facilitate loan workouts that help borrowers and banks while conforming to accepted accounting principles.
But we cannot make the problem go away overnight.
The Industry Needs Regulation to Prevent Excesses
With the benefit of hindsight, I think we all can agree that the time for action would have been before the crisis – when rapid growth in subprime and nontraditional mortgage loans was undermining the foundations of our housing markets, and poorly-managed concentrations in commercial real estate and construction lending were making many small and mid-sized institutions highly vulnerable to a real estate downturn.
As you will recall, regulators did propose and issue guidance on managing commercial real estate concentrations and on nontraditional mortgage lending in 2006, and then extended the mortgage guidance to cover subprime hybrid loans in early 2007. In retrospect, it could have been very helpful if well-run institutions had supported these proposals.
But a review of comment letters sent to regulators by industry trade associations before the crisis shows a consistent pattern of opposition. With regard to commercial real estate concentrations, comments from the various trade associations asserted that:
new guidance was not needed and would only increase regulatory burden,
industry practices had vastly improved since the last real estate downturn, and
high levels of commercial real estate lending were necessary in order for small and midsized institutions to effectively compete against larger institutions.
When we issued proposed guidance on non-traditional mortgages, industry comments found the guidance too proscriptive, saying that it “overstate[d] the risk of these mortgage products,” and that it would stifle innovation and restrict access to credit. Later, when we proposed to extend these guidelines to hybrid adjustable-rate mortgages, which at that time made up about 85 percent of all subprime loans, we received a letter co-signed by nine industry trade associations expressing “strong concerns” and saying that “imposing new underwriting requirements risks denying many borrowers the opportunity for homeownership or needed credit options.”
For our part, I think it is clear in hindsight that while our guidance was a step in the right direction, in the end it was too little, too late. To be sure, most—but not all – of the high risk mortgage lending was originated outside of insured banking institutions. But many large banks funded non-bank originators without appropriate oversight or controls.
And CRE lending did not cause the crisis, though poor management of CRE concentrations made far too many institutions vulnerable to the housing market correction when it finally turned. I think we all missed some opportunities before the crisis to help protect well-run institutions from the high-fliers – both within and outside the banking industry – whose risky lending practices were paving the way for the real estate crisis.
This is where I think the regulators and the industry should stand on common ground, in our determination to prevent a race to the bottom in lending practices and portfolio structures. This will protect the Deposit Insurance Fund and well-managed banks from higher assessment rates in the midst of some future industry downturn. And I do see some recent signs of common purpose in the reforming bank regulation.
In comment letters we received earlier this year, the ABA, for example, has expressed its support for the implementation of the Orderly Liquidation Authority and other measures under Dodd-Frank that will help to restore competitive balance to the industry by ending the doctrine of Too Big To Fail. But when I hear some of the public statements of industry leaders about how stronger capital requirements or risk retention in securitization will stifle lending and douse the recovery, I do worry about the depth of that commitment.
I think there is great pressure to restore earnings to pre-crisis levels.
As we saw in the years leading up to the crisis, there is always the temptation to try to squeeze out a few more basis points in earnings now by watering down certain regulatory provisions that are designed to preserve the long-term stability of our financial system and the deposit insurance fund.
I’ll give one example.
Comments received earlier this year on our proposed change in the assessment base under Dodd-Frank said, in part, “it is best to err on the side of collecting less, not more, from the industry.” This comment was received at a time when the reported balance of the Deposit Insurance Fund was negative 8 billion dollars.
We need to get past rhetoric that implies that, when it comes to financial services, the best regulation is always less regulation.
We need to stand together on the principle that prudential standards are essential to protect the competitive position of responsible players from the excesses of the high-fliers.
And I would very much like to hear from the industry a constructive regulatory agenda that would use the provisions of Dodd-Frank to fix the problems that led to the crisis and help to protect consumers and preserve financial stability in the years ahead.
Public Perceptions of Banks in the Wake of the Crisis
This is not just my vision of how the regulators and the industry need to work together. My reading of recent polling data on how the public views banks also speaks to the need for a different approach from your industry. In April 2010, a Pew Research poll found that just 22 percent of respondents rated banks and other financial institutions as having “a positive effect on the way things are going in this country.”
This was lower than the ratings they gave to Congress, the federal government, big business, labor unions, and the entertainment industry. Even though Americans remain skeptical about government control over the economy, an April 2010 poll conducted by Pew Research found that some 61 percent of respondents supported more financial regulation, virtually unchanged from the spring of 2009.
If you narrow the focus of the questions just to Wall Street firms, the results are even more striking. In a Harris poll conducted in early 2010, some 82 percent of respondents agreed that “recent events have shown that Wall Street should be subject to tougher regulations.” Despite perennial concerns about the government’s role in the economy, only 25 percent of investors polled by Gallup earlier this month agreed that “new financial regulations” were doing a lot to hurt the investment climate.
Nearly three times as many felt that the federal budget deficit and high unemployment were major sources of concern. What really seems to stick in the craw of the public is the extraordinary assistance that was provided to financial companies while millions of Americans were losing their jobs and their homes.
A July 2010 poll conducted by the Pew Research Center and the National Journal shows that some 74 percent of respondents believed that government economic policies since 2008 had helped large banks and financial institutions “a great deal” or “a fair amount.” Only 27 percent thought these policies had helped the middle class, and only 23 percent felt they had helped small business. A Rasmussen poll published earlier this year shows that fully 50 percent of Americans believe the federal government is more concerned with making Wall Street firms profitable than with making sure the U.S. financial system works well for all Americans.
Manage Your Reputational Risk
Bank regulators are never going to be popular or glamorous in the eyes of the public. But the banking industry seems to have an even bigger image problem in the wake of the financial crisis.
What is important for you to recognize is that this type of reputation risk will eventually have implications for your bottom line and the confidence of your investors and customers. In this light, the biggest risk to the long-term success of the banking industry is not today’s difficult economic environment. That will improve over time.
And it is not the introduction of new regulatory rules that will curb the excesses that led to the financial crisis. The vast majority of well-run institutions will benefit from these changes. Instead, the biggest long-term risk to the success of the banking industry would be its failure to support the reforms needed to ensure long-term stability in our financial markets and our economy.
The American people have suffered enormous economic losses as a result of the financial crisis. In the years ahead, they will be asked to make more sacrifices to balance government budgets, repair public infrastructure, and rebuild our economic competitiveness. As this historical era unfolds, public opinion as to the role played by the banking industry seems unlikely to be neutral.
It is far more likely that banks will come to be viewed either as a group that supported the restoration of free enterprise and public responsibility in the American economy, or as a group that mainly looked out for its own short-term interests and resisted reforms that could have restored a sense of confidence and fairness in our financial markets.
