Below is the summary of a very complicated kickback scheme involving Quadrangle Group and the New York Sate Common Retirement Fund. It is a really good example of how politicians and businessmen work so well together in America. Luckily, the SEC performed it’s policing duties quite well in this case which brought about a very large fine for Steve Rattner of the Quadrangle Group. The following is an excerpt from the SEC web page:
“Washington, D.C., Nov. 18, 2010 — The Securities and Exchange Commission today charged former Quadrangle Group principal Steven Rattner with participating in a widespread kickback scheme to obtain investments from New York’s largest pension fund.
The SEC alleges that Rattner secured investments for Quadrangle from the New York State Common Retirement Fund after he arranged for a firm affiliate to distribute the DVD of a low-budget film produced by the Retirement Fund’s chief investment officer and his brothers. Rattner then caused Quadrangle to retain Henry Morris – the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi – as a “placement agent” and pay him more than $1 million in sham fees even though Rattner was already dealing directly with then-New York State Deputy Comptroller David Loglisci and did not need an introduction to the Retirement Fund.
The SEC alleges that after receiving pressure from Morris, Rattner also arranged a $50,000 contribution to Hevesi’s re-election campaign. Just a month later, Loglisci increased the Retirement Fund’s investment with Quadrangle from $100 million to $150 million. As a result of the $150 million investment with Quadrangle, the Retirement Fund paid management fees to a Quadrangle subsidiary. By virtue of his partnership interest in Quadrangle and its affiliates, Rattner’s personal share of these fees totals approximately $3 million.
Rattner agreed to settle the SEC’s charges by paying $6.2 million and consenting to a bar from associating with any investment adviser or broker-dealer for at least two years.
“New York State retirees deserve investment advisers that are selected through a transparent, conflict-free process, not through payoffs, undisclosed financial arrangements and movie distribution deals,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “Rattner delivered special favors and conducted sham transactions that corrupted the Retirement Fund’s investment process. The assets of New York State workers were invested for the hidden purpose of enriching Morris and Loglisci’s brother.”
The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund. The SEC charged Quadrangle earlier this year.
According to the SEC’s complaint against Rattner filed in U.S. District Court for the Southern District of New York, Morris informed Rattner in the fall of 2003 that Loglisci’s brother was involved in producing a film called “Chooch.” Morris suggested that Rattner help Loglisci’s brother with the theatrical distribution of the film. Rattner met with Loglisci’s brother and agreed to assist him, but Rattner’s efforts did not lead to a distribution deal. Approximately one year later, Loglisci’s brother contacted Rattner about DVD distribution of “Chooch.” Within days of speaking to Loglisci’s brother, Rattner contacted Loglisci about investing in a new Quadrangle private equity fund being marketed by the firm. Rattner told Loglisci that he had arranged a meeting between Loglisci’s brother and a Quadrangle affiliate — GT Brands — to discuss a possible DVD distribution deal.
The SEC alleges that after Loglisci’s brother met with GT Brands and telephoned Rattner to complain about the treatment he had received from GT Brands, Rattner warned a GT Brands executive to treat Loglisci’s brother “carefully” because Quadrangle was trying to obtain an investment through Loglisci. After GT Brands made clear to Rattner that it was not interested in distributing the film, Rattner instructed the GT Brands executive to “dance along” with Loglisci’s brother. According to an e-mail, Rattner telephoned Morris to inquire whether “GT needs to distribute [the Chooch] video” in order to secure an investment from the Retirement Fund. Morris offered to “nose around” to determine how important the DVD distribution deal was to Loglisci. GT Brands ultimately reversed course and offered to manufacture and distribute the DVD at a discount from its standard fee. Rattner approved the proposed terms of the distribution deal.
The SEC’s complaint alleges that in late October 2004, after Rattner and others from Quadrangle had already met with Loglisci and the Retirement Fund’s private equity consultant and received encouraging feedback from both of them, Morris met with Rattner and offered his placement agent services to Quadrangle. Morris warned Rattner that Quadrangle’s negotiations with the Retirement Fund could always fall apart. Although Quadrangle was already working with a placement agent, Quadrangle agreed to pay Morris as well.
According to the SEC’s complaint, soon after Quadrangle retained Morris as a placement agent and Rattner had advised Morris that GT Brands was moving forward with the deal to distribute the Chooch DVD, Loglisci personally informed Rattner that the Retirement Fund would be making a $100 million investment in the Quadrangle fund.
The SEC alleges that Morris later contacted Rattner and pressed him for a financial contribution to Hevesi’s re-election campaign. Although Rattner purportedly had a personal policy that he would not make political contributions to politicians who have influence over public pension funds, Rattner agreed to find someone else to make the contribution. After speaking with Morris, Rattner asked a friend and the friend’s wife to each contribute $25,000 to Hevesi’s campaign. The day after these contributions were communicated to Hevesi’s campaign staff, Hevesi telephoned Rattner and left him a message thanking him for the contribution. In late May 2006, Rattner’s friend transmitted the promised campaign contributions to Rattner, who forwarded the two checks to Hevesi’s campaign. Approximately one month later, Loglisci committed the Retirement Fund to an additional $50 million investment in the Quadrangle fund.
In settling the SEC’s charges without admitting or denying the allegations, Rattner consented to the entry of a judgment that permanently enjoins him from violating Section 17(a)(2) of the Securities Act of 1933 and orders him to pay approximately $3.2 million in disgorgement and a $3 million penalty. The settlement is subject to court approval. Rattner also consented to the entry of a Commission order that will bar him from associating with any investment adviser or broker-dealer with the right to reapply after two years.”
Shake downs by state and local politicians is very common in America. I remember when my parents wanted a building permit to put up a cabin in Northern Michigan the local building inspector had to collect a fee for the permit which presumably went to the county and a bottle of Whiskey which most likely stayed with the inspector. No one cared about the little gratuity since once it was paid you could build anything and it would pass inspection. Today of course the price of paying off public officials is far more than a bottle of even one of the best bourbons distilled in Kentucky.
In the above case the SEC has again proved itself as an advocate for the people when businessmen and politicians work together against the interests of the general public. It is sad that so many people in America believe that giving and receiving bribes is just a part of capitalism. Indeed it is the way capitalism works in poor undeveloped regions of our planet. Real capitalism as practiced in the civilized world has more to do with competition between firms over the price and quality of goods and services; not competion over who will pay the biggest bribe.
