Archive for the “Citigroup ASTA Fund MAT fund” Category

It seems Wall Street’s leading investment banks - Lehman Brothers, Citigroup, Morgan Stanley, and Merrill Lynch - are unable to escape the glare of scrutiny over questionable business practices these days. Now a U.S. Senate committee investigation reveals that several top firms are raking in millions of dollars in profits by using complex derivatives and stock schemes to help foreign hedge funds illegally avoid paying billions in U.S. taxes.

In its 77-page report, to be released Sept. 11, the Senate Permanent Subcommittee on Investigations calls the tax-avoidance schemes another example of a “privileged few” benefiting at the expense of millions of American taxpayers who are left to shoulder a disproportionate share of the tax base.

The report says that $100 billion a year is lost to offshore tax abuses.The report names several hedge funds involved in the schemes, including Moore Capital, Highbridge and Maverick Capital.

Foreigners who invest in the United States are exempt from many U.S. taxes - they don’t pay taxes on interest earned on money deposited in a U.S. bank, nor do they pay taxes on capital gains. However, if they invest in a U.S. company and the stock pays a dividend, U.S. law requires them to pay a tax on the dividend. Dividends sent abroad are supposed to be taxed at a rate of 30% in most countries.

In reality, however, it’s a different story, and many non-U.S. stockholders never pay the dividend taxes that they owe. According to the Subcommittee’s report, the fault lies with U.S. financial institutions.

According to the report, each of the institutions investigated developed and marketed “dividend-dodging products” that disguised dividend payments to clients as nontaxable ones. The products involved complex equity swaps or loans that the banks described as offering a “dividend enhancement,” “yield enhancement,” or “dividend uplift.”

For the investment firms, the practice is a profitable one.

The Senate investigation shows that from 2000-2007 Morgan Stanley helped clients dodge payments of U.S. dividend taxes of more than $300 million. Lehman Brothers estimated that in one year alone, it helped clients avoid U.S. dividend taxes amounting to $115 million. From 2004 to 2007, UBS enabled clients to dodge $62 million in dividend taxes.

As was seen in the FBI’s investigation of Bear Stearns’ executives Matthew Tannin and Ralph Cioffi, as well as in several other recent Wall Street scandals, emails are at the center of the Senate Committee’s probe over dividend tax dodging.

As reported Sept. 11 in The New York Times, the Committee’s report cites an internal e-mail message in which an employee from Lehman Brothers refers to Microsoft’s announcement of a special dividend as “the cash register is opening!” A senior Lehman official is then quoted as saying, “Outstanding. Let’s drain every last penny out of this [market] opportunity.”

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The collapse of the auction-rate securities market has left issuers of auction-rate bonds - municipalities, hospitals, universities and others - drowning in high interest rate costs, often in the double digits and three times what they’re used to paying. With no buyers for auction-rate securities - and unwilling to wait for the federal government or regulators to fix the liquidity crisis - their only alternative is to exit the auction market and replace the auction-rate bonds with lower cost and less volatile debt.

And that can be a pricey endeavor. From Indiana to California to New York, issuers of auction bonds are encountering sky-high costs and countless headaches as they try to put the auction-rate securities debacle behind them. In total, issuers have had to pay an extra $2 billion in interest costs following the collapse of the auction market in February.

Making matters even worse: These same borrowers may be on the hook for billions of more dollars in refinancing fees to convert their auction-rate bonds - money that in most cases will go to the very same Wall Street institutions that caused all of their problems in the first place by pulling out of the auction-rate market six months ago.

As reported Sept. 9 on Bloomberg.com, the biggest state issuer of auction rate debt is New York State, with $4 billion in auction-rate bonds. To date, that state has spent $138 million to rid itself of the securities. One of its unexpected costs in dumping the auction bonds was $101 million to repay borrowings by the state Dormitory Authority on behalf of the City University of New York. Those are funds that could have gone toward providing preschool classes for more than 30,000 children, according to the article.

But that’s just the beginning. Total expenses for New York to covert its auction bonds into other forms of financing will climb to $340 million or more, according the Bloomberg article.

