Credit rating agencies caused a great deal of harm to the world economy because of their poor performance in rating the credit worthiness of various securities related to mortgages. Many times these credit rating agencies worked for the companies selling the securities. This might be like having a used car dealer use one of the mechanics they employ to inform customers as to the condition of cars the dealer is selling. In the end the customers of broker/dealers of mortgage backed securities lost a great deal of money because they relied on the ratings of the credit rating agencies. There was of course another element that directly caused the economy to seize up.
The element that placed much of the economy at immediate risk was the inability for broker-dealers to have liquidity because the true credit worthiness of the mortgage backed securities they held was far less than what the credit rating agencies had determined. Because the liquid assets required to be maintained by broker-dealers was determined in part by the value of mortgage related securities when the true value of the mortgage related securities was determined by market forces many institutions became illiquid. The following changes are designed to deal with this issue and others relatng to credit rating agencies. The details below are an excerpt from the SEC web site:
“ Washington, D.C., April 27, 2011 — The Securities and Exchange Commission today voted unanimously to propose amendments that would remove references to credit ratings in several rules under the Exchange Act.
These proposals represent the next step in a series of actions taken under the Dodd-Frank Wall Street Reform and Consumer Protection Act to remove references to credit ratings within agency rules and, where appropriate, replace them with alternative criteria.
Proposed Rule Release No. 34-64352
Under Dodd-Frank, federal agencies must review how their existing regulations rely on credit ratings as an assessment of creditworthiness. At the conclusion of this review, each agency is required to report to Congress on how the agency modified these references to replace them with alternative standards that the agency determined to be appropriate.
Public comments on the rule amendments should be received within 60 days after they are published in the Federal Register.
Credit rating agencies are organizations that rate the credit-worthiness of a company or a financial product, such as a debt security or money market instrument. These credit ratings are often considered by investors evaluating whether to purchase securities.
In passing the Dodd-Frank Act, Congress included a provision in Section 939A that requires every federal agency to review rules that use credit ratings as an assessment of credit-worthiness. At the conclusion of this review, each agency is required to report to Congress on how the agency modified these references and replaced them with alternative standards that the agency determined to be appropriate.
The SEC is one such agency that has adopted rules over the years that reference credit ratings in assessing the credit-worthiness of a security. Among other things, the SEC’s net capital rule requires broker-dealers to maintain certain amounts of liquid assets (net capital) in the event that the broker-dealer fails. In computing this “net capital” amount, existing rules rely on credit ratings to determine the value of certain securities that broker-dealers are holding.
In addition, in Section 939(e) of the Dodd-Frank Act, Congress required credit rating references to be removed from certain sections of the Exchange Act that define the terms “mortgage related security,” and “small business related security.” In place of the credit rating references, Congress added language stating that a mortgage related security and a small business related security instead will need to satisfy “standards of credit-worthiness as established by the Commission.” This replacement language will go into effect on July 21, 2012.
The Commission today proposed rules that would replace such references in certain existing rules and would request comment on how to implement Section 939(e) of the Act.
Earlier this year, the SEC proposed rules that would change existing rules related to money market funds that allowed such funds to only invest in securities that have received one of the two highest categories of short-term credit ratings. Additionally, the SEC proposed amendments to its rules that would remove credit ratings as one of the conditions for companies seeking to use short-form registration when registering securities for public sale.
The Proposals
Removing References to Credit Ratings in the SEC’s Net Capital Rule for Broker-Dealers
Current rule: Rule 15c3-1, the “net capital rule,” requires broker-dealers to maintain specified minimum levels of liquid assets, or net capital. The rule is designed to protect the customers of a broker-dealer from losses upon the broker-dealer’s failure. Among other things, the net capital rule requires that broker-dealers, when computing net capital, apply a lower net capital deduction (or “haircut”) to certain proprietary securities positions in commercial paper, nonconvertible debt, and preferred stock if the securities are rated in higher rating categories by at least two Nationally Recognized Statistical Rating Organizations (NRSROs). That is, broker-dealers do not have to deduct as much from their net capital with respect to these securities because these securities typically are more liquid and less volatile in price than securities that are rated in lower rating categories or are unrated.
Proposed rule: The SEC is proposing to remove from the net capital rule all references to credit ratings and substitute an alternative standard of creditworthiness. Under the proposal, a broker-dealer would be required to take a 15 percent haircut on its proprietary positions in commercial paper, nonconvertible debt, and preferred stock unless the broker-dealer has a process for determining creditworthiness that satisfies the criteria described below. However, as is the requirement in the current rule, if these types of securities do not trade in a ready market as defined in the rule, they would be subject to a 100 percent haircut – meaning that the broker-dealers cannot include the value of these securities in their net capital. The 15 percent haircut is derived from the catchall haircut amount that applies to securities not specifically identified in the net capital rule as having an asset-class specific haircut, provided the security is otherwise deemed to have a ready market. It is also the haircut applicable to most equity securities.
If a broker-dealer establishes, maintains, and enforces written policies and procedures for determining creditworthiness under the proposed amendments, the broker-dealer would be permitted to apply the lesser haircut requirement currently specified in the net capital rule for commercial paper (between zero and ½ of 1 percent), nonconvertible debt (between 2 and 9 percent), and preferred stock (10 percent) when the creditworthiness standard is satisfied. Under this proposal, in order to use these lower haircut percentages for commercial paper, nonconvertible debt, and preferred stock, a broker-dealer would be required to establish, maintain, and enforce written policies and procedures designed to assess the credit and liquidity risks applicable to a security, and based on this process, would have to determine that the investment has only a “minimal amount of credit risk.”
Under the proposed amendments, a broker-dealer could consider the following factors to the extent appropriate when assessing credit risk for purposes of the net capital rule: (1) credit spreads; (2) securities-related research; (3) internal or external credit risk assessments; (4) default statistics; (5) inclusion on an index; (6) priorities and enhancements; (7) price, yield and/or volume; and (8) asset class-specific factors. The range and type of specific factors considered would vary depending on the particular securities that are reviewed.
Each broker-dealer would be required to preserve, for a period of not less than three years, the written policies and procedures that the broker-dealer establishes, maintains, and enforces for assessing credit risk for commercial paper, nonconvertible debt, and preferred stock. Broker-dealers would be subject to this requirement in the SEC’s broker-dealer record retention rule, Exchange Act Rule 17a-4.