This is a photo of the National Register of Historic Places listing with reference number 7000063
Sunday, December 26, 2010
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, December 12, 2010
SEC PROPOSES CRACKDOWN ON NAKED ACCESS TO EXCHANGES
The following information was recently released on the SEC government web site. It is in regards to brokers allowing certain customers direct access to the exchanges without going through a broker/dealer.
Broker/dealers are subject to certain regulations when using the exchanges which customers do not have to follow. Unfiltered trades lead to trades which may be improper which can cause instability in the market.
“Washington, D.C., Jan. 13, 2010 — The Securities and Exchange Commission today voted unanimously to propose a new rule that would effectively prohibit broker-dealers from providing customers with "unfiltered" or "naked" access to an exchange or alternative trading system (ATS).
The SEC's proposed rule would require brokers with market access, including those who sponsor customers' access to an exchange, to put in place risk management controls and supervisory procedures. Among other things, the procedures would help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.
"Unfiltered access is similar to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," said SEC Chairman Mary L. Schapiro. "Today's proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive."
Broker-dealers use a 'special pass' known as their market participant identifier (MPID) to electronically access an exchange or ATS and place an order for a customer. Broker-dealers are subject to the federal securities laws as well as the rules of the self-regulatory organizations that regulate their operation.
However, those laws and rules do not apply to a non-broker-dealer customer who a broker-dealer provides with their MPID in order to individually gain access to an exchange or ATS. Under this arrangement known as "direct market access" or "sponsored access," the customer can sometimes place an order that flows directly into the markets without first passing through the broker-dealer's systems and without being pre-screened by the broker-dealer in any manner. This type of direct market access arrangement is known as "unfiltered" access and "naked" access. A recent report estimated that naked access accounts for 38 percent of the daily volume for equities traded in the U.S. markets.
Through sponsored access, especially "unfiltered" or "naked" sponsored access arrangements, there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. In particular, there is an increased likelihood that customers will enter erroneous orders as a result of computer malfunction or human error, fail to comply with various regulatory requirements, or breach a credit or capital limit.
The SEC's proposed rule would require broker-dealers to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks related to its market access, including access on behalf of sponsored customers.
Broker-dealers would be required to:
Create financial risk management controls reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous.
Create regulatory risk management controls reasonably designed to ensure compliance with all regulatory requirements applicable in connection with market access.
Have financial and regulatory risk management controls applied automatically on a pre-trade basis before orders route to an exchange or ATS.
Maintain risk management controls and supervisory procedures under the direct and exclusive control of the broker-dealer with market access.
Establish, document and maintain a system for regularly reviewing the effectiveness of its risk management controls and for promptly addressing any issues.
The SEC today also approved a new Nasdaq rule that requires broker-dealers offering sponsored access to Nasdaq to establish certain controls over the financial and regulatory risks of that activity. The proposed Commission rule would extend beyond the new Nasdaq rule in several respects. For example, the Commission's proposal would require the broker-dealer to automatically apply its controls on a pre-trade basis, and to retain exclusive control over those controls without delegation of this critical function to the customer or another third party. The Commission's proposal also would require broker-dealers to establish a supervisory system, including an annual CEO certification, to assure the ongoing effectiveness of its controls In addition, the Commission's proposed risk management controls would apply market-wide, whenever a broker-dealer directly accesses any exchange or ATS.”
Broker/dealers are subject to certain regulations when using the exchanges which customers do not have to follow. Unfiltered trades lead to trades which may be improper which can cause instability in the market.
“Washington, D.C., Jan. 13, 2010 — The Securities and Exchange Commission today voted unanimously to propose a new rule that would effectively prohibit broker-dealers from providing customers with "unfiltered" or "naked" access to an exchange or alternative trading system (ATS).
The SEC's proposed rule would require brokers with market access, including those who sponsor customers' access to an exchange, to put in place risk management controls and supervisory procedures. Among other things, the procedures would help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.
"Unfiltered access is similar to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," said SEC Chairman Mary L. Schapiro. "Today's proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive."
Broker-dealers use a 'special pass' known as their market participant identifier (MPID) to electronically access an exchange or ATS and place an order for a customer. Broker-dealers are subject to the federal securities laws as well as the rules of the self-regulatory organizations that regulate their operation.
However, those laws and rules do not apply to a non-broker-dealer customer who a broker-dealer provides with their MPID in order to individually gain access to an exchange or ATS. Under this arrangement known as "direct market access" or "sponsored access," the customer can sometimes place an order that flows directly into the markets without first passing through the broker-dealer's systems and without being pre-screened by the broker-dealer in any manner. This type of direct market access arrangement is known as "unfiltered" access and "naked" access. A recent report estimated that naked access accounts for 38 percent of the daily volume for equities traded in the U.S. markets.
Through sponsored access, especially "unfiltered" or "naked" sponsored access arrangements, there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. In particular, there is an increased likelihood that customers will enter erroneous orders as a result of computer malfunction or human error, fail to comply with various regulatory requirements, or breach a credit or capital limit.
The SEC's proposed rule would require broker-dealers to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks related to its market access, including access on behalf of sponsored customers.
Broker-dealers would be required to:
Create financial risk management controls reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous.
Create regulatory risk management controls reasonably designed to ensure compliance with all regulatory requirements applicable in connection with market access.
Have financial and regulatory risk management controls applied automatically on a pre-trade basis before orders route to an exchange or ATS.
Maintain risk management controls and supervisory procedures under the direct and exclusive control of the broker-dealer with market access.
Establish, document and maintain a system for regularly reviewing the effectiveness of its risk management controls and for promptly addressing any issues.
The SEC today also approved a new Nasdaq rule that requires broker-dealers offering sponsored access to Nasdaq to establish certain controls over the financial and regulatory risks of that activity. The proposed Commission rule would extend beyond the new Nasdaq rule in several respects. For example, the Commission's proposal would require the broker-dealer to automatically apply its controls on a pre-trade basis, and to retain exclusive control over those controls without delegation of this critical function to the customer or another third party. The Commission's proposal also would require broker-dealers to establish a supervisory system, including an annual CEO certification, to assure the ongoing effectiveness of its controls In addition, the Commission's proposed risk management controls would apply market-wide, whenever a broker-dealer directly accesses any exchange or ATS.”