Based on Bloomberg data, states, cities, hospitals, and other municipal borrowers have now refinanced or plan to refinance approximately $104 billion of their $166 billion in auction-rate debt, which amounts to 62% of all auction-rate bonds.

When all is said and done, the final bill for replacing the $166 billion in auction-rate debt could reach upwards of $7 billion, which does not include extra interest costs, according to Bloomberg.

Auction-Rate Settlements

As of August 2008, eight Wall Street banks - Citigroup, Morgan Stanley, JPMorgan Chase, Wachovia, Deutsche Bank AG, Merrill Lynch, Bank of America and Goldman Sachs - have agreed to buy back more than $50 billion of auction-rate securities from retail investors and settle claims of misleading investors about the liquidity risks of the securities.

As part of the settlements, issuers of the auction bonds will be reimbursed refinancing fees on bonds sold after Aug. 1, 2007 and replaced after Feb. 11. That covers only about 1 percent of public-sector borrowings, according to Bloomberg.

Even more disturbing to issuers: When they do pay a bank refinancing fees for converting their auction-rate bonds, they simultaneously reduce that institution’s losses on the very securities that state regulators forced them to buy back.In the end, replacing auction-rate debt has become an expensive, unpleasant and arduous process for many issuers of auction-rate bonds. Not only is it creating financial havoc on already strained state budgets for some public-sector borrowers, but it also means numerous worthwhile and needed public projects must be placed on the backburner for years to come.

On Sept. 18, auction-rate securities will take center stage at a hearing held by the U.S. House Financial Services Committee. Among other things, the Committee plans to examine the actions of regulators and investment banks and their possible connection to the collapse of the $330 billion auction-rate securities market in February.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted withsubprime and other mortgage-related investment losses.

Bank of America apparently is getting ready to join Citigroup, UBS, JPMorgan and other banks that agreed to cut deals with state and federal regulators and resolve investigations into the alleged mishandling of auction rate securities sales.

On Sept. 3, Massachusetts Secretary of State William Galvin said Bank of America, the nation’s second-largest bank, must either reach an agreement with state regulators or be prepared to face legal action. On Sept. 4, New York Attorney General Andrew Cuomo followed up on Galvin’s edict, serving subpoenas to eight Bank of America executives as part of his six-month investigation on how Wall Street’s biggest banks sold auction rate securities to investors.

So far, eight Wall Street heavyweights - UBS, Morgan Stanley, Citigroup, JPMorgan Chase, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank - have agreed to settle claims that they marketed auction rate securities as cash-like alternatives to investors. In addition to buying back nearly $50 billion of the securities from retail investors, the banks also must pay fines totaling more than $500 million to state and federal regulators.

However, the New York attorney general says any settlements agreed to thus far do not cover any possible misconduct by individual brokers.

Meanwhile, two former Credit Suisse Group AG brokers were formally charged with violating securities laws and fraudulently selling subprime mortgages connected to auction rate securities to corporate clients.

As reported Sept. 5 on Bloomberg.com, Julian Tzolov and Eric Butler were charged on Sept. 3 for falsely representing various securities to investors as backed by federally guaranteed student loans and safe alternatives to cash or money market funds.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The lack of mea culpa from “downstream” brokers over the state of auction rate securities and the predicament of investors stuck with the now-illiquid securities may speak volumes. At least New York Attorney General Andrew Cuomo appears to think so.

In an Aug. 20 letter to the Regional Bond Dealers Association (RBDA), the New York attorney general’s office blatantly dismissed earlier claims by the RBDA that brokerage firms such as Fidelity Investments and Charles Schwab shouldn’t be held liable for the demise of the auction rate market or the illiquidity of their clients’ auction rate investments.

In the letter, Benjamin Lawsky, deputy counselor and special assistant to the attorney general, wrote:

Attorney General Cuomo’s investigation has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint . . . For example, some evidence indicates that Fidelity was actively marketing auction rate securities to its high net worth clients. . . “If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms’ culpability.”

In early August, Fidelity Investments and Charles Schwab were among a number of brokerages to contend that state and federal regulators should focus their investigations of abuses concerning auction rate securities solely on the major investment banks that underwrote the securities, rather than the smaller brokerages. As “supporting evidence,” the brokerages suggested they were unaware of the potential pitfalls of auction rate securities and had no prior knowledge that the auction market was in trouble.