Conclusion
Every one of your branches prominently displays the FDIC seal. It is a symbol of public confidence that assures the public that their money is safe if your institution should fail. But that seal also carries with it the expectation of your customers that they will be treated fairly and protected from unsuitable loan products and hidden service charges.
That public trust is sacred, and it is the very foundation of the long-term success of your industry.
If bankers and regulators are to uphold that trust, we must demonstrate the ability to work together and engage in long-term thinking that will protect consumers, preserve financial stability, and lay the foundation for a stronger U.S. economy in the years ahead.
Thank you."
"Remarks by FDIC Chairman Sheila C. Bair to the ABA Government Relations Summit, Washington, DC
March 16, 2011
Good morning. I am pleased to have the opportunity to join you for this year’s ABA Government Relations Summit.
We are, in many ways, at a crossroads in terms of the future of the commercial banking industry -- how it is regulated, and whether it will in fact fulfill its promise as an engine of growth for the U.S. economy. The past few years have taught all of us some painful lessons.
In 2008, our financial markets and institutions came literally to the brink of systemic collapse. Despite a massive infusion of federal support, our economy still experienced its worst recession since the 1930s. Economists tell us that the recession ended almost two years ago, and it’s true that overall business activity has continued to trend higher since then.
But 13.7 million people remain officially unemployed, and millions more are underemployed. Six million Americans have been officially out of work for more than six months. The banking industry is indeed recovering, but that process remains incomplete.
Problem loans are declining, as are loan-loss provisions. But bankers remain concerned about rebuilding their earnings capacity in the wake of the crisis. And many of you are pointing to heightened regulatory oversight as a primary source of concern in the earnings outlook.
We have heard:
that higher capital standards will reduce lending and economic growth,
that restrictions on capital markets activities will push business overseas, and
that the impending Dodd-Frank reforms are both creating unresolved uncertainty for banks and moving along too fast for comfort.
This may be my last opportunity to speak with you before the end of my term in June.
I would like to take this opportunity to discuss with you what I think are some real challenges facing the banking industry, and how the industry can play a more constructive role in the economic recovery and the reform process. Despite the sometimes heated rhetoric about the direction of regulation, I think bankers, regulators, and the public really do share many of the same goals and concerns for the future.
Short-Term Challenges and the Long-Term Economic Future
First, I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not – and should not be – the main goal of our national economic policy.
Yes, as we found out in the Fall of 2008, banking is critically important to the ability of our economy to function. And in the wake of the crisis, it looks like bank lending will have to be an even more important ingredient in financing economic activity than it was just a few years ago.
But, in policy terms, the success of the financial sector is not an end in itself, but a means to an end – which is to support the vitality of the real economy and the livelihood of the American people. What really matters to the life of our nation is enabling entrepreneurs to build new businesses that create more well-paying jobs, and enabling families to put a roof over their heads and educate their children.
In our national economic life, your contribution as bankers, and ours as regulators, can only be measured against this yardstick. And let’s be completely honest – in the period that led up to the financial crisis we did not get the job done. FDIC-insured institutions booked record earnings in each of the first six years of the last decade.
But in the recession that followed, the U.S. economy lost over 8-and-a-half million jobs, of which only about 1.2 million have been regained in the recovery. There are almost two million fewer private-sector jobs in this country today than there were in December 1999, eleven years ago. More than nine million residential mortgages have entered foreclosure in the past four years, and the backlog of seriously past due mortgages stands at more than two-and-a-half million.
The lesson for policymakers is that having a profitable banking industry, even for years at a time, is not sufficient on its own to support the long-term credit needs of the U.S. economy. Instead, the industry also needs to be stable, and its earnings must be sustainable over the long term. This, quite simply, is why regulatory changes must be made.
Is the Problem Regulation – or Confidence?
While it is clearly recovering, our economy continues to face some significant challenges.
The balance sheets of households, depository institutions, state and local governments and the federal government all suffered serious damage as a result of the recession. All of these sectors are taking steps to repair that damage, but in some cases it will be a long, painful process.
In some respects we have seen a dramatic improvement in investor confidence and the functioning of financial markets. Credit spreads are down, stock prices are up, and lending standards have eased a little. We’re finding that troubled institutions have recently been better able to raise capital or find an acquirer before failure, and we have also been getting better bids for failed banks that have good retail franchises.
But not every part of our financial system is working the way it is supposed to.
The issuance of private mortgage-backed securities last year was just $60 billion, the same as in 2009 and down almost 95 percent from the peak years of 2005 and 2006. Let’s be clear – the collapse in this market is not the result of actual or anticipated regulatory intervention. Instead, it is the result of a crisis of confidence on the part of investors who lost hundreds of billions of dollars in the mortgage crisis.
And this is not the only area of lending where volume has declined sharply.
The issuance of non-mortgage asset-backed securities is down by well more than half. And in the last three years, the volume of loans for the construction and development of real estate, or C&D loans, held by FDIC-insured institutions also has fallen by half. Net charge-offs of C&D loans during this period now exceed 10 percent of the loans that were on the books at year-end 2007.
There are some who continue to point to over-zealous regulators as the reason for rising charge-offs and declining balances in C&D portfolios. But the truth is that small and mid-sized institutions held record-high concentrations of these loans when U.S. real estate markets began their historic slide in 2006 and 2007. Regulators have done what they can in the wake of the crisis to facilitate loan workouts that help borrowers and banks while conforming to accepted accounting principles.
But we cannot make the problem go away overnight.
The Industry Needs Regulation to Prevent Excesses
With the benefit of hindsight, I think we all can agree that the time for action would have been before the crisis – when rapid growth in subprime and nontraditional mortgage loans was undermining the foundations of our housing markets, and poorly-managed concentrations in commercial real estate and construction lending were making many small and mid-sized institutions highly vulnerable to a real estate downturn.
As you will recall, regulators did propose and issue guidance on managing commercial real estate concentrations and on nontraditional mortgage lending in 2006, and then extended the mortgage guidance to cover subprime hybrid loans in early 2007. In retrospect, it could have been very helpful if well-run institutions had supported these proposals.
But a review of comment letters sent to regulators by industry trade associations before the crisis shows a consistent pattern of opposition. With regard to commercial real estate concentrations, comments from the various trade associations asserted that:
new guidance was not needed and would only increase regulatory burden,
industry practices had vastly improved since the last real estate downturn, and
high levels of commercial real estate lending were necessary in order for small and midsized institutions to effectively compete against larger institutions.
When we issued proposed guidance on non-traditional mortgages, industry comments found the guidance too proscriptive, saying that it “overstate[d] the risk of these mortgage products,” and that it would stifle innovation and restrict access to credit. Later, when we proposed to extend these guidelines to hybrid adjustable-rate mortgages, which at that time made up about 85 percent of all subprime loans, we received a letter co-signed by nine industry trade associations expressing “strong concerns” and saying that “imposing new underwriting requirements risks denying many borrowers the opportunity for homeownership or needed credit options.”