Tuesday, December 7, 2010
SEC CHARGED BANC OF AMERICA SECUITIES WITH SECURITIES FRAUD
The following is a breaking story which alleged that Banc of America Securities committed fraud in it’s dealings with municipal bonds. BAS was part of Bank of America and was merged with Merril Lynch when Bank of America took over that firm. The following excerpt from the SEC web page shows in detail the case which the SEC laid out against BAS:
"Washington, D.C., Dec. 7, 2010 — The Securities and Exchange Commission today charged Banc of America Securities, LLC (BAS) with securities fraud for its part in an effort to rig bids in connection with the investment of proceeds of municipal securities.
To settle the SEC's charges, BAS has agreed to pay more than $36 million in disgorgement and interest. In addition, BAS and its affiliates have agreed to pay another $101 million to other federal and state authorities for its conduct.
"This ongoing investigation has helped to expose wide-spread corruption in the municipal reinvestment industry," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The conduct was egregious — in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper."
When investors purchase municipal securities, the municipalities generally invest the proceeds temporarily in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process, whereby bidding agents search for the appropriate investment vehicle for a municipality.
In its Order, the SEC found that the bidding process was not competitive because it was tainted by undisclosed consultations, agreements, or payments and, therefore, could not be used to establish the fair market value of the reinvestment instruments. As a result, these improper bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, the principal amounts of which totaled billions of dollars.
According to the Commission's Order, certain bidding agents steered business from municipalities to BAS through a variety of mechanisms. In some cases, the agents gave BAS information on competing bids (last looks), and deliberately obtained off-market "courtesy" bids or purposefully non-winning bids so that BAS could win the transaction (set-ups). As a result, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).
In return, BAS steered business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. In addition, those bidding agents were at times rewarded with, among other things, undisclosed gratuitous payments and kickbacks. The Commission also found that former officers of BAS participated in, and condoned, these improper bidding practices.
BAS is now known as Merrill Lynch, Pierce, Fenner & Smith Incorporated following a merger.
Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added "This conduct threatened the integrity of the municipal marketplace, affecting not only the municipal issuers who were directly defrauded, but also the thousands of investors nationwide who purchased their tax-exempt municipal securities."
Without admitting or denying the SEC's findings, BAS consented to the entry of a Commission Order which censures BAS, requires it to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act of 1934, and to pay disgorgement plus prejudgment interest totaling $36,096,442 directly to the affected entities.
In determining to accept BAS' offer, which does not include the imposition of a civil penalty, the Commission considered the cooperation of and remedial actions undertaken by BAS in connection with the Commission's investigation as well as investigations conducted by other law enforcement agencies. Among other things, BAS self-reported the bidding practices to the Antitrust Division of the Department of Justice.
In a related action, the Commission barred Douglas Lee Campbell, a former officer of BAS, from association with any broker, dealer or investment adviser, based upon his guilty plea to a criminal information on Sept. 9, 2010, in United States v. Douglas Lee Campbell (Criminal Action No. 10-cr-803) charging him with two counts of conspiracy and one count of wire fraud. The criminal information charged, among other things, that Campbell engaged in fraudulent misconduct in connection with the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission is not imposing a civil penalty against Campbell based on his cooperation in the Commission's investigation.
Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers of the SEC's Municipal Securities and Public Pensions Unit conducted the investigation out of the agency's Philadelphia Regional Office under the leadership of Unit Chief Elaine C. Greenberg, Regional Director Daniel M. Hawke and Assistant Regional Director Mary P. Hansen.
The SEC thanks the Antitrust Division of the Department of Justice and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC is bringing this action in coordination with the Internal Revenue Service, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and 20 State Attorney Generals.
The SEC's investigation is continuing."
The above is an ongoing story and it may be possible that several other
institutions might be involved in similar schemes. Maybe other institutions should be feeling nervous with the SEC's current dedication to giving the corpses of financial institutions very detailed autopsies.
"Washington, D.C., Dec. 7, 2010 — The Securities and Exchange Commission today charged Banc of America Securities, LLC (BAS) with securities fraud for its part in an effort to rig bids in connection with the investment of proceeds of municipal securities.
To settle the SEC's charges, BAS has agreed to pay more than $36 million in disgorgement and interest. In addition, BAS and its affiliates have agreed to pay another $101 million to other federal and state authorities for its conduct.
"This ongoing investigation has helped to expose wide-spread corruption in the municipal reinvestment industry," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The conduct was egregious — in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper."
When investors purchase municipal securities, the municipalities generally invest the proceeds temporarily in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process, whereby bidding agents search for the appropriate investment vehicle for a municipality.
In its Order, the SEC found that the bidding process was not competitive because it was tainted by undisclosed consultations, agreements, or payments and, therefore, could not be used to establish the fair market value of the reinvestment instruments. As a result, these improper bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, the principal amounts of which totaled billions of dollars.
According to the Commission's Order, certain bidding agents steered business from municipalities to BAS through a variety of mechanisms. In some cases, the agents gave BAS information on competing bids (last looks), and deliberately obtained off-market "courtesy" bids or purposefully non-winning bids so that BAS could win the transaction (set-ups). As a result, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).
In return, BAS steered business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. In addition, those bidding agents were at times rewarded with, among other things, undisclosed gratuitous payments and kickbacks. The Commission also found that former officers of BAS participated in, and condoned, these improper bidding practices.
BAS is now known as Merrill Lynch, Pierce, Fenner & Smith Incorporated following a merger.
Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added "This conduct threatened the integrity of the municipal marketplace, affecting not only the municipal issuers who were directly defrauded, but also the thousands of investors nationwide who purchased their tax-exempt municipal securities."
Without admitting or denying the SEC's findings, BAS consented to the entry of a Commission Order which censures BAS, requires it to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act of 1934, and to pay disgorgement plus prejudgment interest totaling $36,096,442 directly to the affected entities.
In determining to accept BAS' offer, which does not include the imposition of a civil penalty, the Commission considered the cooperation of and remedial actions undertaken by BAS in connection with the Commission's investigation as well as investigations conducted by other law enforcement agencies. Among other things, BAS self-reported the bidding practices to the Antitrust Division of the Department of Justice.