Removing References to Credit Ratings in the Definition of “Major Market Foreign Currency”
Current rule: Appendix A to Rule 15c3-1 allows broker-dealers to employ theoretical option pricing models in determining net capital requirements for listed options and related positions. Broker-dealers also may elect a strategy-based methodology. The purpose of Appendix A is to simplify the net capital treatment of options and accurately reflect the risk inherent in options and related positions. Under Appendix A, broker-dealers’ proprietary positions in “major market foreign currency” options receive more favorable treatment than options for all other currencies when using theoretical option pricing models to compute net capital deductions. The term “major market foreign currency” is defined to mean “the currency of a sovereign nation whose short term debt is rated in one of the two highest categories by at least two nationally recognized statistical rating organizations and for which there is a substantial inter-bank forward currency market.”
Proposed rule: With respect to the definition of the term “major market foreign currency,” the SEC is proposing to remove from that definition the phrase “whose short-term debt is rated in one of the two highest categories by at least two nationally recognized statistical rating organizations.” The change would modify the definition of that term to include foreign currencies only “for which there is a substantial inter-bank forward currency market.” The SEC is also proposing to eliminate the specific reference in the rule to the European Currency Unit (ECU), which is identified by the rule as the only major market foreign currency under Appendix A. Because of the establishment of the euro as the official currency of the euro-zone, a specific reference to the ECU is no longer needed. A specific reference to the euro also is not necessary, as it is a foreign currency with a substantial inter-bank forward currency market.
Removing References to Credit Ratings When Determining Net Capital Charges for Credit Risk
Current rule: A broker-dealer may apply to the SEC for authorization to use the alternative method for computing capital (the alternative net capital, or “ANC,” computation) contained in Appendix E to the net capital rule. Under Appendix E, firms that have been determined to have robust internal risk management practices may utilize the mathematical modeling methods they use to manage their own business risk, including value-at-risk (VaR) models and scenario analysis, to compute deductions from net capital for market and credit risks arising from OTC derivatives transactions. OTC derivatives dealers may also apply to the SEC to use VaR models to calculate capital charges for market risk and to take alternative charges for credit risk under Appendix F.
Proposed rule: Under Appendix E and Appendix F to the net capital rule, broker-dealers subject to the ANC computation and OTC derivatives dealers, respectively, are required to deduct from their net capital credit risk charges that take counterparty risk into consideration. This counterparty risk determination is currently based on either NRSRO ratings or a dealer’s internal counterparty credit rating. To comply with Section 939A of the Dodd-Frank Act, the SEC is proposing to remove references to NRSRO ratings from Appendices E and F to Rule 15c3-1 and to make conforming changes to Appendix G and the form that OTC derivatives dealers periodically file with the SEC, Form X-17A-5, Part IIB.
Removing References to Credit Ratings in Rule 15c3-3
Current rule: Rule 15c3-3 under the Exchange Act protects customer funds and securities held by broker-dealers. In general, Rule 15c3-3 has two parts.
The first part requires a broker-dealer to have possession or control of all fully paid and excess margin securities of its customers. In this regard, a broker-dealer must make a daily determination in order to comply with this aspect of the rule.
The second part covers customer funds and requires broker-dealers subject to the rule to make a periodic computation to determine how much money it is holding that is either customer money or money obtained from the use of customer securities (credits). From that figure, the broker-dealer subtracts the amount of money that it is owed by customers or by other broker-dealers relating to customer transactions (debits). If the credits exceed debits after this “reserve formula” computation, the broker-dealer must deposit the excess in a “Special Reserve Bank Account for the Exclusive Benefit of Customers” (a Reserve Account). If the debits exceed credits, no deposit is necessary. Funds deposited in a Reserve Account cannot be withdrawn until the broker-dealer completes another computation that shows that the broker-dealer has on deposit more funds than the reserve formula requires.
Exhibit A to Rule 15c3-3 contains the formula that a broker-dealer must use to determine its reserve requirement.
Under Note G to Exhibit A, a broker-dealer may include required customer margin for transactions in security futures products as a debit in its reserve formula computation if:
That margin is required.
That margin is on deposit at a clearing agency or derivatives clearing organization that either:
Maintains the highest investment-grade rating from an NRSRO.
Maintains security deposits from clearing members in connection with regulated options or futures transactions and assessment power over member firms that equal a combined total of at least $2 billion, at least $500 million of which must be in the form of security deposits.
Maintains at least $3 billion in margin deposits.
Obtains an exemption from the Commission.
Proposed rule: The SEC is proposing to remove the first criterion described above (the highest investment-grade rating from an NRSRO). The criteria are disjunctive and, therefore, a clearing agency or derivatives clearing organization needs to satisfy only one criterion to permit a broker-dealer to treat customer margin as a reserve formula debit. While one potential criterion would be removed, there is only one clearing agency for security futures products (namely, the Options Clearing Corporation) and that clearing agency would continue to qualify under each of the other applicable criteria. If a new registered clearing agency or derivatives clearing organization could not meet one of the remaining criteria, a broker-dealer may request an exemption for the clearing agency or organization under the rule.
Removing References to Credit Ratings in Rules 101 and 102 of Regulation M
Current rule: Regulation M is a set of anti-manipulation rules designed to preserve the integrity of the securities market by prohibiting activities that could artificially influence the market for an offered security. Rules 101 and 102 of Regulation M specifically prohibit certain persons, such as issuers and underwriters from directly or indirectly bidding for, purchasing, or attempting to induce another person to bid for or purchase a “covered security” for a specified period of time. In particular the rules currently include an exception for “investment grade nonconvertible and asset-backed securities.” These exceptions apply to nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities that are rated by at least one NRSRO in one of its generic rating categories that signifies investment grade.
Proposed rule: The SEC’s proposal would instead provide an exception for nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities from Rules 101 and 102 if they: (1) are liquid relative to the market for that asset class; (2) trade in relation to general market interest rates and yield spreads; and (3) are relatively fungible with securities of similar characteristics and interest rate yield spreads. The proposed standards are an attempt to identify the subset of trading characteristics of these securities that make them less prone to the type of manipulation that Regulation M seeks to prevent. Under the proposal, a person seeking to rely on the exception would make the determination that the security in question meets the proposed standards. The determination would be required to be made utilizing reasonable factors of evaluation and would be required to be subsequently verified by an independent third party.
Removing References to Credit Ratings in Rule 10b-10
Current rule: Rule 10b-10, the Commission’s customer confirmation rule, generally requires that broker-dealers effecting securities transactions on behalf of customers provide to their customers, at or before completion of the securities transaction, a written notification with certain basic transaction terms. Under Rule 10b-10(a)(8), broker-dealers must disclose to customers in debt security transactions if the debt security is unrated by an NRSRO.