For our part, I think it is clear in hindsight that while our guidance was a step in the right direction, in the end it was too little, too late. To be sure, most—but not all – of the high risk mortgage lending was originated outside of insured banking institutions. But many large banks funded non-bank originators without appropriate oversight or controls.
And CRE lending did not cause the crisis, though poor management of CRE concentrations made far too many institutions vulnerable to the housing market correction when it finally turned. I think we all missed some opportunities before the crisis to help protect well-run institutions from the high-fliers – both within and outside the banking industry – whose risky lending practices were paving the way for the real estate crisis.
This is where I think the regulators and the industry should stand on common ground, in our determination to prevent a race to the bottom in lending practices and portfolio structures. This will protect the Deposit Insurance Fund and well-managed banks from higher assessment rates in the midst of some future industry downturn. And I do see some recent signs of common purpose in the reforming bank regulation.
In comment letters we received earlier this year, the ABA, for example, has expressed its support for the implementation of the Orderly Liquidation Authority and other measures under Dodd-Frank that will help to restore competitive balance to the industry by ending the doctrine of Too Big To Fail. But when I hear some of the public statements of industry leaders about how stronger capital requirements or risk retention in securitization will stifle lending and douse the recovery, I do worry about the depth of that commitment.
I think there is great pressure to restore earnings to pre-crisis levels.
As we saw in the years leading up to the crisis, there is always the temptation to try to squeeze out a few more basis points in earnings now by watering down certain regulatory provisions that are designed to preserve the long-term stability of our financial system and the deposit insurance fund.
I’ll give one example.
Comments received earlier this year on our proposed change in the assessment base under Dodd-Frank said, in part, “it is best to err on the side of collecting less, not more, from the industry.” This comment was received at a time when the reported balance of the Deposit Insurance Fund was negative 8 billion dollars.
We need to get past rhetoric that implies that, when it comes to financial services, the best regulation is always less regulation.
We need to stand together on the principle that prudential standards are essential to protect the competitive position of responsible players from the excesses of the high-fliers.
And I would very much like to hear from the industry a constructive regulatory agenda that would use the provisions of Dodd-Frank to fix the problems that led to the crisis and help to protect consumers and preserve financial stability in the years ahead.
Public Perceptions of Banks in the Wake of the Crisis
This is not just my vision of how the regulators and the industry need to work together. My reading of recent polling data on how the public views banks also speaks to the need for a different approach from your industry. In April 2010, a Pew Research poll found that just 22 percent of respondents rated banks and other financial institutions as having “a positive effect on the way things are going in this country.”
This was lower than the ratings they gave to Congress, the federal government, big business, labor unions, and the entertainment industry. Even though Americans remain skeptical about government control over the economy, an April 2010 poll conducted by Pew Research found that some 61 percent of respondents supported more financial regulation, virtually unchanged from the spring of 2009.
If you narrow the focus of the questions just to Wall Street firms, the results are even more striking. In a Harris poll conducted in early 2010, some 82 percent of respondents agreed that “recent events have shown that Wall Street should be subject to tougher regulations.” Despite perennial concerns about the government’s role in the economy, only 25 percent of investors polled by Gallup earlier this month agreed that “new financial regulations” were doing a lot to hurt the investment climate.
Nearly three times as many felt that the federal budget deficit and high unemployment were major sources of concern. What really seems to stick in the craw of the public is the extraordinary assistance that was provided to financial companies while millions of Americans were losing their jobs and their homes.
A July 2010 poll conducted by the Pew Research Center and the National Journal shows that some 74 percent of respondents believed that government economic policies since 2008 had helped large banks and financial institutions “a great deal” or “a fair amount.” Only 27 percent thought these policies had helped the middle class, and only 23 percent felt they had helped small business. A Rasmussen poll published earlier this year shows that fully 50 percent of Americans believe the federal government is more concerned with making Wall Street firms profitable than with making sure the U.S. financial system works well for all Americans.
Manage Your Reputational Risk
Bank regulators are never going to be popular or glamorous in the eyes of the public. But the banking industry seems to have an even bigger image problem in the wake of the financial crisis.
What is important for you to recognize is that this type of reputation risk will eventually have implications for your bottom line and the confidence of your investors and customers. In this light, the biggest risk to the long-term success of the banking industry is not today’s difficult economic environment. That will improve over time.
And it is not the introduction of new regulatory rules that will curb the excesses that led to the financial crisis. The vast majority of well-run institutions will benefit from these changes. Instead, the biggest long-term risk to the success of the banking industry would be its failure to support the reforms needed to ensure long-term stability in our financial markets and our economy.
The American people have suffered enormous economic losses as a result of the financial crisis. In the years ahead, they will be asked to make more sacrifices to balance government budgets, repair public infrastructure, and rebuild our economic competitiveness. As this historical era unfolds, public opinion as to the role played by the banking industry seems unlikely to be neutral.
It is far more likely that banks will come to be viewed either as a group that supported the restoration of free enterprise and public responsibility in the American economy, or as a group that mainly looked out for its own short-term interests and resisted reforms that could have restored a sense of confidence and fairness in our financial markets.
Conclusion
Every one of your branches prominently displays the FDIC seal. It is a symbol of public confidence that assures the public that their money is safe if your institution should fail. But that seal also carries with it the expectation of your customers that they will be treated fairly and protected from unsuitable loan products and hidden service charges.
That public trust is sacred, and it is the very foundation of the long-term success of your industry.
If bankers and regulators are to uphold that trust, we must demonstrate the ability to work together and engage in long-term thinking that will protect consumers, preserve financial stability, and lay the foundation for a stronger U.S. economy in the years ahead.
Thank you."
FDIC PROPOSES NEW RULE TO RECOUP LOSSES FROM EXECUTIVES
The following is an outline obtained from the Federal Deposit Insurance Corporation web site regarding proposed new rules to reform Wall Street:
“The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved a Notice of Proposed Rulemaking (NPR) to further clarify application of the orderly liquidation authority contained in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, "Orderly Liquidation Authority" (OLA). The NPR builds on the interim rule approved by the FDIC on January 18, 2011, which clarified certain discrete issues under the OLA. The NPR approved today establishes a comprehensive framework for the priority payment of creditors and for the procedures for filing a claim with the receiver and, if dissatisfied, pursuing the claim in court. The NPR also clarifies additional issues important to the implementation of the OLA, including how compensation will be recouped from senior executives and directors who are substantially responsible for the failure of the firm. The NPR, along with the interim final rule, is intended to provide clarity and certainty about how key components of OLA will be implemented and to ensure that the liquidation process under Title II reflects the Dodd-Frank Act's mandate of transparency in the liquidation of covered financial companies.