In a related action, the Commission barred Douglas Lee Campbell, a former officer of BAS, from association with any broker, dealer or investment adviser, based upon his guilty plea to a criminal information on Sept. 9, 2010, in United States v. Douglas Lee Campbell (Criminal Action No. 10-cr-803) charging him with two counts of conspiracy and one count of wire fraud. The criminal information charged, among other things, that Campbell engaged in fraudulent misconduct in connection with the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission is not imposing a civil penalty against Campbell based on his cooperation in the Commission's investigation.
Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers of the SEC's Municipal Securities and Public Pensions Unit conducted the investigation out of the agency's Philadelphia Regional Office under the leadership of Unit Chief Elaine C. Greenberg, Regional Director Daniel M. Hawke and Assistant Regional Director Mary P. Hansen.
The SEC thanks the Antitrust Division of the Department of Justice and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC is bringing this action in coordination with the Internal Revenue Service, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and 20 State Attorney Generals.
The SEC's investigation is continuing."
The above is an ongoing story and it may be possible that several other
institutions might be involved in similar schemes. Maybe other institutions should be feeling nervous with the SEC's current dedication to giving the corpses of financial institutions very detailed autopsies.
Sunday, December 5, 2010
OIL SERVICE, FREIGHT COS. PAY FINES FOR ALLEGED BRIBES
The following excerpt from the SEC web site detaisl the settlement by several companies accused of bribing foreign officials:
"SEC Charges Seven Oil Services and Freight Forwarding Companies for Widespread Bribery of Customs Officials
FOR IMMEDIATE RELEASE
2010-214
Washington, D.C., Nov. 4, 2010 — The Securities and Exchange Commission today announced sweeping settlements with global freight forwarding company Panalpina, Inc. and six other companies in the oil services industry that violated the Foreign Corrupt Practices Act (FCPA) by paying millions of dollars in bribes to foreign officials to receive preferential treatment and improper benefits during the customs process.
SEC Complaints:
Panalpina, Inc.
Pride International, Inc.
Tidewater Inc.
Transocean, Inc.
GlobalSantaFe Corp.
Noble Corporation
SEC Administrative Proceeding:
Royal Dutch Shell plc
The SEC alleges that the companies bribed customs officials in more than 10 countries in exchange for such perks as avoiding applicable customs duties on imported goods, expediting the importation of goods and equipment, extending drilling contracts, and lowering tax assessments. The companies also paid bribes to obtain false documentation related to temporary import permits for oil drilling rigs, and enable the release of drilling rigs and other equipment from customs officials.
The SEC's cases were coordinated with the U.S. Department of Justice's Fraud Section, and the sanctions to be paid by the companies under the settlements total $236.5 million. This is the first sweep of a particular industrial sector in order to crack down on public companies and third parties who are paying bribes abroad.
"Bribing customs officials is not only illegal but also bad for business, as the coordinated efforts of law enforcement increase the risk of detection every day," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These companies resorted to lucrative arrangements behind the scenes to obtain phony paperwork and special favors, and they landed themselves squarely in investigators' crosshairs."
Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit, added, "This investigation was the culmination of proactive work by the SEC and DOJ after detecting widespread corruption in the oil services industry. The FCPA Unit will continue to focus on industry-wide sweeps, and no industry is immune from investigation."
Without admitting or denying the allegations, the companies agreed to settle the SEC's charges against them by paying approximately $80 million in disgorgement, interest, and penalties. The companies agreed to pay fines of $156.5 million to settle the criminal proceedings with DOJ.
SEC charges against six companies were filed in federal court, and one company was charged in an SEC administrative proceeding. Among the SEC's allegations:
Panalpina, Inc. — A U.S. subsidiary of the Swiss freight forwarding giant Panalpina World Transport (Holding) Ltd. (PWT), Panalpina is charged with paying bribes to customs officials around the world from 2002 to 2007 on behalf of its customers, some of whom are included in these settlements. Panalpina bribed customs officials in Nigeria, Angola, Brazil, Russia and Kazakhstan to enable importation of goods into those countries and the provision of logistics services. The bribes were often authorized by Panalpina's customers and then inaccurately described in customer invoices as "local processing" or "special intervention" or "special handling" fees.
Panalpina agreed to an injunction and will pay disgorgement of $11,329,369 in the SEC case.
PWT and Panalpina agreed to pay a criminal fine of $70.56 million.
Pride International, Inc. — One of the world's largest offshore drilling companies, Pride and its subsidiaries paid approximately $2 million to foreign officials in eight countries from 2001 to 2006 in exchange for various benefits related to oil services. For example, Pride's former country manager in Venezuela authorized bribes of approximately $384,000 to a state-owned oil company official to secure extensions of drilling contracts, and a French subsidiary of Pride paid $500,000 in bribes intended for a judge to influence customs litigation relating to the importation of a drilling rig.
Pride agreed to an injunction and will pay disgorgement and prejudgment interest of $23,529,718 in the SEC case.
Pride and subsidiary Pride Forasol agreed to pay a criminal fine of $32.625 million.
Tidewater Inc. — The New Orleans-based shipping company through a subsidiary reimbursed approximately $1.6 million to its customs broker in Nigeria from 2002 to 2007 so the broker could make improper payments to Nigerian customs officials and induce them to disregard regulatory requirements related to the importation of Tidewater's vessels.
Tidewater agreed to an injunction and will pay $8,104,362 in disgorgement and a $217,000 penalty.
Tidewater Marine International agreed to pay a criminal fine of $7.35 million.
Transocean, Inc. — An international provider of offshore drilling services to oil companies throughout the world, Transocean made illicit payments from at least 2002 to 2007 through its customs agents to Nigerian government officials in order to extend the temporary importation status of its drilling rigs. Bribes also were paid to obtain false paperwork associated with its drilling rigs and obtain inward clearance authorizations for its rigs and a bond registration.
Transocean agreed to an injunction and will pay disgorgement and prejudgment interest of $7,265,080.
Transocean Ltd. and Transocean Inc. agreed to pay a criminal fine of $13.44 million.
GlobalSantaFe Corp. (GSF) A provider of offshore drilling services GSF made illegal payments through its customs brokers from approximately 2002 to 2007 to officials of the Nigerian Customs Service (NCS) to secure documentation showing that its rigs had left Nigerian waters. The rigs had in fact never moved. GSF also made other payments to government officials in Gabon, Angola, and Equatorial Guinea.
GSF agreed to an injunction and will pay disgorgement of $3,758,165 and a penalty of $2.1 million.