Proposed rule: When paragraph (a)(8) of Rule 10b-10 was adopted in 1994, the SEC indicated that this additional disclosure was not intended to suggest that an unrated security was riskier than a rated security; rather, it was intended to prompt a dialogue between the customer and the broker-dealer in the event that the customer was not aware of the unrated status prior to the transaction. Although the disclosure required by Rule 10b-10(a)(8) may not necessarily come within the mandate of Section 939A, the SEC is proposing to delete this reference in light of the SEC’s prior proposals to do so and because it would be consistent with the broader efforts under the Dodd-Frank Act to reduce direct, and in this case, indirect, reliance on NRSRO ratings.
Requests for Comment on Section 939(e) of the Dodd-Frank Act
Section 939(e) of the Dodd-Frank Act deleted Exchange Act references to credit ratings by NRSROs in Exchange Act Section 3(a)(41), which defines the term “mortgage related security,” and in Exchange Act Section 3(a)(53), which defines the term “small business related security.” The credit rating references in Sections 3(a)(41) and 3(a)(53) effectively exclude from the respective definitions securities that otherwise meet the definitions but are not rated by at least one NRSRO in the top two credit rating categories in the case of mortgage related securities or in the top four credit rating categories in the case of small business related securities.
In place of the credit rating references, Congress added language stating that a mortgage related security and a small business related security will need to satisfy “standards of credit-worthiness as established by the Commission.” This replacement language will go into effect on July 21, 2012. Before that time, the Commission will need to establish a new standard of creditworthiness for each Exchange Act definition. To assist the Commission in considering how to implement Section 939(e) of the Dodd-Frank Act, the Commission is requesting comment on potential “standards of credit-worthiness” for purposes of Sections 3(a)(41) and 3(a)(53)”
This is a photo of the National Register of Historic Places listing with reference number 7000063
Showing posts with label SEC EXCERPT. Show all posts
Showing posts with label SEC EXCERPT. Show all posts
Friday, April 29, 2011
Sunday, December 19, 2010
SEC FINDS A DIAMOND PONZI SCHEME
It is easy to believe that over the front door of every trading house in America there is a bust of Charles Ponzi. It seems that there are Ponzi schemes everywhere. There are Ponzi schemes involving insurance, real estate, bonds, commodities and stocks. The following case involves generating cash payouts to clients using profits from trading in diamonds. In fact there does not appear to be any evidence of profitable trading going on at the firm. Instead, like in the Madoff case, the diamond traders were just cutting checks to old investors using the money from new investors. In this case, the SEC had to get a court order to freeze the assets of the owner and his company. The following is an excerpt from the SEC web page:
“Nov. 23 2010 — The Securities and Exchange Commission has obtained an emergency court order freezing the assets of a Colorado man and his company charged with running a Ponzi scheme with money invested for diamond trading.
The SEC alleges that Richard Dalton and Universal Consulting Resources LLC (UCR) raised approximately $17 million from investors in 13 states for two fraudulent offerings that were generally referred to as the “Trading Program” and the “Diamond Program.” Investors in both programs received monthly payments which Dalton told them were profits from successful trading. However, there is no evidence to substantiate the $10 million in claimed profits from the two programs, and the vast majority of funds that came into UCR bank accounts were from new investors instead of actual profit-generating activity. Dalton used money from new investors to fund the monthly payments to existing investors while continuing to recruit new investors in order to keep his scheme going. Meanwhile, Dalton stole investor funds to purchase a home and a vehicle and pay for his daughter’s wedding reception.
Investors often learned of Dalton through a friend or family member who had previously invested with him. These new investors placed great weight on the fact that someone they knew and trusted received regular monthly payments from Dalton. Some investors even invested funds from their self-directed IRA retirement accounts.
“Dalton made his Ponzi scheme falsely appear profitable by continuing to bring in new investor money,” said Donald Hoerl, Director of the SEC’s Denver Regional Office. “Investors should be skeptical when someone promises low risk and high guaranteed returns, and focus on the details of the investment being offered rather than the lure of profits paid to friends and family.”
According to the SEC’s complaint filed in U.S. District Court in Denver, Dalton told investors in UCR’s Trading Program that their money would be held safely in an escrow account at a bank in the United States, and that a European trader would use the value of that account — but not the actual funds — to obtain leveraged funds to purchase and sell bank notes. According to Dalton, the trading was profitable enough that he was able to guarantee returns of 4 to 5 percent per month — or 48 to 60 percent per year — to investors. Dalton claimed that he had successfully run the Trading Program for nine years.
According to the SEC’s complaint, UCR began offering the Diamond Program in early 2009. Dalton claimed the program would profit by using investor funds for diamond trading. Similar to the Trading Program, Dalton claimed that investor funds would be safely held in an escrow account. Under the Diamond program, Dalton enticed investors with a guaranteed 10 percent monthly return — or 120 percent annual return.
The SEC further alleges that Dalton, who had no other employment or legitimate source of income, funded his personal life at the expense of investors. Dalton spent or withdrew in excess of $250,000 from UCR accounts that held investor money and used those funds for personal expenses, including paying $5,000 for his daughter’s wedding reception and $38,000 to purchase a vehicle. Dalton also transferred more than $900,000 from another UCR account in order to purchase a home. The home was purchased solely in the name of his wife, Marie Dalton, in an attempt to protect it from creditors. The asset freeze obtained by the SEC extends to the assets of Dalton’s wife, who is named as a relief defendant.
The SEC’s complaint alleges that Dalton and UCR violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint names Marie Dalton as a relief defendant in the case in order to recover investor assets now in her possession. The SEC’s investigation is ongoing.”
It is a comment on how some investors think when they pick either super glamorous assets or really odd items to buy into with their hard earned dollars. Something glamorous like diamonds is hard to turn down as an investment because it seems obvious that you can’t loose money betting on diamonds which are sometimes as good as cash (better than cash in some countries). An example of an odd item that my uncle invested (lost) money in was a beach towel with a pillow sewn into it. It seemed like a great idea at the time and everyone encouraged him to keep pouring money into the pillow beach towel. My uncle had an overseas partner in the deal and that partner eventually disappeared and my uncle never heard from him again.
“Nov. 23 2010 — The Securities and Exchange Commission has obtained an emergency court order freezing the assets of a Colorado man and his company charged with running a Ponzi scheme with money invested for diamond trading.
The SEC alleges that Richard Dalton and Universal Consulting Resources LLC (UCR) raised approximately $17 million from investors in 13 states for two fraudulent offerings that were generally referred to as the “Trading Program” and the “Diamond Program.” Investors in both programs received monthly payments which Dalton told them were profits from successful trading. However, there is no evidence to substantiate the $10 million in claimed profits from the two programs, and the vast majority of funds that came into UCR bank accounts were from new investors instead of actual profit-generating activity. Dalton used money from new investors to fund the monthly payments to existing investors while continuing to recruit new investors in order to keep his scheme going. Meanwhile, Dalton stole investor funds to purchase a home and a vehicle and pay for his daughter’s wedding reception.