"Today's action is another significant step toward leveling the competitive playing field and enforcing market discipline on all financial institutions, no matter their size. Under Dodd-Frank, the shareholders and creditors will bear the cost of any failure, not taxpayers," said FDIC Chairman Sheila C. Bair. "This NPR provides clarity to the process by letting creditors know clearly how they can file a claim and how they will be paid for their claims. This is an important step in providing certainty for the market in this new process."
In addition to the priority of claims and the procedures for filing and pursuing claims, the NPR defines the ability of the receiver to recoup compensation from persons who are substantially responsible for the financial condition of the company under Section 210(s) of the Dodd-Frank Act. Before seeking to recoup compensation, the receiver will consider whether the senior executive performed his or her responsibilities with the requisite degree of skill and care, and whether the individual caused a loss that materially contributed to the failure of the financial company. However, for the most senior executives, including those performing the duties of CEO, COO, CFO, as well as the Chairman of the Board, there will be a presumption that they are substantially responsible and thus subject to recoupment of up to two years of compensation. An exception is created for executives recently hired by the financial company specifically for improving its condition.
The NPR also ensures that the preferential and fraudulent transfer provisions of the Dodd-Frank Act are implemented consistently with the corresponding provisions of the Bankruptcy Code. The proposed rule conforms to the interpretation provided by the FDIC General Counsel in December 2010.
Finally, the NPR clarifies the meaning of "financial company" under OLA. Under the proposal, a financial company will be defined as "predominantly engaged" in financial activates if their organization derived at least 85 percent of its total consolidated revenue from financial activities over the two most recent fiscal years. This rule will enhance certainty about which financial companies could be subject to resolution under OLA.
The proposed rule will be out for comment 60 days after publication in the Federal Register.”
The way the above reads seems to indicate that a receiver managing a failed financial institution can attempt to get at least some money back from certain executives and corporate directors if they do not act as they should in their capacity as having a major input as to how a financial institution is managed. It also indicates that a financial institution is an entity that gets 85% of its revenue from financial activities. These clarifications to the Dodd-Frank act might help spare the government a great deal of money which is often needed to shore up failing financial institutions.
“The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved a Notice of Proposed Rulemaking (NPR) to further clarify application of the orderly liquidation authority contained in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, "Orderly Liquidation Authority" (OLA). The NPR builds on the interim rule approved by the FDIC on January 18, 2011, which clarified certain discrete issues under the OLA. The NPR approved today establishes a comprehensive framework for the priority payment of creditors and for the procedures for filing a claim with the receiver and, if dissatisfied, pursuing the claim in court. The NPR also clarifies additional issues important to the implementation of the OLA, including how compensation will be recouped from senior executives and directors who are substantially responsible for the failure of the firm. The NPR, along with the interim final rule, is intended to provide clarity and certainty about how key components of OLA will be implemented and to ensure that the liquidation process under Title II reflects the Dodd-Frank Act's mandate of transparency in the liquidation of covered financial companies.
"Today's action is another significant step toward leveling the competitive playing field and enforcing market discipline on all financial institutions, no matter their size. Under Dodd-Frank, the shareholders and creditors will bear the cost of any failure, not taxpayers," said FDIC Chairman Sheila C. Bair. "This NPR provides clarity to the process by letting creditors know clearly how they can file a claim and how they will be paid for their claims. This is an important step in providing certainty for the market in this new process."
In addition to the priority of claims and the procedures for filing and pursuing claims, the NPR defines the ability of the receiver to recoup compensation from persons who are substantially responsible for the financial condition of the company under Section 210(s) of the Dodd-Frank Act. Before seeking to recoup compensation, the receiver will consider whether the senior executive performed his or her responsibilities with the requisite degree of skill and care, and whether the individual caused a loss that materially contributed to the failure of the financial company. However, for the most senior executives, including those performing the duties of CEO, COO, CFO, as well as the Chairman of the Board, there will be a presumption that they are substantially responsible and thus subject to recoupment of up to two years of compensation. An exception is created for executives recently hired by the financial company specifically for improving its condition.
The NPR also ensures that the preferential and fraudulent transfer provisions of the Dodd-Frank Act are implemented consistently with the corresponding provisions of the Bankruptcy Code. The proposed rule conforms to the interpretation provided by the FDIC General Counsel in December 2010.
Finally, the NPR clarifies the meaning of "financial company" under OLA. Under the proposal, a financial company will be defined as "predominantly engaged" in financial activates if their organization derived at least 85 percent of its total consolidated revenue from financial activities over the two most recent fiscal years. This rule will enhance certainty about which financial companies could be subject to resolution under OLA.
The proposed rule will be out for comment 60 days after publication in the Federal Register.”
The way the above reads seems to indicate that a receiver managing a failed financial institution can attempt to get at least some money back from certain executives and corporate directors if they do not act as they should in their capacity as having a major input as to how a financial institution is managed. It also indicates that a financial institution is an entity that gets 85% of its revenue from financial activities. These clarifications to the Dodd-Frank act might help spare the government a great deal of money which is often needed to shore up failing financial institutions.
Sunday, March 13, 2011
SEC CHARGES INDYMAC EXECUTIVES WITH FRAUD
The SEC occasionally brings charges against bank executives. The following excerpt from the SEC web site alleges that executives at IndyMac Bancorp lied to their investors:
“Washington, D.C., Feb. 11, 2011 — The Securities and Exchange Commission today charged three former senior executives at IndyMac Bancorp with securities fraud for misleading investors about the mortgage lender’s deteriorating financial condition.
The SEC alleges that former CEO Michael W. Perry and former CFOs A. Scott Keys and S. Blair Abernathy participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank F.S.B. The three executives regularly received internal reports about IndyMac’s deteriorating capital and liquidity positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to investors as IndyMac sold millions of dollars in new stock.
IndyMac Bank was a federally-chartered thrift institution regulated by the Office of Thrift Supervision (OTS) and headquartered in Pasadena, Calif. The OTS closed the bank on July 11, 2008, and placed it under Federal Deposit Insurance Corporation (FDIC) receivership. IndyMac filed for bankruptcy protection later that month.
“These corporate executives made false and misleading disclosures about IndyMac at a time when the company’s financial condition was rapidly deteriorating. Truthful and accurate disclosure to investors is particularly critical during a time of crisis, and the federal securities laws do not become optional when the news is negative,” said Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement.
According to the SEC’s complaints filed in U.S. District Court for the Central District of California, Perry and Keys defrauded new and existing IndyMac shareholders by making false and misleading statements about IndyMac’s financial condition in its 2007 annual report and in offering materials for the company’s sale of $100 million in new stock to investors. In early February 2008, IndyMac projected that it would return to profitability and continue to pay preferred dividends in 2008 without having to raise new capital. In late February 2008, Perry and Keys knew that contrary to the rosy projections released just two weeks earlier, IndyMac had begun raising new capital to protect IndyMac’s capital and liquidity positions. Specifically, Perry and Keys regularly received information that IndyMac’s financial condition was rapidly deteriorating and authorized new stock sales as a result. Yet they fraudulently failed to fully disclose IndyMac’s precarious financial condition in the 2007 annual report and the offering documents for the new stock sales.