Noble Corporation — An offshore drilling services provider, Noble authorized payments by its Nigerian subsidiary to its custom agent to obtain false documentation from NCS officials to show export and re-import of its drilling rigs into Nigerian waters. From 2003 to 2007, Noble obtained eight temporary import permits with false documentation.
Noble agreed to an injunction and will pay disgorgement and prejudgment interest of $5,576,998.
Noble agreed to pay a criminal fine of $2.59 million.
Royal Dutch Shell plc — An oil company headquartered in the Netherlands, Shell and its indirect subsidiary called Shell International Exploration and Production, Inc. (SIEP) violated the FCPA by using a customs broker to make payments from 2002 to 2005 to officials at NCS to obtain preferential customs treatment related to a project in Nigeria.
SIEP and Shell agreed to a cease-and-desist order and will pay disgorgement and prejudgment interest of $18,149,459.
Shell Nigerian Exploration and Production Co. Ltd. will pay a criminal fine of $30 million. "
It should be noted that the SEC acknowledged that the Department of Justice and the FBI helped with the investigation.
The bribing of government officials and politicians is a problem in many countries of the world including the United States. It is hard to say whether the people in government or the people in business should be given the worse punishments. In America prosecuting for giving or receiving bribes in this country is rare because so many laws have been passed and court cases decided which pretty much legalizes bribery. Our politicians might be corrupt but they are not stupid. Bribery is looked upon as a victimless crime in the United States.
Of course the victims of bribery are obvious. First of all the citizens do not have a government operating in their best interest. Secondly, businesses that give bribes undermine the businesses of honest entrepreneurs who refuse to give payola to people in government. Bribery simply undermines the workings of capitalism and should simply be treated as a crime.
"SEC Charges Seven Oil Services and Freight Forwarding Companies for Widespread Bribery of Customs Officials
FOR IMMEDIATE RELEASE
2010-214
Washington, D.C., Nov. 4, 2010 — The Securities and Exchange Commission today announced sweeping settlements with global freight forwarding company Panalpina, Inc. and six other companies in the oil services industry that violated the Foreign Corrupt Practices Act (FCPA) by paying millions of dollars in bribes to foreign officials to receive preferential treatment and improper benefits during the customs process.
SEC Complaints:
Panalpina, Inc.
Pride International, Inc.
Tidewater Inc.
Transocean, Inc.
GlobalSantaFe Corp.
Noble Corporation
SEC Administrative Proceeding:
Royal Dutch Shell plc
The SEC alleges that the companies bribed customs officials in more than 10 countries in exchange for such perks as avoiding applicable customs duties on imported goods, expediting the importation of goods and equipment, extending drilling contracts, and lowering tax assessments. The companies also paid bribes to obtain false documentation related to temporary import permits for oil drilling rigs, and enable the release of drilling rigs and other equipment from customs officials.
The SEC's cases were coordinated with the U.S. Department of Justice's Fraud Section, and the sanctions to be paid by the companies under the settlements total $236.5 million. This is the first sweep of a particular industrial sector in order to crack down on public companies and third parties who are paying bribes abroad.
"Bribing customs officials is not only illegal but also bad for business, as the coordinated efforts of law enforcement increase the risk of detection every day," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These companies resorted to lucrative arrangements behind the scenes to obtain phony paperwork and special favors, and they landed themselves squarely in investigators' crosshairs."
Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit, added, "This investigation was the culmination of proactive work by the SEC and DOJ after detecting widespread corruption in the oil services industry. The FCPA Unit will continue to focus on industry-wide sweeps, and no industry is immune from investigation."
Without admitting or denying the allegations, the companies agreed to settle the SEC's charges against them by paying approximately $80 million in disgorgement, interest, and penalties. The companies agreed to pay fines of $156.5 million to settle the criminal proceedings with DOJ.
SEC charges against six companies were filed in federal court, and one company was charged in an SEC administrative proceeding. Among the SEC's allegations:
Panalpina, Inc. — A U.S. subsidiary of the Swiss freight forwarding giant Panalpina World Transport (Holding) Ltd. (PWT), Panalpina is charged with paying bribes to customs officials around the world from 2002 to 2007 on behalf of its customers, some of whom are included in these settlements. Panalpina bribed customs officials in Nigeria, Angola, Brazil, Russia and Kazakhstan to enable importation of goods into those countries and the provision of logistics services. The bribes were often authorized by Panalpina's customers and then inaccurately described in customer invoices as "local processing" or "special intervention" or "special handling" fees.
Panalpina agreed to an injunction and will pay disgorgement of $11,329,369 in the SEC case.
PWT and Panalpina agreed to pay a criminal fine of $70.56 million.
Pride International, Inc. — One of the world's largest offshore drilling companies, Pride and its subsidiaries paid approximately $2 million to foreign officials in eight countries from 2001 to 2006 in exchange for various benefits related to oil services. For example, Pride's former country manager in Venezuela authorized bribes of approximately $384,000 to a state-owned oil company official to secure extensions of drilling contracts, and a French subsidiary of Pride paid $500,000 in bribes intended for a judge to influence customs litigation relating to the importation of a drilling rig.
Pride agreed to an injunction and will pay disgorgement and prejudgment interest of $23,529,718 in the SEC case.
Pride and subsidiary Pride Forasol agreed to pay a criminal fine of $32.625 million.
Tidewater Inc. — The New Orleans-based shipping company through a subsidiary reimbursed approximately $1.6 million to its customs broker in Nigeria from 2002 to 2007 so the broker could make improper payments to Nigerian customs officials and induce them to disregard regulatory requirements related to the importation of Tidewater's vessels.
Tidewater agreed to an injunction and will pay $8,104,362 in disgorgement and a $217,000 penalty.
Tidewater Marine International agreed to pay a criminal fine of $7.35 million.
Transocean, Inc. — An international provider of offshore drilling services to oil companies throughout the world, Transocean made illicit payments from at least 2002 to 2007 through its customs agents to Nigerian government officials in order to extend the temporary importation status of its drilling rigs. Bribes also were paid to obtain false paperwork associated with its drilling rigs and obtain inward clearance authorizations for its rigs and a bond registration.
Transocean agreed to an injunction and will pay disgorgement and prejudgment interest of $7,265,080.
Transocean Ltd. and Transocean Inc. agreed to pay a criminal fine of $13.44 million.