Investors often learned of Dalton through a friend or family member who had previously invested with him. These new investors placed great weight on the fact that someone they knew and trusted received regular monthly payments from Dalton. Some investors even invested funds from their self-directed IRA retirement accounts.
“Dalton made his Ponzi scheme falsely appear profitable by continuing to bring in new investor money,” said Donald Hoerl, Director of the SEC’s Denver Regional Office. “Investors should be skeptical when someone promises low risk and high guaranteed returns, and focus on the details of the investment being offered rather than the lure of profits paid to friends and family.”
According to the SEC’s complaint filed in U.S. District Court in Denver, Dalton told investors in UCR’s Trading Program that their money would be held safely in an escrow account at a bank in the United States, and that a European trader would use the value of that account — but not the actual funds — to obtain leveraged funds to purchase and sell bank notes. According to Dalton, the trading was profitable enough that he was able to guarantee returns of 4 to 5 percent per month — or 48 to 60 percent per year — to investors. Dalton claimed that he had successfully run the Trading Program for nine years.
According to the SEC’s complaint, UCR began offering the Diamond Program in early 2009. Dalton claimed the program would profit by using investor funds for diamond trading. Similar to the Trading Program, Dalton claimed that investor funds would be safely held in an escrow account. Under the Diamond program, Dalton enticed investors with a guaranteed 10 percent monthly return — or 120 percent annual return.
The SEC further alleges that Dalton, who had no other employment or legitimate source of income, funded his personal life at the expense of investors. Dalton spent or withdrew in excess of $250,000 from UCR accounts that held investor money and used those funds for personal expenses, including paying $5,000 for his daughter’s wedding reception and $38,000 to purchase a vehicle. Dalton also transferred more than $900,000 from another UCR account in order to purchase a home. The home was purchased solely in the name of his wife, Marie Dalton, in an attempt to protect it from creditors. The asset freeze obtained by the SEC extends to the assets of Dalton’s wife, who is named as a relief defendant.
The SEC’s complaint alleges that Dalton and UCR violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint names Marie Dalton as a relief defendant in the case in order to recover investor assets now in her possession. The SEC’s investigation is ongoing.”
It is a comment on how some investors think when they pick either super glamorous assets or really odd items to buy into with their hard earned dollars. Something glamorous like diamonds is hard to turn down as an investment because it seems obvious that you can’t loose money betting on diamonds which are sometimes as good as cash (better than cash in some countries). An example of an odd item that my uncle invested (lost) money in was a beach towel with a pillow sewn into it. It seemed like a great idea at the time and everyone encouraged him to keep pouring money into the pillow beach towel. My uncle had an overseas partner in the deal and that partner eventually disappeared and my uncle never heard from him again.
Sunday, November 14, 2010
FORMER COUNTRYWIDE FINANCIAL CEO TO PAY 22.5 MIL. TO SETTLE CHARGES
The SEC released its settlement details with the former CEO of Countrywide Financial. Although this is just a punishment which amounts to a fine at least the SEC has done something whereas, the rest of the government is worried about cutting social programs for the elderly and even our veterans. The people who served our country directly though military service and those who worked hard all their lives and supported the government by paying social security and medicare taxes are again those who will have to pay the price for rampant fraud and abuse by con-men and paid off government officials.
The following is an excerpt from the SEC web pages regarding it's settlement with Countrywide Financial:
"Washington, D.C., Oct. 15, 2010 — The Securities and Exchange Commission today announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company.
Mozilo’s financial penalty is the largest ever paid by a public company's senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.
Former Countrywide chief operating officer David Sambol agreed to a settlement in which he is liable for $5 million in disgorgement and a $520,000 penalty, and a three-year officer and director bar. Former chief financial officer Eric Sieracki agreed to pay a $130,000 penalty and a one-year bar from practicing before the Commission. In settling the SEC’s charges, the former executives neither admit nor deny the allegations against them.
The penalties and disgorgement paid by Sambol and Sieracki will also be returned to harmed investors.
“Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite — a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model,” said Robert Khuzami, Director of the SEC's Division of Enforcement.
John McCoy, Associate Regional Director of the SEC’s Division of Enforcement, added, “This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”
The settlement was approved by the Honorable John F. Walter, United States District Judge for the Central District of California in a court hearing held today.
The SEC filed charges against Mozilo, Sambol, and Sieracki on June 4, 2009, alleging that they failed to disclose to investors the significant credit risk that Countrywide was taking on as a result of its efforts to build and maintain market share. Investors were misled by representations assuring them that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. In reality, Countrywide was writing increasingly risky loans and its senior executives knew that defaults and delinquencies in its servicing portfolio as well as the loans it packaged and sold as mortgage-backed securities would rise as a result.
The SEC’s complaint further alleged that Mozilo engaged in insider trading in the securities of Countrywide by establishing four 10b5-1 sales plans in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the risk regarding the poor expected performance of Countrywide-originated loans.
In addition to the financial penalties, Mozilo and Sambol consented to the entry of a final judgment that provides for a permanent injunction against violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Mozilo also consented to the entry of a permanent officer and director bar, and Sambol consented to the entry of a three-year bar.
Sieracki agreed to a permanent injunction from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and consented to a one-year bar under the Commission’s Rule of Practice 102(e)(3).
The SEC investigation that led to the filing and settlement of this enforcement action was conducted by Michele Wein Layne, Spencer E. Bendell, Lynn M. Dean, Paris Wynn, and Sam Puathasnanon. Together with Associate Regional Director John M. McCoy, that same team has been handling the SEC’s litigation.
The SEC has filed many other enforcement actions involving mortgage-related securities and mortgage-related products linked to the financial crisis, including:
American Home Mortgage (4/28/2009)
Reserve Fund (5/05/2009)
Evergreen (6/08/2009)
New Century (12/07/2009)
Brookstreet (12/08/2009)
Goldman Sachs (4/16/2010)
Farkas/Taylor, Bean & Whitaker (6/16/2010)
ICP (6/21/2010)
Citigroup (7/29/2010)"
Angelo Mazilo was for many people in the press the very face of the slick, fast talking salesman and con-man who helped to fuel the housing bubble by making loans to everyone. Mr. Mazilo was in fact just one of many thousands of people who made millions by tweaking the truth. In fact, there have been so many big businessmen who committed fraud in this country that capitalism is becoming as big a failure here as communism was in the old Soviet Union. Our free enterprise system has been replaced by some toxic form of economics which rewards liars and frauds and punishes honest men of good character because they will not pay government officials for the right to conduct an honest business in the United States of America.