The SEC further alleges that Perry knew that rating downgrades in April 2008 on bonds held by IndyMac Bank had exacerbated its capital and liquidity positions to the extent that IndyMac had no choice but to suspend future preferred dividend payments by no later than May 2, 2008. This material information was not disclosed in IndyMac’s ongoing stock offerings. Perry also failed to disclose in various SEC filings or a May 2008 earnings conference call that IndyMac would not have been “well-capitalized” at the end of its first quarter without departing from its traditional method for risk-weighting subprime assets and backdating an $18 million capital contribution.
According to the SEC’s complaint, Abernathy replaced Keys as IndyMac’s CFO in April 2008. He similarly made false and misleading statements in the offering documents used in selling new IndyMac stock to investors despite regularly receiving internal reports about IndyMac’s deteriorating capital and liquidity positions.
The SEC also alleges that in summer 2007 while serving as IndyMac’s executive vice president in charge of specialty lending, Abernathy made false and misleading statements about the quality of the loans in six IndyMac offerings of residential mortgage-backed securities (RMBS) totaling $2.5 billion. Abernathy received internal reports each month revealing that 12 to 18 percent of IndyMac’s loans contained misrepresentations regarding important loan and borrower characteristics. However, the RMBS offering documents stated that nothing had come to IndyMac’s attention that any loan included in the offering contained a misrepresentation. The SEC alleges that Abernathy failed to ensure that the quality of IndyMac’s loans was accurately disclosed and failed to disclose that information had come to IndyMac’s attention about loans containing misrepresentations.
Abernathy agreed to settle the SEC’s charges without admitting or denying the allegations. He consented to the entry of an order that permanently restrains and enjoins him from violating Section 17(a)(2) and 17(a)(3) of the Securities Act and requires him to pay a $100,000 penalty, $25,000 in disgorgement, and prejudgment interest of $1,592.26. Abernathy also consented to the issuance of an administrative order pursuant to Rule 102(e) of the SEC’s Rules of Practice, suspending him from appearing or practicing before the SEC as an accountant. He has the right to apply for reinstatement after two years.
The SEC’s complaint charges Perry and Keys with knowingly violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aiding and abetting IndyMac’s violations of its periodic reporting requirements under Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Perry also is charged with aiding and abetting IndyMac’s reporting violations under Exchange Act Rules 13a-11 and 13a-13. The SEC’s complaint against Perry and Keys seeks permanent injunctive relief, an officer and director bar, disgorgement of ill-gotten gains with prejudgment interest, and a financial penalty.
The SEC acknowledges the assistance of the FDIC in this investigation.”
An executive lying to stockholders is very common in the United States. Seldom are any real penalties given or even charges brought against executives who lie. In fact lying seems to be a prerequisite for the post of CEO at most U.S. corporations that I look at as an investor. Perhaps stockholders believe they need a devious monster to run their company. The problem with devious people is that they tend to steal from everyone. A ruthless person when it comes to competitors is also a ruthless person when it comes to stockholders. To paraphrase Shakespeare a thief by any other name is still a thief.
“Washington, D.C., Feb. 11, 2011 — The Securities and Exchange Commission today charged three former senior executives at IndyMac Bancorp with securities fraud for misleading investors about the mortgage lender’s deteriorating financial condition.
The SEC alleges that former CEO Michael W. Perry and former CFOs A. Scott Keys and S. Blair Abernathy participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank F.S.B. The three executives regularly received internal reports about IndyMac’s deteriorating capital and liquidity positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to investors as IndyMac sold millions of dollars in new stock.
IndyMac Bank was a federally-chartered thrift institution regulated by the Office of Thrift Supervision (OTS) and headquartered in Pasadena, Calif. The OTS closed the bank on July 11, 2008, and placed it under Federal Deposit Insurance Corporation (FDIC) receivership. IndyMac filed for bankruptcy protection later that month.
“These corporate executives made false and misleading disclosures about IndyMac at a time when the company’s financial condition was rapidly deteriorating. Truthful and accurate disclosure to investors is particularly critical during a time of crisis, and the federal securities laws do not become optional when the news is negative,” said Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement.
According to the SEC’s complaints filed in U.S. District Court for the Central District of California, Perry and Keys defrauded new and existing IndyMac shareholders by making false and misleading statements about IndyMac’s financial condition in its 2007 annual report and in offering materials for the company’s sale of $100 million in new stock to investors. In early February 2008, IndyMac projected that it would return to profitability and continue to pay preferred dividends in 2008 without having to raise new capital. In late February 2008, Perry and Keys knew that contrary to the rosy projections released just two weeks earlier, IndyMac had begun raising new capital to protect IndyMac’s capital and liquidity positions. Specifically, Perry and Keys regularly received information that IndyMac’s financial condition was rapidly deteriorating and authorized new stock sales as a result. Yet they fraudulently failed to fully disclose IndyMac’s precarious financial condition in the 2007 annual report and the offering documents for the new stock sales.
The SEC further alleges that Perry knew that rating downgrades in April 2008 on bonds held by IndyMac Bank had exacerbated its capital and liquidity positions to the extent that IndyMac had no choice but to suspend future preferred dividend payments by no later than May 2, 2008. This material information was not disclosed in IndyMac’s ongoing stock offerings. Perry also failed to disclose in various SEC filings or a May 2008 earnings conference call that IndyMac would not have been “well-capitalized” at the end of its first quarter without departing from its traditional method for risk-weighting subprime assets and backdating an $18 million capital contribution.
According to the SEC’s complaint, Abernathy replaced Keys as IndyMac’s CFO in April 2008. He similarly made false and misleading statements in the offering documents used in selling new IndyMac stock to investors despite regularly receiving internal reports about IndyMac’s deteriorating capital and liquidity positions.
The SEC also alleges that in summer 2007 while serving as IndyMac’s executive vice president in charge of specialty lending, Abernathy made false and misleading statements about the quality of the loans in six IndyMac offerings of residential mortgage-backed securities (RMBS) totaling $2.5 billion. Abernathy received internal reports each month revealing that 12 to 18 percent of IndyMac’s loans contained misrepresentations regarding important loan and borrower characteristics. However, the RMBS offering documents stated that nothing had come to IndyMac’s attention that any loan included in the offering contained a misrepresentation. The SEC alleges that Abernathy failed to ensure that the quality of IndyMac’s loans was accurately disclosed and failed to disclose that information had come to IndyMac’s attention about loans containing misrepresentations.