GlobalSantaFe Corp. (GSF) A provider of offshore drilling services GSF made illegal payments through its customs brokers from approximately 2002 to 2007 to officials of the Nigerian Customs Service (NCS) to secure documentation showing that its rigs had left Nigerian waters. The rigs had in fact never moved. GSF also made other payments to government officials in Gabon, Angola, and Equatorial Guinea.
GSF agreed to an injunction and will pay disgorgement of $3,758,165 and a penalty of $2.1 million.
Noble Corporation — An offshore drilling services provider, Noble authorized payments by its Nigerian subsidiary to its custom agent to obtain false documentation from NCS officials to show export and re-import of its drilling rigs into Nigerian waters. From 2003 to 2007, Noble obtained eight temporary import permits with false documentation.
Noble agreed to an injunction and will pay disgorgement and prejudgment interest of $5,576,998.
Noble agreed to pay a criminal fine of $2.59 million.
Royal Dutch Shell plc — An oil company headquartered in the Netherlands, Shell and its indirect subsidiary called Shell International Exploration and Production, Inc. (SIEP) violated the FCPA by using a customs broker to make payments from 2002 to 2005 to officials at NCS to obtain preferential customs treatment related to a project in Nigeria.
SIEP and Shell agreed to a cease-and-desist order and will pay disgorgement and prejudgment interest of $18,149,459.
Shell Nigerian Exploration and Production Co. Ltd. will pay a criminal fine of $30 million. "
It should be noted that the SEC acknowledged that the Department of Justice and the FBI helped with the investigation.
The bribing of government officials and politicians is a problem in many countries of the world including the United States. It is hard to say whether the people in government or the people in business should be given the worse punishments. In America prosecuting for giving or receiving bribes in this country is rare because so many laws have been passed and court cases decided which pretty much legalizes bribery. Our politicians might be corrupt but they are not stupid. Bribery is looked upon as a victimless crime in the United States.
Of course the victims of bribery are obvious. First of all the citizens do not have a government operating in their best interest. Secondly, businesses that give bribes undermine the businesses of honest entrepreneurs who refuse to give payola to people in government. Bribery simply undermines the workings of capitalism and should simply be treated as a crime.
Thursday, December 2, 2010
FDIC CHAIRMAN CALLS FOR ACCOUNTABILITY
Although the FDIC (Federal Deposit Insurance Corporation) is theoretically geared more to the banking system than the SEC (Security and Exchange Commission) the businesses of banking and securitization has been merged within many institutions over the last couple of decades. In short, what affects the securities industry affects the banking industry and vice verse. The following excerpt from the FDIC web page are remarks given by FDIC Chairman Sheila Bair to the Boston Club:
"Remarks by FDIC Chairman Sheila C. Bair to The Boston Club, Boston, MA
December 2, 2010
Thank you for that kind introduction. It is wonderful to be back in Massachusetts and an honor to talk to this distinguished group.
The past few years have been the most eventful for U.S. economic policy since the 1930s. And that, of course, is because our nation has suffered its most serious economic setback since the Great Depression. We knew that the crisis posed a grave threat to the U.S. economy. Our response has been historic in scope, and it has sparked a sorely needed debate over the appropriate roles for government and business in regulating and leading the economy.
What I would like to do this morning is outline the rationale for the new reforms, and explain how they intersect with the fundamental need for much greater responsibility and accountability on the part of government and corporate leaders. The following are remarks given by
Warren Buffett has said: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”
What we need are leaders who are willing to do things differently; leaders who are willing to do the hard work necessary to move our country forward. Leaders who aren’t interested in promoting their short term personal gains, but rather want to build their organizations for the long term for the benefit of this and future generations.
Accountability and responsibility
The financial crisis has revealed critical flaws in how our financial system operated and was regulated, as well as in our leadership culture. If there is an overarching theme of this crisis, it is a lack of accountability by managers, by regulators, by lenders, by borrowers -- by everyone. We see that at the failed banks – both large ones that the government bailed-out and smaller ones the FDIC has had to resolve.
We’ve seen disengaged managers; managers who were not hands-on, who would not take responsibility or find out what was going on inside of their organization. We’ve seen managers who didn’t look beyond their next quarter’s financial statements and who rewarded short term profit generation through high risk activities which sowed the seeds of their ultimate demise. They didn't do their homework, they didn't understand the risks their companies were taking, and they didn't work hard enough. Some were arrogant.
It's an important lesson for investors, shareholders and, of course boards, who ultimately are responsible for hiring the CEO, and making sure that the CEO and other senior managers are up to the job, and doing their job. At larger institutions, some managers assumed that their size protected them from regulatory or market sanctions – that they were so systemically important and interconnected that they were Too Big To Fail. And some of them proved to be right. Especially at the height of the financial crisis, we saw these large, systemically important institutions exempted from the type of supervisory sanctions that community banks face every day.
That is one of the reasons why we fought so hard to end Too Big To Fail. We now have a resolution process that will impose discipline on large institutions as well as the smaller ones. If they get into trouble, there will be accountability. There will be consequences for management, for corporate boards, for investors, and for creditors.
Too Big To Fail & Resolution Authority
The new Dodd-Frank financial reform act establishes a credible resolution authority for giant banks and non-bank financial institutions. It gives the FDIC, for the first time, a set of receivership powers to close and liquidate systemically-important financial firms that are failing. These new powers are similar to the existing FDIC receivership process for insured banks and thrifts.
Let me briefly describe the practical significance of these new powers. In the old world of Too Big To Fail, risk taking was subsidized. Systemically-important companies took on too much risk because the gains were private while the losses were socialized. Market discipline failed to rein in the excesses at these institutions because equity and debt holders -- who should rightly be at risk if things go wrong -- enjoyed an implicit government backstop.
This skewing of financial incentives inevitably led to a misallocation of capital and credit flows, which ultimately was harmful to the broader public good, as we have seen with the recent devastating losses of livelihoods, homes, and life savings. It was these poor incentives in place under Too Big To Fail that helped push risk out into the so-called shadow banking system, where regulation was the lightest. That’s where you saw most of the excesses in subprime and nontraditional mortgage lending, as well as holdings of mortgage-related derivative instruments.
So implementing the new resolution authority and ending Too Big To Fail is a game changer. It corrects the economic incentives, and protects the broader public good:
Market discipline will be restored,
Financial incentives will be better aligned,
Capital and credit will be allocated more efficiently, and
Taxpayers will no longer be on the hook when financial companies get it wrong.