The following is an excerpt from the SEC web pages regarding it's settlement with Countrywide Financial:
"Washington, D.C., Oct. 15, 2010 — The Securities and Exchange Commission today announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company.
Mozilo’s financial penalty is the largest ever paid by a public company's senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.
Former Countrywide chief operating officer David Sambol agreed to a settlement in which he is liable for $5 million in disgorgement and a $520,000 penalty, and a three-year officer and director bar. Former chief financial officer Eric Sieracki agreed to pay a $130,000 penalty and a one-year bar from practicing before the Commission. In settling the SEC’s charges, the former executives neither admit nor deny the allegations against them.
The penalties and disgorgement paid by Sambol and Sieracki will also be returned to harmed investors.
“Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite — a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model,” said Robert Khuzami, Director of the SEC's Division of Enforcement.
John McCoy, Associate Regional Director of the SEC’s Division of Enforcement, added, “This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”
The settlement was approved by the Honorable John F. Walter, United States District Judge for the Central District of California in a court hearing held today.
The SEC filed charges against Mozilo, Sambol, and Sieracki on June 4, 2009, alleging that they failed to disclose to investors the significant credit risk that Countrywide was taking on as a result of its efforts to build and maintain market share. Investors were misled by representations assuring them that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. In reality, Countrywide was writing increasingly risky loans and its senior executives knew that defaults and delinquencies in its servicing portfolio as well as the loans it packaged and sold as mortgage-backed securities would rise as a result.
The SEC’s complaint further alleged that Mozilo engaged in insider trading in the securities of Countrywide by establishing four 10b5-1 sales plans in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the risk regarding the poor expected performance of Countrywide-originated loans.
In addition to the financial penalties, Mozilo and Sambol consented to the entry of a final judgment that provides for a permanent injunction against violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Mozilo also consented to the entry of a permanent officer and director bar, and Sambol consented to the entry of a three-year bar.
Sieracki agreed to a permanent injunction from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and consented to a one-year bar under the Commission’s Rule of Practice 102(e)(3).
The SEC investigation that led to the filing and settlement of this enforcement action was conducted by Michele Wein Layne, Spencer E. Bendell, Lynn M. Dean, Paris Wynn, and Sam Puathasnanon. Together with Associate Regional Director John M. McCoy, that same team has been handling the SEC’s litigation.
The SEC has filed many other enforcement actions involving mortgage-related securities and mortgage-related products linked to the financial crisis, including:
American Home Mortgage (4/28/2009)
Reserve Fund (5/05/2009)
Evergreen (6/08/2009)
New Century (12/07/2009)
Brookstreet (12/08/2009)
Goldman Sachs (4/16/2010)
Farkas/Taylor, Bean & Whitaker (6/16/2010)
ICP (6/21/2010)
Citigroup (7/29/2010)"
Angelo Mazilo was for many people in the press the very face of the slick, fast talking salesman and con-man who helped to fuel the housing bubble by making loans to everyone. Mr. Mazilo was in fact just one of many thousands of people who made millions by tweaking the truth. In fact, there have been so many big businessmen who committed fraud in this country that capitalism is becoming as big a failure here as communism was in the old Soviet Union. Our free enterprise system has been replaced by some toxic form of economics which rewards liars and frauds and punishes honest men of good character because they will not pay government officials for the right to conduct an honest business in the United States of America.
Sunday, August 15, 2010
SEC FILES CHARGES AGAINS DELL INC. FOR FRAUD
There are so many companies that cook their books to gain the approval of Wall Street. It is perhaps too often that traders and investors alike look to pundits on Wall Street to get information about a company. Some of the problem might be laziness on the part of potential purchasers of a given security. But, I suspect that a lot of the problem for purchases of securities is that the market moves so fast that by the time the real research and analysis is done on a company the company’s stock could have shot up several percent and then taken a nose dive only to shoot back up again. Doing corporate research and background checks is can be used to pick an entry point price to pay for a security but, because of extreme market volatility and the connectivity of our one world economy it is impossible to eliminate the gambling side to Wall Street. If something happens in Indonesia tomorrow it could cause a given company to go bankrupt or make billions. Since most companies are in several different countries keeping track of all the politics and economics in every country a company has ties to may be impossible.
The following is a story released by the SEC regarding Dell Inc. who seemed to consistently meet Wall Street expectations. You might recall the Bernard Madoff story in which he consistently did well for his investors and gave them fantastic returns. The Dell story like the Madoff story is a story of cooking the books so that investors did not panic when they saw that Dell did not meet the expectations of Wall Street gurus. Now Madoff cooked his books strictly to continue getting new investors to keep his Ponzi scheme going. Dell not only wanted to protect itself from investor flight but was also getting kickbacks from Intel to keep Dell from using another company’s CPU. In short, Dell made up for it’s shortfall in earnings from operations by taking bribes from Intel. Please read the excerpt from the SEC web site for details of this somewhat strange story.
“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.
The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival. It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.
The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.
Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges.
“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”
Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added, “Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality.”
The SEC’s complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the company’s ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. The SEC’s complaint further alleges that Dell’s most senior former accounting personnel including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s management and operations.
According to the SEC’s complaint, Intel made exclusivity payments to Dell in order for Dell to not use CPUs manufactured by its rival — Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dell’s operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.
The SEC’s complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue — an important financial metric that the company itself highlighted — for more than three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.
Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.
Michael Dell and Rollins settled the SEC’s disclosure charges, without admitting or denying the SEC’s allegations, by each agreeing to pay the $4 million penalties and consenting to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.
Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SEC’s allegations, and agreed to pay the $3 million penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SEC’s improper accounting charges without admitting or denying the SEC’s allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.
The SEC’s investigation is continuing as to other individuals.”
The above might be a very stupid crime on the part of Dell executives. After all, perhaps if they had used the CPU’s of an Intel competitor they might have had more sales, more revenues and more profits in which case, their ability to meet Wall Street expectations would have been met or exceeded. In any case, the fines were quite severe. The one problem I have with fining a company for committing fraud on its stockholders is that the stockholders (victims) end up paying for the crime twice. The first time they pay are when they are defrauded by paying too much for a stock and the second time they also pay by a declining stock price due to decreased profits because of large fines that the SEC levies. To levy fines against the victims seems stupid on the face of it and it is stupid. Congress should find a way to fix this problem but, too many of them became politicians because daddy does not trust them to run the family business.
In full disclosure I own shares in Intel but, I do not own shares in Dell. I do own a Dell computer and I have no complaints about the product or company services.