Such excuses may not hold water, however. As licensed brokers, having knowledge and information about a particular investment product is a standard part of the job. That point was reiterated in Lawsky’s letter, in which he stated that the attorney general believes it is highly unlikely that the brokerages were, as they claim, “in the dark with investors” regarding the liquidity risks of auction rate securities.

The growing concern by secondary dealers for their auction rate securities fate stems to recent settlement announcements by Cuomo’s office - settlements that do not include some $60 billion in outstanding auction rate securities purchased through smaller brokerages. Now, the brokerages fear the onus will be on them.

Indeed, next week the Financial Industry Regulatory Authority (FINRA) is planning a series of on-site inspections at approximately 40 downstream brokerages, where it will try to determine exactly what they knew in advance of the auction market’s collapse and whether they knowingly represented auction rate securities as safe and liquid investments to clients.

Meanwhile, Citigroup, JPMorgan Chase, Morgan Stanley, UBS and Wachovia all have agreed to buy back $35 billion of auction rate securities and pay more than $360 million in fines. As reported Aug. 22 in the New York Times, three other banks - Merrill Lynch, Goldman Sachs and Deutsche Bank - also plan to buy back at least $12.5 billion in the securities and pay more than $160 million in fines as part of settlements reached late in the day on Aug. 21.

Beginning in October, Merrill Lynch will buy back at least $10 billion of auction rate securities from investors holding less than $4 million of the investments. A $125 million fine also was imposed on the firm.

Separately, the Securities and Exchange Commission (SEC) is continuing its investigation into Merrill Lynch for possible corporate and individual violations.

Goldman Sachs agreed to buy back about $1.5 billion of auction rate securities from investors by mid-November, and pay a $22.5 million fine, while Deutsche Bank will buy back $1 billion of auction rate debt by mid-November and pay a $15 million penalty.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

“Nobody gets a pass.” That’s apparently the verdict from Christopher Cox, chairman of the Securities and Exchange Commission (SEC), who says investigations into the collapse of the auction rate securities market will indeed extend beyond major Wall Street investment banks to include secondary dealers who sold the securities.

Cox’s clarification follows recent criticism by smaller brokerages like Fidelity Investments and Oppenheimer & Co., which contend they should not be obligated to buy back billions of dollars of auction rate securities from investors based on the fact they didn’t underwrite the securities nor run the auctions for the securities. The big investment banks did.

Moreover, the brokerages say that when it came to knowing about potential problems brewing in the auction rate market, they were kept in the dark right along with investors.

The finger pointing over who’s at fault over auction rate securities has gained momentum in the past week after several of Wall Street’s biggest players - including UBS, Citigroup, JP Morgan Chase and Wachovia - agreed to settle claims of auction rate fraud with New York Attorney General Andrew Cuomo and buy back more than $42 billion of auction rate securities from their customers. Now, smaller brokerages say even though some of Wall Street’s larger investment banks are agreeing to Cuomo’s terms, it doesn’t mean they need to follow suit.

As reported Aug. 19 in the Wall Street Journal, secondary dealers of auction rate securities like Fidelity and Oppenheimer believe regulators should put the onus of blame for the auction market’s demise - as well as any agreements to buy back auction rate securities from investors - solely on the underwriters of the securities and the controllers of the auctions: Wall Street investment banks.

“None of the rest of the market knew about how auction dealers allegedly controlled the whole auction process for 25 years,” said Michael Decker, chief executive of the association that represents regional brokerages, in the Wall Street Journal article.

Whether regional brokers had prior knowledge about the inner workings of the auction rate process may be irrelevant. At the heart of the state and federal investigations regarding auction rate securities is the issue of whether the securities were presented and sold to investors as “safe” and “liquid” when, in fact, they were not. In many cases, investors contend brokers sold them the instruments as cash alternatives - investments they could cash out of at will.

It was only when the auction market collapsed in February - and their auction securities became illiquid - that investors learned their “cash alternative” investments strayed far from the promises of brokers.