Executive compensation
Another example of lack of accountability can be found in the misaligned compensation incentives, which were among the root causes of the financial crisis. Compensation was too-often based on deal volume or current earnings, and not enough attention was paid to risks that eventually caused problems down the road.
It is not appropriate for regulators to set or limit compensation. But it is very appropriate to undertake regulatory initiatives that encourage companies to structure compensation so that excessive risk taking is discouraged, long term profitability is rewarded, and most importantly, that meaningful financial penalties are imposed on employees whose risk taking ends up causing losses later on.
Fiscal responsibility
In Washington, we also need more accountability for our increasingly dire fiscal situation. We must mend our ways if we are to preserve financial stability in the years ahead. Excessive government borrowing poses a clear danger to our long-term financial stability, and assuaging it requires fiscal responsibility and leadership. Total U.S. public debt has doubled in just the past seven years to almost $14 trillion, or more than $100,000 for every U.S. household.
This explosive growth in federal borrowing is not only the result of the financial crisis, but also the unwillingness of our government over many years to make the hard choices necessary to rein in our long-term structural deficit. If it is not checked soon, this borrowing will at some point directly threaten financial stability by undermining the confidence that investors have in U.S. government obligations.
Actually fixing these problems will require a bipartisan national commitment to a comprehensive package of spending cuts and tax increases over many years. The plan released yesterday by the National Commission on Fiscal Responsibility and Reform offers such a plan. It proposes a combination of spending cuts, revenue-enhancing tax reforms, and cost containment in health care and entitlement programs that would produce nearly $4 trillion in deficit reduction over the next ten years.
While opinions differ as to exactly what combination of spending cuts and revenue increase will be necessary we can be sure that most of the needed changes will be unpopular, and will likely affect every interest group in some way or another. We will want to phase in these changes over time as the economy continues to recover from the effects of the financial crisis.
But only with a comprehensive package can we truly achieve the long-term budget discipline needed to preserve our nation’s credibility in global financial markets, and maintain a stable banking system to support the real economy. We must look beyond our narrow partisan interests, and show the world that we are prepared to act boldly to secure our economic future.
Leadership
I am very proud of the stability that the FDIC has provided throughout the crisis. No one lost a penny of insured deposits. And in fact, no one has ever lost a penny of insured deposits in the 77 years since the FDIC was created in 1933. As the crisis unfolded and other financial sectors were destabilizing, insured deposits remained stable and there were no disruptions.
As the leader of an organization, I always try to keep a focus on mission. Protecting insured deposits is a very important, tangible mission. It's one that the public understands and appreciates.
If you look at other organizations – whether private or public -- that have high morale, they have a clearly defined mission. The leadership at those organizations has to ensure that people stay focused on the mission and help them understand how their individual jobs relate to the mission. You need accountability. You need responsibility. You need people to take ownership of their jobs and connect that to the organization’s broader mission.
One challenge I have is to tell our people how good they are. That their judgment is as good as that of the banks they are examining, and that it is their job to speak up about any concerns they have. That they have the right and the obligation to question and tell a bank’s management about those concerns, whether they're not reserving enough against their loans, or that they're moving into a new line of business or a new geographic area in which they are unfamiliar.
Conclusion
We all know there are no easy shortcuts to rebuilding our financial infrastructure and reining in our long-term structural deficit. And it is always appealing to try to go back to old and familiar ways. But in American finance, those are the practices that pushed our economy to the brink of ruin.
Instead, we must move forward, make the tough choices, and accept that preserving stability is a prerequisite to making the financial system more efficient and more profitable. In the end, leadership means showing the resolve to identify emerging risks and taking concerted action to head them off.
In concluding, I don’t want to leave you with the impression that all leadership in the financial sector should be faulted. There are several examples of senior management at financial institutions, large and small, who avoided the excessive risk taking that led to the crisis. So let us celebrate those who led their organizations effectively and resolve to foster a culture which rewards managers who are willing to forego short term profits in favor of long term stability and prosperity.
And as part of building that culture, let’s hope that we see a lot more women in the upper echelons of financial institution management, including – at long last – at the very top.
Thank you."
The FDIC believes there has to be reform in order to improve our overall economy. With reforms supported by the FDIC along with legal sanctions taken by the SEC perhaps we might have a light at the end of this long dark tunnel our economy in which our economy has been stuck. We can only hope someone sprays for poisonous spiders before financial oversight authorities signal that it is O.K. to move through the tunnel to the light.
"Remarks by FDIC Chairman Sheila C. Bair to The Boston Club, Boston, MA
December 2, 2010
Thank you for that kind introduction. It is wonderful to be back in Massachusetts and an honor to talk to this distinguished group.
The past few years have been the most eventful for U.S. economic policy since the 1930s. And that, of course, is because our nation has suffered its most serious economic setback since the Great Depression. We knew that the crisis posed a grave threat to the U.S. economy. Our response has been historic in scope, and it has sparked a sorely needed debate over the appropriate roles for government and business in regulating and leading the economy.
What I would like to do this morning is outline the rationale for the new reforms, and explain how they intersect with the fundamental need for much greater responsibility and accountability on the part of government and corporate leaders. The following are remarks given by
Warren Buffett has said: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”
What we need are leaders who are willing to do things differently; leaders who are willing to do the hard work necessary to move our country forward. Leaders who aren’t interested in promoting their short term personal gains, but rather want to build their organizations for the long term for the benefit of this and future generations.
Accountability and responsibility
The financial crisis has revealed critical flaws in how our financial system operated and was regulated, as well as in our leadership culture. If there is an overarching theme of this crisis, it is a lack of accountability by managers, by regulators, by lenders, by borrowers -- by everyone. We see that at the failed banks – both large ones that the government bailed-out and smaller ones the FDIC has had to resolve.
We’ve seen disengaged managers; managers who were not hands-on, who would not take responsibility or find out what was going on inside of their organization. We’ve seen managers who didn’t look beyond their next quarter’s financial statements and who rewarded short term profit generation through high risk activities which sowed the seeds of their ultimate demise. They didn't do their homework, they didn't understand the risks their companies were taking, and they didn't work hard enough. Some were arrogant.