The following is a story released by the SEC regarding Dell Inc. who seemed to consistently meet Wall Street expectations. You might recall the Bernard Madoff story in which he consistently did well for his investors and gave them fantastic returns. The Dell story like the Madoff story is a story of cooking the books so that investors did not panic when they saw that Dell did not meet the expectations of Wall Street gurus. Now Madoff cooked his books strictly to continue getting new investors to keep his Ponzi scheme going. Dell not only wanted to protect itself from investor flight but was also getting kickbacks from Intel to keep Dell from using another company’s CPU. In short, Dell made up for it’s shortfall in earnings from operations by taking bribes from Intel. Please read the excerpt from the SEC web site for details of this somewhat strange story.
“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.
The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival. It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.
The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.
Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges.
“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”
Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added, “Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality.”
The SEC’s complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the company’s ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. The SEC’s complaint further alleges that Dell’s most senior former accounting personnel including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s management and operations.
According to the SEC’s complaint, Intel made exclusivity payments to Dell in order for Dell to not use CPUs manufactured by its rival — Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dell’s operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.
The SEC’s complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue — an important financial metric that the company itself highlighted — for more than three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.
Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.
Michael Dell and Rollins settled the SEC’s disclosure charges, without admitting or denying the SEC’s allegations, by each agreeing to pay the $4 million penalties and consenting to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.
Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SEC’s allegations, and agreed to pay the $3 million penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SEC’s improper accounting charges without admitting or denying the SEC’s allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.
The SEC’s investigation is continuing as to other individuals.”
The above might be a very stupid crime on the part of Dell executives. After all, perhaps if they had used the CPU’s of an Intel competitor they might have had more sales, more revenues and more profits in which case, their ability to meet Wall Street expectations would have been met or exceeded. In any case, the fines were quite severe. The one problem I have with fining a company for committing fraud on its stockholders is that the stockholders (victims) end up paying for the crime twice. The first time they pay are when they are defrauded by paying too much for a stock and the second time they also pay by a declining stock price due to decreased profits because of large fines that the SEC levies. To levy fines against the victims seems stupid on the face of it and it is stupid. Congress should find a way to fix this problem but, too many of them became politicians because daddy does not trust them to run the family business.
In full disclosure I own shares in Intel but, I do not own shares in Dell. I do own a Dell computer and I have no complaints about the product or company services.
Monday, May 10, 2010
BROKERS ACCUSED OF HELPING TO SELL PENNY STOCKS UNLAWFULLY
The sale of penny stocks are often looked upon as controversial way to raise capital. Many investors will not purchase stocks that sell for under $10.00 for fear the company may not have the financial ability to survive. However, sometimes a stock may be undervalued by the market and becomes a really good value at really low prices.
Of course anyone with a copy machine can print off stock certificates and anyone with a computer can set up bogus securities to sell to the public. Most people remember all the anecdotal stories of Internet companies being formed and then raising capital on the basis of just an idea with no real business behind the issued securities. This type of behaviour is something the SEC is mandated to investigate.
Because companies who engage in security sales are required to make sure that bogus the securities they sell are legitimate; the SEC brought the following action against Leeb Brokerage Services:
"Washington, D.C., April 27, 2010 — The Securities and Exchange Commission today announced administrative proceedings against five securities professionals accused of facilitating unlawful sales of penny stocks to investors and failing to act as "gatekeepers" as required under the federal securities laws.
The SEC's Division of Enforcement alleges that three registered representatives and two supervisors at Leeb Brokerage Services allowed customers to routinely deliver large blocks of privately obtained shares of penny stocks into their accounts at the firm. The customers would then sell them to the public in transactions that were not registered with the SEC under the securities laws. The accused securities professionals allowed these sales without sufficiently investigating whether they were facilitating illegal underwriting, and they also caused the firm's failure to file Suspicious Activity Reports (SARs) as required under the Bank Secrecy Act to report potential misconduct by their customers.
-"Firms whose customers repeatedly bring in large blocks of microcap securities for sale to the public have an obligation to ensure they are not facilitating wrongdoing," said George S. Canellos, Director of the SEC's New York Regional Office. "Securities professionals who turn a blind eye to suspicious customer conduct are not fulfilling their duties as gatekeepers and risk violating the securities laws themselves."
The SEC's Division of Enforcement alleges that Leeb registered representatives Ronald Bloomfield, John Earl Martin, Sr., and Victor Labi failed to conduct a reasonable inquiry before allowing the public sales of the large blocks of penny stocks in violation of the registration provisions of the federal securities laws. The Enforcement Division further alleges that the firm's president Eugene Miller and its chief compliance officer Robert Gorgia failed to reasonably supervise the conduct of these representatives. All five individuals are accused of aiding and abetting the firm's failure to file SARs. These events occurred between 2005 and 2007. Leeb is no longer in business.
According to the Commission's order instituting administrative proceedings, the Leeb representatives ignored obvious red flags indicating that their customers were violating securities laws by engaging in illegal distributions of securities through their Leeb accounts. One group of customer accounts was affiliated with an individual who had previously been involved in a pump-and-dump scheme, and with a stock promoter who routinely received shares in compensation for promotional services for penny stock companies. The accounts earned more than $20 million in proceeds while repeatedly depositing privately obtained shares and then selling them to the public, raising the constant specter that Leeb was facilitating "scalping." Another Leeb customer wired more than $30 million in penny stock proceeds to a bank in Liechtenstein, a tax haven.
The SEC's Division of Enforcement alleges that despite these and other suspicious activities of their customers, the accused Leeb representatives and supervisors ignored their obligation to report the possible misconduct to authorities. Such disregard of the firm's reporting requirements under the Bank Secrecy Act enabled Leeb's customer activity, and the commissions it generated, to continue unfettered. And the public was exposed to repeated risk of unlawful distributions of penny stocks.
A hearing will be scheduled before an administrative law judge to determine whether the accused individuals committed the alleged violations and provide them an opportunity to defend the allegations. The hearing also will determine what sanctions, if any, are appropriate in the public interest."
The above was quoted from the SEC official web page. The possibility of fraud is great in an unregulated industry and it is good that there are regulations to help protect the public from being victims of heinous crimes. The unfortunate thing is that too many politicians believe that it is alright that people loose their life savings to fraudsters. These politicians believe that stealing from people is just one very legitimate form of capitalism that should be protected from governmental intervention. This form of capitalism only works if the public is allowed to exact vengeance upon fraudsters the same way vengeance was enacted upon horse thieves in the old west. "Horse Thief Capitalism" only works if you have a "Horse Thief Justice System" otherwise, it is important to have strong aggressive governmental institutions to protect the public from fraud and the fraudsters from "Horse Thief Justice".
