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.

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.

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.

SEC ALLEGES FORMER EXECUTIVE WITH BRIBING IRAQI OFFICIAL'S

The following is another case involving alleged bribery of foreign governments by an official working for a U. S. corporation. The charges are based upon the violation of the Foreign Corrupt Practices Act. For details please read the excerpt from the SEC web site:


The SEC “charged a former chief executive officer at Innospec, Inc., with violating the Foreign Corrupt Practices Act (FCPA) by approving bribes to government officials to obtain and retain business.
The SEC alleges that Paul W. Jennings learned of the company's longstanding practice of paying bribes to win orders for sales of tetraethyl lead (TEL) in mid- to late 2004 while serving as the CFO. After becoming CEO in 2005, Jennings and others in Innospec's management approved bribery payments to officials at the Iraqi Ministry of Oil (MoO) in order to sell the fuel additive to Iraq refineries. Innospec used its third-party agent in Iraq to funnel payments to Iraqi officials.

Jennings agreed to settle the SEC's charges against him. The SEC previously charged Innospec as well as its former TEL business director and its agent in Iraq with FCPA violations.
"This is the third enforcement action against an individual responsible for the widespread bribery that occurred at Innospec," said Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit. "We will vigorously hold accountable those individuals who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing."
According to the SEC's complaint filed in U.S. District Court for the District of Columbia, Jennings played a key role in Innospec's bribery activities in Iraq and Indonesia. Innospec, a manufacturer and distributor of fuel additives and other specialty chemicals, was charged last year for making illicit payments of approximately $6.3 million and promised an additional $2.8 million in illicit payments to Iraqi ministries and government officials as well as Indonesian government officials in exchange for contracts worth approximately $176 million.
The SEC alleges that Innospec made payments totaling more than $1.6 million and promised an additional $884,480 to MoO officials. For example, in an October 2005 e-mail copying Jennings, the agent said that Iraqi officials were demanding a 2 percent kickback and that "[w]e are sharing most of our profits with Iraqi officials. Otherwise, our business will stop and we will lose the market. We have to change our strategy and do more compensation to get the rewards." The kickback and later payments were paid by increasing the agent's commission, which Jennings approved. The SEC's complaint also alleges that Jennings was aware of the scheme to pay an official at the Trade Bank of Iraq in exchange for a favorable exchange rate on letters of credit. Another scheme involved a bribe to ensure the failure of a field test of a competitor product. A confidential MoO report for the field trial test was shared with Jennings. Bribes were offered to secure a 2008 Long Term Purchase Agreement that would have caused approximately $850,000 to be shared with Iraqi officials. The agreement, however, did not go forward due to the investigation and ultimate discovery by U.S. regulators of widespread bribery by Innospec.
According to the SEC's complaint, Innospec also paid bribes to Indonesian government officials from at least 2000 to 2005 in order to win contracts worth more than $48 million from state-owned oil and gas companies in Indonesia. Jennings became aware of and approved payments beginning in mid to late 2004. Various euphemisms to refer to the bribery were commonly used in e-mails and in discussions with Jennings and others at Innospec, including "the Indonesian Way," "the Lead Defense Fund," and "TEL optimization." Bribery discussions were held on a flight in the U.S. and even discussed at Jennings' performance review in 2005. In one bribery scheme with Pertamina, an Indonesian state owned oil and gas company, Innospec agreed, with approval by Jennings, to a "one off payment" of $300,000 to their Indonesian Agent with the understanding that it would be passed on to an Indonesian official.
The SEC's complaint also alleges that from 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he had complied with Innospec's Code of Ethics incorporating the Company's FCPA policy. Jennings also signed annual and quarterly personal certifications pursuant to the Sarbanes-Oxley Act of 2002 in which he made false certifications concerning the company's books and records and internal controls.
Jennings has consented, without admitting or denying the SEC's allegations, to the entry of a final judgment that permanently enjoins him from violating Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 13a-14, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting Innospec's violations of Exchange Act Sections 30A, 13(b)(2)(A) and13(b)(2)(B). Jennings will disgorge $116,092 plus prejudgment interest of $12,945, and pay a penalty of $100,000 that takes into consideration Jennings's cooperation in this matter.
The SEC appreciates the assistance of the U.S. Department of Justice's Fraud Section, the Federal Bureau of Investigation, and the U.K.'s SFO in this matter. The SEC's investigation is continuing.”

It is good to see that there was cooperation between agencies in the investigation of this case. There have been many cases of bribery which violated the Foreign Corrupt Practices Act. It might be to the advantage of The United States if the State Department would seek severe punitive actions against nations that allow officials to seek out bribes.