Abernathy agreed to settle the SEC’s charges without admitting or denying the allegations. He consented to the entry of an order that permanently restrains and enjoins him from violating Section 17(a)(2) and 17(a)(3) of the Securities Act and requires him to pay a $100,000 penalty, $25,000 in disgorgement, and prejudgment interest of $1,592.26. Abernathy also consented to the issuance of an administrative order pursuant to Rule 102(e) of the SEC’s Rules of Practice, suspending him from appearing or practicing before the SEC as an accountant. He has the right to apply for reinstatement after two years.
The SEC’s complaint charges Perry and Keys with knowingly violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aiding and abetting IndyMac’s violations of its periodic reporting requirements under Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Perry also is charged with aiding and abetting IndyMac’s reporting violations under Exchange Act Rules 13a-11 and 13a-13. The SEC’s complaint against Perry and Keys seeks permanent injunctive relief, an officer and director bar, disgorgement of ill-gotten gains with prejudgment interest, and a financial penalty.
The SEC acknowledges the assistance of the FDIC in this investigation.”
An executive lying to stockholders is very common in the United States. Seldom are any real penalties given or even charges brought against executives who lie. In fact lying seems to be a prerequisite for the post of CEO at most U.S. corporations that I look at as an investor. Perhaps stockholders believe they need a devious monster to run their company. The problem with devious people is that they tend to steal from everyone. A ruthless person when it comes to competitors is also a ruthless person when it comes to stockholders. To paraphrase Shakespeare a thief by any other name is still a thief.
Wednesday, March 9, 2011
SEC GOES AFTER UBS FINACIAL ADVISER
The problem with modern American capitalism is that stealing is a good business practice. Proponents of modern capitalism say that people act in their own self interests and therefore everyone you do business with is a thief and everyone should realize that they will be ripped-off every time they do any kind of business. Organizing societies around stealing will result in the long run in very bad results namely, murderous revolutions like the one led by Robes Pierre. The following is a case in which the SEC alleges that a man lived beyond his means by stealing from his clients. The following is an excerpt from the case.
Washington, D.C., March 3, 2011 – The Securities and Exchange Commission today charged a former financial adviser at UBS Financial Services LLC with misappropriating $3.3 million in a scheme that included bilking investors in a private investment fund he established.
The SEC alleges that Steven T. Kobayashi, who worked in UBS’s Walnut Creek, Calif., office, created a pooled investment fund to invest in life insurance policies. But he wound up stealing much of the money to support his extravagant lifestyle. Kobayashi concealed his fraud by liquidating his customers’ securities and funneling the money back to the fund and its investors.
In a parallel action, the U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Kobayashi arising from some of the same alleged misconduct.
“Investors count on their brokers to safeguard their investments,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “It’s difficult to imagine a more flagrant abuse of that trust than the manner in which Kobayashi pocketed his customers’ money and used it to feed his own habits.”
According to the SEC complaint filed today in federal district court in Oakland, Kobayashi established Life Settlement Partners LLC (LSP), a fund that invested in life settlement policies. He raised several million dollars from his UBS customers for the fund. Beginning in early 2006, Kobayashi used LSP’s bank accounts as his personal piggy bank, spending at least $1.4 million in investor funds on expensive cars, prostitutes, and large gambling debts.
The SEC alleges that in an attempt to repay LSP and its investors before they discovered his theft, Kobayashi induced several of his other UBS customers to liquidate securities in their UBS accounts and transfer the proceeds of those sales to entities that he controlled. In this manner, he stole an additional $1.9 million from these investors.
Kobayashi, who lives in Livermore, Calif., agreed to settle the SEC’s charges against him without admitting or denying the allegations. He agreed to a permanent injunction from further violations of the antifraud and other provisions of the federal securities laws, and consented to the institution of public administrative proceedings against him in which he will be permanently barred from associating with entities in the securities industry. The amount of ill-gotten gains and monetary penalties that Kobayashi will be required to pay will be determined by the court at a later date.
The SEC acknowledges the assistance of the U.S. Attorney's Office for the Northern District of California, the Federal Bureau of Investigation, and the Internal Revenue Service.”
Perhaps the modern capitalist state will one day be defined as an epitaph of evil. Real capitalism comes from the heart. It comes from the minds of people who want to better the lives of their fellow human beings. It has nothing to do with just cheating people as the vast number of current capitalist believe. Beat and cheat is the mantra of most capitalists today.
Washington, D.C., March 3, 2011 – The Securities and Exchange Commission today charged a former financial adviser at UBS Financial Services LLC with misappropriating $3.3 million in a scheme that included bilking investors in a private investment fund he established.
The SEC alleges that Steven T. Kobayashi, who worked in UBS’s Walnut Creek, Calif., office, created a pooled investment fund to invest in life insurance policies. But he wound up stealing much of the money to support his extravagant lifestyle. Kobayashi concealed his fraud by liquidating his customers’ securities and funneling the money back to the fund and its investors.
In a parallel action, the U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Kobayashi arising from some of the same alleged misconduct.
“Investors count on their brokers to safeguard their investments,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “It’s difficult to imagine a more flagrant abuse of that trust than the manner in which Kobayashi pocketed his customers’ money and used it to feed his own habits.”
According to the SEC complaint filed today in federal district court in Oakland, Kobayashi established Life Settlement Partners LLC (LSP), a fund that invested in life settlement policies. He raised several million dollars from his UBS customers for the fund. Beginning in early 2006, Kobayashi used LSP’s bank accounts as his personal piggy bank, spending at least $1.4 million in investor funds on expensive cars, prostitutes, and large gambling debts.
The SEC alleges that in an attempt to repay LSP and its investors before they discovered his theft, Kobayashi induced several of his other UBS customers to liquidate securities in their UBS accounts and transfer the proceeds of those sales to entities that he controlled. In this manner, he stole an additional $1.9 million from these investors.
Kobayashi, who lives in Livermore, Calif., agreed to settle the SEC’s charges against him without admitting or denying the allegations. He agreed to a permanent injunction from further violations of the antifraud and other provisions of the federal securities laws, and consented to the institution of public administrative proceedings against him in which he will be permanently barred from associating with entities in the securities industry. The amount of ill-gotten gains and monetary penalties that Kobayashi will be required to pay will be determined by the court at a later date.
The SEC acknowledges the assistance of the U.S. Attorney's Office for the Northern District of California, the Federal Bureau of Investigation, and the Internal Revenue Service.”
Perhaps the modern capitalist state will one day be defined as an epitaph of evil. Real capitalism comes from the heart. It comes from the minds of people who want to better the lives of their fellow human beings. It has nothing to do with just cheating people as the vast number of current capitalist believe. Beat and cheat is the mantra of most capitalists today.