Of course anyone with a copy machine can print off stock certificates and anyone with a computer can set up bogus securities to sell to the public. Most people remember all the anecdotal stories of Internet companies being formed and then raising capital on the basis of just an idea with no real business behind the issued securities. This type of behaviour is something the SEC is mandated to investigate.
Because companies who engage in security sales are required to make sure that bogus the securities they sell are legitimate; the SEC brought the following action against Leeb Brokerage Services:
"Washington, D.C., April 27, 2010 — The Securities and Exchange Commission today announced administrative proceedings against five securities professionals accused of facilitating unlawful sales of penny stocks to investors and failing to act as "gatekeepers" as required under the federal securities laws.
The SEC's Division of Enforcement alleges that three registered representatives and two supervisors at Leeb Brokerage Services allowed customers to routinely deliver large blocks of privately obtained shares of penny stocks into their accounts at the firm. The customers would then sell them to the public in transactions that were not registered with the SEC under the securities laws. The accused securities professionals allowed these sales without sufficiently investigating whether they were facilitating illegal underwriting, and they also caused the firm's failure to file Suspicious Activity Reports (SARs) as required under the Bank Secrecy Act to report potential misconduct by their customers.
-"Firms whose customers repeatedly bring in large blocks of microcap securities for sale to the public have an obligation to ensure they are not facilitating wrongdoing," said George S. Canellos, Director of the SEC's New York Regional Office. "Securities professionals who turn a blind eye to suspicious customer conduct are not fulfilling their duties as gatekeepers and risk violating the securities laws themselves."
The SEC's Division of Enforcement alleges that Leeb registered representatives Ronald Bloomfield, John Earl Martin, Sr., and Victor Labi failed to conduct a reasonable inquiry before allowing the public sales of the large blocks of penny stocks in violation of the registration provisions of the federal securities laws. The Enforcement Division further alleges that the firm's president Eugene Miller and its chief compliance officer Robert Gorgia failed to reasonably supervise the conduct of these representatives. All five individuals are accused of aiding and abetting the firm's failure to file SARs. These events occurred between 2005 and 2007. Leeb is no longer in business.
According to the Commission's order instituting administrative proceedings, the Leeb representatives ignored obvious red flags indicating that their customers were violating securities laws by engaging in illegal distributions of securities through their Leeb accounts. One group of customer accounts was affiliated with an individual who had previously been involved in a pump-and-dump scheme, and with a stock promoter who routinely received shares in compensation for promotional services for penny stock companies. The accounts earned more than $20 million in proceeds while repeatedly depositing privately obtained shares and then selling them to the public, raising the constant specter that Leeb was facilitating "scalping." Another Leeb customer wired more than $30 million in penny stock proceeds to a bank in Liechtenstein, a tax haven.
The SEC's Division of Enforcement alleges that despite these and other suspicious activities of their customers, the accused Leeb representatives and supervisors ignored their obligation to report the possible misconduct to authorities. Such disregard of the firm's reporting requirements under the Bank Secrecy Act enabled Leeb's customer activity, and the commissions it generated, to continue unfettered. And the public was exposed to repeated risk of unlawful distributions of penny stocks.
A hearing will be scheduled before an administrative law judge to determine whether the accused individuals committed the alleged violations and provide them an opportunity to defend the allegations. The hearing also will determine what sanctions, if any, are appropriate in the public interest."
The above was quoted from the SEC official web page. The possibility of fraud is great in an unregulated industry and it is good that there are regulations to help protect the public from being victims of heinous crimes. The unfortunate thing is that too many politicians believe that it is alright that people loose their life savings to fraudsters. These politicians believe that stealing from people is just one very legitimate form of capitalism that should be protected from governmental intervention. This form of capitalism only works if the public is allowed to exact vengeance upon fraudsters the same way vengeance was enacted upon horse thieves in the old west. "Horse Thief Capitalism" only works if you have a "Horse Thief Justice System" otherwise, it is important to have strong aggressive governmental institutions to protect the public from fraud and the fraudsters from "Horse Thief Justice".
Saturday, May 1, 2010
SEC CHARGES DETROIT FIRM WITH FRAUD
It seems the penchant for securities dealers to steal pensions never ends. The Detroit area is one of the most economically ravaged areas of the U.S. and then to have some Wall Street fraudsters come along and rub salt in the wounds of this ancient French Fort City is just unconscionable. At any rate, the SEC feels it can go ahead and get some of the money back. The following excerpt was taken from the SEC site and explains in pretty good detail the crimes that were committed:
"Washington, D.C., April 22, 2010 — The Securities and Exchange Commission today charged a private equity firm, a money manager and his friend with participating in a fraudulent scheme through which they stole more than $3 million invested by three Detroit-area public pension funds.
Detroit-based Onyx Capital Advisors LLC and its founder Roy Dixon, Jr., raised $23.8 million from the three pension funds for a start-up private equity fund created to invest in small and medium-sized private companies. Often to cover overdrafts in his bank accounts, Dixon illegally withdrew money invested by the pension funds from the bank accounts of the private equity fund. Assisting in the scheme was Dixon’s friend Michael A. Farr, who controls three companies in which the Onyx fund invested millions of dollars. Farr diverted money invested in these entities to another company he owned, withdrew the money from that bank account, and gave the cash to Dixon. Farr also kept some money for himself, and used investor funds to make payments to contractors building a multi-million dollar house for Dixon, who lives primarily in Atlanta.
The SEC’s complaint, filed in federal district court in Detroit, also alleges that Dixon and Onyx Capital made a number of false and misleading statements to defraud the three pension funds about the private equity fund and the investments they were making.
“These public pension funds provided seed capital to the Onyx fund, and Dixon betrayed their trust by stealing their money,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Farr assisted Dixon by making large bank withdrawals of money ostensibly invested in Farr’s companies, and together they treated the pension funds’ investments as their own pot of cash.”
According to the SEC’s complaint, shortly after the three pension funds made their first contributions to the Onyx fund in early 2007, Dixon and Onyx Capital began illegally siphoning money. Dixon and Onyx Capital took more than $2.06 million under the guise of management fees, and Farr assisted in diverting approximately $1.05 million through the Onyx fund’s purported investments in companies Farr controlled. Dixon used the money to pay personal and business expenses, including construction of his house in Atlanta and mortgage payments on more than 40 rental properties Dixon owns in Detroit and Pontiac, Mich.
Under the partnership agreement for the Onyx fund, Onyx Capital was entitled to receive an annual management fee of 2 percent of the committed capital within the fund, or $500,000 per year, payable on a quarterly basis. The SEC alleges that instead of deducting management fees on a quarterly basis, Dixon withdrew money whenever he desired from the Onyx fund’s bank accounts under his control.