BANKS ARE MAKING MONEY ACCORDING TO THE FDIC

The following excerpt from the FDIC shows that overall big banks are doing well and smaller banks are recovering:

"The fourth quarter 2010 FDIC Quarterly Banking Profile (QBP) is now available on line. FDIC-insured institutions reported an aggregate profit of $21.7 billion in the fourth quarter of 2010, a $23.5 billion improvement from the $1.8 billion net loss the industry reported in the fourth quarter of 2009. This is the sixth consecutive quarter that earnings registered a year-over-year increase. Almost two-thirds of all institutions (62 percent) reported improvements in their quarterly net income from a year ago. The average return on assets (ROA) rose to 0.65 percent, from negative 0.06 percent a year ago. Although community banks' aggregate return on assets lags the ROA for larger institutions, as a group they are recovering, as most community banks reported higher earnings than a year ago."

CANCER, A BIO-TECH COMPANY AND ALLEGED INSIDER TRAIDING

The Securities and Exchange Commission has a lot of territory to cover when it comes to uncovering insider trading frauds. The internationalization of securities trading has tempted many individuals to pass on insider information to friends and relatives living over seas. The hope of such fraudsters is to move their ill gotten profits along with themselves to a safe haven out side of the United States. In the following case the SEC alleges that a bio-tech manager arranged to have his relatives purchase stock options in the manager’s company after the manager became aware that there was a positive result for a cancer drug that his company was developing. The following excerpt came from the SEC website:

“Washington, D.C., Jan. 21, 2011 — The Securities and Exchange Commission today announced that it has obtained a court order freezing the bank and brokerage accounts controlled by an individual who made more than $800,000 in illegal profits by trading on inside information tipped to him by an employee of a Seattle-area biopharmaceutical firm.
In a complaint unsealed late Thursday by the U.S. District Court for the Western District of Washington, the SEC alleges that Zizhong (James) Fan, a manager at Seattle Genetics, told family member Zishen (Brandon) Fan about confidential positive trial results for the company's flagship cancer treatment. Zishen spent hundreds of thousands of dollars purchasing speculative stock options in the company as well as common stock, which skyrocketed in value when the news became public in late September 2010.

According to the SEC's complaint, the SEC staff contacted both Zizhong and Zishen last Thursday, January 13. Almost immediately after being contacted, Zishen attempted to wire several hundred thousand dollars to a bank in China while Zizhong informed his employer that he was leaving unexpectedly for China. The SEC thereafter filed an emergency enforcement action. On Wednesday, January 19, Judge Marsha J. Pechman of the Western District of Washington issued an order freezing brokerage and bank accounts containing the Seattle Genetics trading proceeds.

Marc Fagel, Director of the SEC's San Francisco Regional Office, explained, "While our investigation is at an early stage, when we have evidence of insider trading and the individuals involved respond to our investigation by trying to funnel their illicit profits offshore, we are prepared to take quick action to preserve those assets for recovery by the authorities."

The SEC's complaint alleges that Zizhong Fan, who lives in Bothell, Wash., was employed during 2010 as the manager of clinical programming at Seattle Genetics. He was involved in clinical trials for a development-stage product to be used in the treatment of Hodgkin's lymphoma. As Zizhong Fan began learning information about the success of those trials, Zishen Fan, who lives in Chino Hills, Calif., began amassing large quantities of risky stock options that would allow him to profit from a rise in the company's stock price.
The SEC's complaint alleges that on Sept. 24, 2010 — the day that Zizhong attended a series of meetings to finalize the results for presentation to the company's senior executives — Zishen made his largest options purchase to date (over 50 percent of the options trades in the entire market), while also buying $150,000 in stock. The next business day — September 27 — Seattle Genetics reported the positive results to the public, and its stock price rose nearly 18 percent. According to the SEC, Zishen ultimately realized net trading profits of more than $803,000.
The SEC's complaint charges Zizhong Fan and Zishen Fan with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and monetary penalties. The SEC also named another family member Junhua Fan, who resides in the People's Republic of China, as a relief defendant in the case. His brokerage account was used by Zishen to make many of the illegal trades, according to the SEC's complaint.
The SEC's investigation was conducted by Jennifer J. Lee and Jina L. Choi of the San Francisco Regional Office. The case will be litigated by Robert L. Mitchell. The SEC would like to thank the Chicago Board Options Exchange for its assistance in this matter. The SEC also acknowledges the cooperation of Seattle Genetics.”

Insider trading is done all the time however; there is some debate about what information should constitute an actionable crime and what information may be justifiably obtained. If a business executive knows some secret information that he and his family try to profit from at the publics expense then clearly that could be considered a crime. But, what about a case where the businesses executive passes on the same information but does not profit in any way from its distribution? What if a low level accountant casually passes on insider information to an acquaintance about a large purchase the government just made from his company? Even a shipping clerk or truck driver might be privy to insider information regarding large purchases. The line between obtaining insider information from company personnel and doing research by talking to company personnel should make any investor feel uncomfortable.