Sunday, March 6, 2011
SEC ALLEGES FIRM PAID $2.5 MILLION IN BRIBES TO CHINESE OFFICIALS
The following case is one which involves the alleged bribing of officials in China by a U. S. based manufacturer. It is unfortunate that on occasion in some nations bribery takes place. The following excerpt is from the SEC web page:
“ Washington, D.C., Jan. 31, 2011 — The Securities and Exchange Commission today charged energy-related products manufacturer Maxwell Technologies Inc. with violating the Foreign Corrupt Practices Act (FCPA) by repeatedly paying bribes to government officials in China to obtain business from several Chinese state-owned entities.
The SEC alleges that a Maxwell subsidiary paid more than $2.5 million in bribes to Chinese officials through a third-party sales agent from 2002 to May 2009. As a result, the subsidiary was awarded contracts that generated more than $15 million in revenues and $5.6 million in profits for Maxwell. These sales and profits helped Maxwell offset losses that it incurred to develop new products now expected to become Maxwell's future source of revenue growth.
Maxwell — a Delaware corporation headquartered in San Diego — has agreed to pay more than $6.3 million to settle the SEC's charges. In a related criminal proceeding, Maxwell has reached a settlement with the U.S. Department of Justice and agreed to pay an $8 million penalty.
"Maxwell's bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold," said Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit. "This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws."
According to the SEC's complaint filed in U.S. District Court for the District of Columbia, Maxwell's wholly-owned Swiss subsidiary Maxwell Technologies SA paid the bribes to officials at several Chinese state-owned entities. The bribes were classified in invoices as either "Extra Amount" or "Special Arrangement" fees, and were made to improperly influence decisions by foreign officials to assist Maxwell in obtaining and retaining sales contracts for high voltage capacitors produced by Maxwell SA.
The SEC's complaint alleges that the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officials. For example, former management at Maxwell knew of the bribery scheme in late 2002 when an employee indicated in an e-mail that a payment made in connection with a sale in China appeared to be "a kick-back, pay-off, bribe, whatever you want to call it, . . . . in violation of US trade laws." A U.S.-based Maxwell executive replied that "this is a well know[n] issue" and he warned "[n]o more e-mails please."
The SEC alleges that Maxwell failed to devise and maintain an effective system of internal controls and improperly recorded the bribes on its books. The illicit sales and profits from the bribery scheme helped Maxwell offset losses that it incurred to develop its new products. Maxwell made corrections in its Form 10-Q filing for the quarter ended March 31, 2009.
Without admitting or denying the allegations in the SEC's complaint, Maxwell consented to the entry of a final judgment that permanently enjoins the company from future violations of Sections 30A, 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, orders the company to pay $5,654,576 in disgorgement and $696,314 in prejudgment interest under a payment plan. The company also is required to comply with certain undertakings regarding its FCPA compliance program. Maxwell cooperated in the investigation.
Tracy L. Price and James Valentino of the SEC Enforcement Division's FCPA Unit conducted the investigation. The Commission acknowledges the assistance of the Department of Justice's Criminal Division-Fraud Section in its investigation, which is continuing.”
Clearly one way to get ahead of your competition is to pay bribes. It is a nasty situation when corporations pay bribes to foreign officials. However, it is even a nastier situation when corporations pay bribes to shameless U.S. lawmakers and judges in the form of campaign contributions and jobs for their relatives. It seems almost foolish to enforce laws overseas when the men who make and sit in judgment on such laws in the U.S. are perhaps some the most corrupt officials in the world.
“ Washington, D.C., Jan. 31, 2011 — The Securities and Exchange Commission today charged energy-related products manufacturer Maxwell Technologies Inc. with violating the Foreign Corrupt Practices Act (FCPA) by repeatedly paying bribes to government officials in China to obtain business from several Chinese state-owned entities.
The SEC alleges that a Maxwell subsidiary paid more than $2.5 million in bribes to Chinese officials through a third-party sales agent from 2002 to May 2009. As a result, the subsidiary was awarded contracts that generated more than $15 million in revenues and $5.6 million in profits for Maxwell. These sales and profits helped Maxwell offset losses that it incurred to develop new products now expected to become Maxwell's future source of revenue growth.
Maxwell — a Delaware corporation headquartered in San Diego — has agreed to pay more than $6.3 million to settle the SEC's charges. In a related criminal proceeding, Maxwell has reached a settlement with the U.S. Department of Justice and agreed to pay an $8 million penalty.
"Maxwell's bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold," said Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit. "This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws."
According to the SEC's complaint filed in U.S. District Court for the District of Columbia, Maxwell's wholly-owned Swiss subsidiary Maxwell Technologies SA paid the bribes to officials at several Chinese state-owned entities. The bribes were classified in invoices as either "Extra Amount" or "Special Arrangement" fees, and were made to improperly influence decisions by foreign officials to assist Maxwell in obtaining and retaining sales contracts for high voltage capacitors produced by Maxwell SA.
The SEC's complaint alleges that the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officials. For example, former management at Maxwell knew of the bribery scheme in late 2002 when an employee indicated in an e-mail that a payment made in connection with a sale in China appeared to be "a kick-back, pay-off, bribe, whatever you want to call it, . . . . in violation of US trade laws." A U.S.-based Maxwell executive replied that "this is a well know[n] issue" and he warned "[n]o more e-mails please."
The SEC alleges that Maxwell failed to devise and maintain an effective system of internal controls and improperly recorded the bribes on its books. The illicit sales and profits from the bribery scheme helped Maxwell offset losses that it incurred to develop its new products. Maxwell made corrections in its Form 10-Q filing for the quarter ended March 31, 2009.
Without admitting or denying the allegations in the SEC's complaint, Maxwell consented to the entry of a final judgment that permanently enjoins the company from future violations of Sections 30A, 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, orders the company to pay $5,654,576 in disgorgement and $696,314 in prejudgment interest under a payment plan. The company also is required to comply with certain undertakings regarding its FCPA compliance program. Maxwell cooperated in the investigation.
Tracy L. Price and James Valentino of the SEC Enforcement Division's FCPA Unit conducted the investigation. The Commission acknowledges the assistance of the Department of Justice's Criminal Division-Fraud Section in its investigation, which is continuing.”
Clearly one way to get ahead of your competition is to pay bribes. It is a nasty situation when corporations pay bribes to foreign officials. However, it is even a nastier situation when corporations pay bribes to shameless U.S. lawmakers and judges in the form of campaign contributions and jobs for their relatives. It seems almost foolish to enforce laws overseas when the men who make and sit in judgment on such laws in the U.S. are perhaps some the most corrupt officials in the world.
Tuesday, March 1, 2011
SEC FILES CHARGES AGAINST FORMER GOLDMAN SACHS BOARD MEMBER
Insider information that comes from a low level insider might be hard to legitimize as a case worth pursuing if the insider has no financial gain from leaking information. However, when a high level executive or member of the board of directors of a major financial institution leaks the information to someone else in order to profit personally then, the case for insider trading can be easily made. The following is an excerpt from the SEC web site and it outlines a very compelling set of allegations against a former Goldman Sachs board member:
“Washington, D.C., March 1, 2011 – The Securities and Exchange Commission today announced insider trading charges against a Westport, Conn.-based business consultant who has served on the boards of directors at Goldman Sachs and Procter & Gamble for illegally tipping Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.