According to the SEC’s complaint, Onyx Capital invested more than $15 million from the Onyx fund in three related entities controlled by Farr – Second Chance Motors, SCM Credit LLC, and SCM Finance LLC. Farr diverted a portion of the pension fund investments in Farr’s companies to 1097 Sea Jay LLC, another entity that Farr controlled. Farr then withdrew large sums of cash and provided most of it to Dixon while retaining at least $229,000 for his own benefit. Farr also used Sea Jay’s bank accounts to make at least $522,000 in payments to construction companies performing work on Dixon’s house in Atlanta.
The SEC further alleges that Dixon and Onyx Capital made numerous false and misleading statements to Onyx Capital’s public pension fund clients. For example, one pension fund had concerns about Dixon’s inexperience in private equity. To allay the concerns and ultimately convince the pension fund to fund the investment, Dixon sent a letter falsely stating that a purported joint owner of Onyx Capital with substantial experience evaluating private equity investments would devote all of his efforts to the Onyx fund. The letter contained a forged signature of that individual, who had reviewed certain investment opportunities for the Onyx fund during his spare time, but has never owned or been employed by Onyx Capital. He instead had been working full-time for another company since 1996.
As alleged in the SEC’s complaint, Dixon and Onyx Capital violated and Farr aided and abetted violations of the antifraud provisions of the federal securities laws. The SEC is seeking a court order for emergency relief, including temporary restraining orders, asset freezes and accountings. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains and financial penalties."
It is just too bad the SEC can't prosecute these individuals as real criminals and send them off to prison. It seems Congress made sure many years ago that the most that can happen to Wall Street fraudsters is that they might have to give back at least some of the money they stole. People who steal candy bars at convenience stores get greater punishments. The Department of Justice is supposed to handle criminal prosecutions of Wall Street fraudsters but, they don't seem to have the accountants who can find the fraud or the lawyers who can understand the fraud once it is found.
It might be noted that a fraud of just a few million dollars is not that big however, these frauds are being perpetrated by perhaps the hundreds or even thousands across the United States. Of course with the penalty of being caught being no greater than giving back what was stolen then "why not steal?" In this country it seems we have banks too big to fail and Wall Street bankers too rich to go to jail.
"Washington, D.C., April 22, 2010 — The Securities and Exchange Commission today charged a private equity firm, a money manager and his friend with participating in a fraudulent scheme through which they stole more than $3 million invested by three Detroit-area public pension funds.
Detroit-based Onyx Capital Advisors LLC and its founder Roy Dixon, Jr., raised $23.8 million from the three pension funds for a start-up private equity fund created to invest in small and medium-sized private companies. Often to cover overdrafts in his bank accounts, Dixon illegally withdrew money invested by the pension funds from the bank accounts of the private equity fund. Assisting in the scheme was Dixon’s friend Michael A. Farr, who controls three companies in which the Onyx fund invested millions of dollars. Farr diverted money invested in these entities to another company he owned, withdrew the money from that bank account, and gave the cash to Dixon. Farr also kept some money for himself, and used investor funds to make payments to contractors building a multi-million dollar house for Dixon, who lives primarily in Atlanta.
The SEC’s complaint, filed in federal district court in Detroit, also alleges that Dixon and Onyx Capital made a number of false and misleading statements to defraud the three pension funds about the private equity fund and the investments they were making.
“These public pension funds provided seed capital to the Onyx fund, and Dixon betrayed their trust by stealing their money,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Farr assisted Dixon by making large bank withdrawals of money ostensibly invested in Farr’s companies, and together they treated the pension funds’ investments as their own pot of cash.”
According to the SEC’s complaint, shortly after the three pension funds made their first contributions to the Onyx fund in early 2007, Dixon and Onyx Capital began illegally siphoning money. Dixon and Onyx Capital took more than $2.06 million under the guise of management fees, and Farr assisted in diverting approximately $1.05 million through the Onyx fund’s purported investments in companies Farr controlled. Dixon used the money to pay personal and business expenses, including construction of his house in Atlanta and mortgage payments on more than 40 rental properties Dixon owns in Detroit and Pontiac, Mich.
Under the partnership agreement for the Onyx fund, Onyx Capital was entitled to receive an annual management fee of 2 percent of the committed capital within the fund, or $500,000 per year, payable on a quarterly basis. The SEC alleges that instead of deducting management fees on a quarterly basis, Dixon withdrew money whenever he desired from the Onyx fund’s bank accounts under his control.
According to the SEC’s complaint, Onyx Capital invested more than $15 million from the Onyx fund in three related entities controlled by Farr – Second Chance Motors, SCM Credit LLC, and SCM Finance LLC. Farr diverted a portion of the pension fund investments in Farr’s companies to 1097 Sea Jay LLC, another entity that Farr controlled. Farr then withdrew large sums of cash and provided most of it to Dixon while retaining at least $229,000 for his own benefit. Farr also used Sea Jay’s bank accounts to make at least $522,000 in payments to construction companies performing work on Dixon’s house in Atlanta.
The SEC further alleges that Dixon and Onyx Capital made numerous false and misleading statements to Onyx Capital’s public pension fund clients. For example, one pension fund had concerns about Dixon’s inexperience in private equity. To allay the concerns and ultimately convince the pension fund to fund the investment, Dixon sent a letter falsely stating that a purported joint owner of Onyx Capital with substantial experience evaluating private equity investments would devote all of his efforts to the Onyx fund. The letter contained a forged signature of that individual, who had reviewed certain investment opportunities for the Onyx fund during his spare time, but has never owned or been employed by Onyx Capital. He instead had been working full-time for another company since 1996.
As alleged in the SEC’s complaint, Dixon and Onyx Capital violated and Farr aided and abetted violations of the antifraud provisions of the federal securities laws. The SEC is seeking a court order for emergency relief, including temporary restraining orders, asset freezes and accountings. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains and financial penalties."
It is just too bad the SEC can't prosecute these individuals as real criminals and send them off to prison. It seems Congress made sure many years ago that the most that can happen to Wall Street fraudsters is that they might have to give back at least some of the money they stole. People who steal candy bars at convenience stores get greater punishments. The Department of Justice is supposed to handle criminal prosecutions of Wall Street fraudsters but, they don't seem to have the accountants who can find the fraud or the lawyers who can understand the fraud once it is found.
It might be noted that a fraud of just a few million dollars is not that big however, these frauds are being perpetrated by perhaps the hundreds or even thousands across the United States. Of course with the penalty of being caught being no greater than giving back what was stolen then "why not steal?" In this country it seems we have banks too big to fail and Wall Street bankers too rich to go to jail.
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