Moving forward, the issue of culpability for smaller brokerage houses will be contingent on what regulators uncover in their investigations. Period. Interestingly, several of the brokerages mentioned in the Aug. 19 Wall Street Journal story, including Oppenheimer, E-Trade Financial Corp. and Fidelity Investments, have refused to specify the dollar amount in auction rate securities their clients hold.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Just when you thought the auction rate securities ordeal might be nearing an end - and investors who’d been pitched the instruments by Wall Street as cash alternatives finally would receive their money back - think again.

In the past two weeks, New York Attorney General Andrew Cuomo has succeeded in getting several major Wall Street players - Citigroup, UBS, JP Morgan Chase, Morgan Stanley and Wachovia, among them - to pony up billions of dollars to buy back the auction rate securities they sold to investors. The catch is in the fine print of the agreements orchestrated by Cuomo: The Wall Street firms only have to pay back the auction rate bonds they sold, not the billions more they actually underwrote.

That small detail could have big repercussions for millions of investors holding illiquid auction rate securities bought through mutual fund firms or individual brokers. As reported Aug. 18 on CNBC.com, a number of regional firms and discount brokerage houses say the blame for the auction rate securities scandal rests firmly with the major underwriters of the securities - Wall Street powerhouse firms that decided to no longer support the auction rate market and dropped out entirely in February.

According to the CNBC article, the Regional Bond Dealers Association, a brokerage trade association, has written a letter to Cuomo and the Securities and Exchange Commission (SEC) in which it claims the real auction rate fraud was conducted by the underwriters of auction rate securities. The Wall Street firms dominated the auction rate market, the letter says, and sold the auction bonds to regional firms and discount brokerages with the promise to hold auctions. The brokers who sold the securities to customers contend they acted in good faith and relied on information about liquidity risks from those underwriters.

And that’s where problems arise. Many regional firms and brokers do not have the financial prowess of major Wall Street banks. Forcing them to buy back auction rate securities from investors at par value could financially bury many of them. The Regional Bond Dealers Association, in its letter to the SEC, said that the only practical solution for making investors whole is to include ARS customers of distributing firms in the settlements with large lead managers.

For his part, Cuomo reportedly stated in an Aug. 16 interview with CNBC that he has no plans to become involved in what could be a he said/she said dispute between brokers and the big Wall Street firms over who is culpable for misleading investors.

“I represent the investor,” he said, “and that’s why I’m treating this as a sales practice issue.” That’s all well and good. But until the fine print in the settlement agreements involving auction rate securities is worked out, thousands of ARS investors are no better off today than they were six months ago.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

When several major Wall Street investment firms - including Citigroup, UBS, Wachovia and JP Morgan Chase - agreed to settle claims of auction rate securities fraud by state and federal regulators, many investors thought their financial problems finally were solved.

As it turns out, that may not be the case. According to an Aug. 18 story on Bloomberg.com, the recent deals that New York Attorney General Andrew Cuomo struck with some Wall Street institutions to buy back billions of dollars of action rate securities they sold directly to individuals do not include investors who hold auction rate debt purchased through mutual fund firms or brokers that didn’t actually underwrite the securities.

And that leaves a lot of unanswered questions. These investors hold some $160 billion of auction rate securities.

“This is a glaring oversight,” said Jonathan Kahn in the Bloomberg article. Kahn is an investor who holds auction rate debt underwritten by Goldman Sachs Group Inc. and purchased through a different brokerage.Investors like Kahn have been in a holding pattern over their auction rate investments since February, when the market for auction rate securities seized up as Wall Street investment banks abruptly stopped offering financial support to buy the securities.

Investors, who previously had been told by their brokers that auction rate securities were cash equivalents, suddenly found themselves with illiquid investments.

Following the auction market’s collapse, several states, including New York, began looking into how Wall Street firms marketed and sold auction rate securities to investors. In August, settlements were reached with some of the biggest underwriters of the securities, with Citigroup, UBS, Morgan Stanley, JPMorgan Chase and Wachovia Corp. agreeing to buy back a combined $42 billion of auction rate securities they sold directly to individuals.