The SEC’s Division of Enforcement alleges that Rajat K. Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.
The SEC has previously charged Rajaratnam and others in the widespread insider trading scheme involving the Galleon hedge funds.
“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”
In the order that institutes administrative and cease-and-desist proceedings against Gupta, the SEC’s Division of Enforcement alleges that, while a member of Goldman’s Board of Directors, Gupta tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman’s Board considered and approved Berkshire’s investment in Goldman Sachs and the public equity offering. Within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before the market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $900,000.
The SEC’s Division of Enforcement alleges that Gupta also illegally disclosed to Rajaratnam inside information about Goldman Sachs’s positive financial results for the second quarter of 2008. Goldman Sachs CEO Lloyd Blankfein called Gupta and various other Goldman outside directors on June 10, when the company’s financial performance was significantly better than analysts’ consensus estimates. Blankfein knew the earnings numbers and discussed them with Gupta during the call. Between that night and the following morning, there was a flurry of calls between Gupta and Rajaratnam. Shortly after the last of these calls and within minutes after the markets opened on June 11, Rajaratnam caused certain Galleon funds to purchase more than 5,500 out-of-the-money Goldman call options and more than 350,000 Goldman shares. Rajaratnam liquidated these positions on or around June 17, when Goldman made its quarterly earnings announcement. These transactions generated illicit profits of more than $13.6 million for the Galleon funds.
The Division of Enforcement further alleges that Gupta tipped Rajaratnam with confidential information that he learned during a board posting call about Goldman’s impending negative financial results for the fourth quarter of 2008. The call ended after the close of the market on October 23, with senior executives informing the board of the company’s financial situation. Mere seconds after the board call, Gupta called Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 120,000 shares. In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman Sachs to earn $2.50 per share, he had heard the prior day from a Goldman Sachs board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on the inside information that Gupta provided, the Galleon funds avoided losses of more than $3 million.
Gupta served as a Goldman board member from November 2006 to May 2010, and has been serving on Procter & Gamble's board since 2007.
As it pertains to insider trades by the Galleon funds in the securities of Procter & Gamble, the Division of Enforcement alleges that Gupta illegally disclosed to Rajaratnam inside information about the company financial results for the quarter ending December 2008. Gupta participated in a telephonic meeting of P&G’s Audit Committee at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s quarterly earnings the next day. A draft of the earnings release, which had been mailed to Gupta and the other committee members two days before the meeting, indicated that P&G’s expected organic sales would be less than previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, and Rajaratnam shortly afterward advised another participant in the insider trading conspiracy that he had learned from a contact on P&G’s board that the company’s organic sales growth would be lower than expected. Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000.
The Division of Enforcement alleges that by engaging in the misconduct described in the SEC’s order, Gupta willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The administrative proceedings will determine what relief, if any, is in the public interest against Gupta, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties, an officer or director bar, and other remedial relief.”
It is good to see the SEC investigating a board member at a major financial institution. However, it is hopeful that the SEC will pursue investigations of others at Goldman and other large institutions for financial malfeasance. It is best to be suspicious whenever a person of some importance is a target of an investigation. Sometimes wolves will sacrifice a pup in order to escape a bear.
“Washington, D.C., March 1, 2011 – The Securities and Exchange Commission today announced insider trading charges against a Westport, Conn.-based business consultant who has served on the boards of directors at Goldman Sachs and Procter & Gamble for illegally tipping Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.
The SEC’s Division of Enforcement alleges that Rajat K. Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.
The SEC has previously charged Rajaratnam and others in the widespread insider trading scheme involving the Galleon hedge funds.
“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”
In the order that institutes administrative and cease-and-desist proceedings against Gupta, the SEC’s Division of Enforcement alleges that, while a member of Goldman’s Board of Directors, Gupta tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman’s Board considered and approved Berkshire’s investment in Goldman Sachs and the public equity offering. Within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before the market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $900,000.
The SEC’s Division of Enforcement alleges that Gupta also illegally disclosed to Rajaratnam inside information about Goldman Sachs’s positive financial results for the second quarter of 2008. Goldman Sachs CEO Lloyd Blankfein called Gupta and various other Goldman outside directors on June 10, when the company’s financial performance was significantly better than analysts’ consensus estimates. Blankfein knew the earnings numbers and discussed them with Gupta during the call. Between that night and the following morning, there was a flurry of calls between Gupta and Rajaratnam. Shortly after the last of these calls and within minutes after the markets opened on June 11, Rajaratnam caused certain Galleon funds to purchase more than 5,500 out-of-the-money Goldman call options and more than 350,000 Goldman shares. Rajaratnam liquidated these positions on or around June 17, when Goldman made its quarterly earnings announcement. These transactions generated illicit profits of more than $13.6 million for the Galleon funds.
The Division of Enforcement further alleges that Gupta tipped Rajaratnam with confidential information that he learned during a board posting call about Goldman’s impending negative financial results for the fourth quarter of 2008. The call ended after the close of the market on October 23, with senior executives informing the board of the company’s financial situation. Mere seconds after the board call, Gupta called Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 120,000 shares. In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman Sachs to earn $2.50 per share, he had heard the prior day from a Goldman Sachs board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on the inside information that Gupta provided, the Galleon funds avoided losses of more than $3 million.
Gupta served as a Goldman board member from November 2006 to May 2010, and has been serving on Procter & Gamble's board since 2007.
As it pertains to insider trades by the Galleon funds in the securities of Procter & Gamble, the Division of Enforcement alleges that Gupta illegally disclosed to Rajaratnam inside information about the company financial results for the quarter ending December 2008. Gupta participated in a telephonic meeting of P&G’s Audit Committee at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s quarterly earnings the next day. A draft of the earnings release, which had been mailed to Gupta and the other committee members two days before the meeting, indicated that P&G’s expected organic sales would be less than previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, and Rajaratnam shortly afterward advised another participant in the insider trading conspiracy that he had learned from a contact on P&G’s board that the company’s organic sales growth would be lower than expected. Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000.
The Division of Enforcement alleges that by engaging in the misconduct described in the SEC’s order, Gupta willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The administrative proceedings will determine what relief, if any, is in the public interest against Gupta, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties, an officer or director bar, and other remedial relief.”
It is good to see the SEC investigating a board member at a major financial institution. However, it is hopeful that the SEC will pursue investigations of others at Goldman and other large institutions for financial malfeasance. It is best to be suspicious whenever a person of some importance is a target of an investigation. Sometimes wolves will sacrifice a pup in order to escape a bear.
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