It's an important lesson for investors, shareholders and, of course boards, who ultimately are responsible for hiring the CEO, and making sure that the CEO and other senior managers are up to the job, and doing their job. At larger institutions, some managers assumed that their size protected them from regulatory or market sanctions – that they were so systemically important and interconnected that they were Too Big To Fail. And some of them proved to be right. Especially at the height of the financial crisis, we saw these large, systemically important institutions exempted from the type of supervisory sanctions that community banks face every day.
That is one of the reasons why we fought so hard to end Too Big To Fail. We now have a resolution process that will impose discipline on large institutions as well as the smaller ones. If they get into trouble, there will be accountability. There will be consequences for management, for corporate boards, for investors, and for creditors.
Too Big To Fail & Resolution Authority
The new Dodd-Frank financial reform act establishes a credible resolution authority for giant banks and non-bank financial institutions. It gives the FDIC, for the first time, a set of receivership powers to close and liquidate systemically-important financial firms that are failing. These new powers are similar to the existing FDIC receivership process for insured banks and thrifts.
Let me briefly describe the practical significance of these new powers. In the old world of Too Big To Fail, risk taking was subsidized. Systemically-important companies took on too much risk because the gains were private while the losses were socialized. Market discipline failed to rein in the excesses at these institutions because equity and debt holders -- who should rightly be at risk if things go wrong -- enjoyed an implicit government backstop.
This skewing of financial incentives inevitably led to a misallocation of capital and credit flows, which ultimately was harmful to the broader public good, as we have seen with the recent devastating losses of livelihoods, homes, and life savings. It was these poor incentives in place under Too Big To Fail that helped push risk out into the so-called shadow banking system, where regulation was the lightest. That’s where you saw most of the excesses in subprime and nontraditional mortgage lending, as well as holdings of mortgage-related derivative instruments.
So implementing the new resolution authority and ending Too Big To Fail is a game changer. It corrects the economic incentives, and protects the broader public good:
Market discipline will be restored,
Financial incentives will be better aligned,
Capital and credit will be allocated more efficiently, and
Taxpayers will no longer be on the hook when financial companies get it wrong.
Executive compensation
Another example of lack of accountability can be found in the misaligned compensation incentives, which were among the root causes of the financial crisis. Compensation was too-often based on deal volume or current earnings, and not enough attention was paid to risks that eventually caused problems down the road.
It is not appropriate for regulators to set or limit compensation. But it is very appropriate to undertake regulatory initiatives that encourage companies to structure compensation so that excessive risk taking is discouraged, long term profitability is rewarded, and most importantly, that meaningful financial penalties are imposed on employees whose risk taking ends up causing losses later on.
Fiscal responsibility
In Washington, we also need more accountability for our increasingly dire fiscal situation. We must mend our ways if we are to preserve financial stability in the years ahead. Excessive government borrowing poses a clear danger to our long-term financial stability, and assuaging it requires fiscal responsibility and leadership. Total U.S. public debt has doubled in just the past seven years to almost $14 trillion, or more than $100,000 for every U.S. household.
This explosive growth in federal borrowing is not only the result of the financial crisis, but also the unwillingness of our government over many years to make the hard choices necessary to rein in our long-term structural deficit. If it is not checked soon, this borrowing will at some point directly threaten financial stability by undermining the confidence that investors have in U.S. government obligations.
Actually fixing these problems will require a bipartisan national commitment to a comprehensive package of spending cuts and tax increases over many years. The plan released yesterday by the National Commission on Fiscal Responsibility and Reform offers such a plan. It proposes a combination of spending cuts, revenue-enhancing tax reforms, and cost containment in health care and entitlement programs that would produce nearly $4 trillion in deficit reduction over the next ten years.
While opinions differ as to exactly what combination of spending cuts and revenue increase will be necessary we can be sure that most of the needed changes will be unpopular, and will likely affect every interest group in some way or another. We will want to phase in these changes over time as the economy continues to recover from the effects of the financial crisis.
But only with a comprehensive package can we truly achieve the long-term budget discipline needed to preserve our nation’s credibility in global financial markets, and maintain a stable banking system to support the real economy. We must look beyond our narrow partisan interests, and show the world that we are prepared to act boldly to secure our economic future.
Leadership
I am very proud of the stability that the FDIC has provided throughout the crisis. No one lost a penny of insured deposits. And in fact, no one has ever lost a penny of insured deposits in the 77 years since the FDIC was created in 1933. As the crisis unfolded and other financial sectors were destabilizing, insured deposits remained stable and there were no disruptions.
As the leader of an organization, I always try to keep a focus on mission. Protecting insured deposits is a very important, tangible mission. It's one that the public understands and appreciates.
If you look at other organizations – whether private or public -- that have high morale, they have a clearly defined mission. The leadership at those organizations has to ensure that people stay focused on the mission and help them understand how their individual jobs relate to the mission. You need accountability. You need responsibility. You need people to take ownership of their jobs and connect that to the organization’s broader mission.
One challenge I have is to tell our people how good they are. That their judgment is as good as that of the banks they are examining, and that it is their job to speak up about any concerns they have. That they have the right and the obligation to question and tell a bank’s management about those concerns, whether they're not reserving enough against their loans, or that they're moving into a new line of business or a new geographic area in which they are unfamiliar.
Conclusion
We all know there are no easy shortcuts to rebuilding our financial infrastructure and reining in our long-term structural deficit. And it is always appealing to try to go back to old and familiar ways. But in American finance, those are the practices that pushed our economy to the brink of ruin.
Instead, we must move forward, make the tough choices, and accept that preserving stability is a prerequisite to making the financial system more efficient and more profitable. In the end, leadership means showing the resolve to identify emerging risks and taking concerted action to head them off.
In concluding, I don’t want to leave you with the impression that all leadership in the financial sector should be faulted. There are several examples of senior management at financial institutions, large and small, who avoided the excessive risk taking that led to the crisis. So let us celebrate those who led their organizations effectively and resolve to foster a culture which rewards managers who are willing to forego short term profits in favor of long term stability and prosperity.
And as part of building that culture, let’s hope that we see a lot more women in the upper echelons of financial institution management, including – at long last – at the very top.
Thank you."
The FDIC believes there has to be reform in order to improve our overall economy. With reforms supported by the FDIC along with legal sanctions taken by the SEC perhaps we might have a light at the end of this long dark tunnel our economy in which our economy has been stuck. We can only hope someone sprays for poisonous spiders before financial oversight authorities signal that it is O.K. to move through the tunnel to the light.
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