So far, about 30 companies have been subpoenaed by Cuomo’s office for their alleged mishandling of auction rate securities sales. Other states, as well as the Securities and Exchange Commission (SEC), also are involved in ongoing investigations.

Eventually, Cuomo says action against smaller brokerages will come to fruition.

But, as everyone knows, “eventually” on Wall Street could be a long time in coming. Until then, the light that so many investors thought they saw at the end of the auction rate tunnel has fallen dark once again.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

When it rains, it pours. After a streak of bad luck that includes staggering losses tied to mortgage debt and massive job cuts, Wachovia Corp. could be forced to sell its asset management unit, Evergreen Investments, to raise much-needed capital.

Speculation of the Evergreen Investments sale first surfaced following an announcement that the nation’s fourth-largest bank has agreed to buy back $8.5 billion in auction rate securities as part of a fraud investigation led by Missouri Secretary of State Robin Carnahan.

Wachovia’s agreement with Carnahan, as well as New York Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), is the latest in several recent settlements by Wall Street investment banks and securities firms as they try to put claims of auction rate abuses behind them. As part of its deal, Wachovia will pay a $50 million fine, and must buy back all illiquid auction rate securities from retail customers, charities and small businesses by Nov. 28.

In addition, Wachovia is required to make no-interest loans immediately available for any investor who needs liquidity before the auction buyouts are finalized.

In the past week-and-a-half, Citigroup, UBS, JP Morgan Chase and Morgan Stanley all have agreed to repurchase a combined total of $32.6 billion in auction rate securities and pay fines of more than $300 million.

As with a number of Wall Street investment banks, the collapse of the auction rate securities market in February created a public relations nightmare for Wachovia. In July, after being deluged with complaints from investors who said Wachovia brokers had intentionally misled them about the liquidity risks of the auction rate bonds, securities regulators from several states launched a surprise raid at the St. Louis headquarters of Wachovia Securities.

Trouble over auction rate securities sales may be minuscule, however, compared to Wachovia’s other problems. On Aug. 11, the bank was forced to revise its second-quarter loss from the prior month to $8.92 billion from $8.66 billion. It is the worst loss in the company’s history. Wachovia also plans to cut nearly 7,000 jobs, 600 more than it said three weeks ago.

Wachovia attributes much of its recent difficulties to the disastrous purchase of Golden West Financial, a California mortgage company specializing in loans that enabled borrowers to pay less than their full mortgage payment. Wachovia purchased Golden West in 2006 for $25 billion.

The acquisition of Golden West turned out to be anything but golden for Wachovia following last year’s collapse of the housing market. Wachovia’s stock is down 53 percent this year.

And now Evergreen Investments potentially could be on the selling block. Evergreen made headlines in June, when it announced plans to liquidate its Ultra Short Opportunities Fund. The fund, which had more than 70% of its assets tied to toxic subprime mortgages, lost 20% over a period of 16 days. In 2008, it was named as one of the two worst-performing ultra short bond funds of the year.

Investors in the Ultra Short Opportunities Fund say the fund’s managers purposefully kept information from them about the extent of investments made by the fund in risky mortgage-backed securities. Several investors have since filed lawsuits against Evergreen and Wachovia.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

New York Attorney General Andrew Cuomo, the self-appointed cop of Wall Street for his aggressive efforts to right the wrongs of investment banks over deceptive sales of auction rate securities, hailed another victory today.

Two more Wall Street investment banks - JPMorgan Chase and Morgan Stanley - have agreed to Cuomo’s terms and will buy back the illiquid instruments from investors. The banks, which are two of the largest underwriters of auction rate securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction rate securities sold to individual investors, charities and small to mid-sized businesses.

The agreement with Morgan Stanley, which is paying a $35 million penalty, and JPMorgan, a $25 million penalty, brings the total number of Wall Street firms to settle state investigations of fraudulent auction rate securities sales to four. Last week, Citigroup, followed by UBS, agreed to buy back nearly $30 billion of auction rate securities and pay fines of $250 million. Merrill Lynch later voluntarily said it would repurchase about $10 billion. In Merrill’s case, however, no deal was reached with state or federal regulators.

At the time that Citigroup agreed to settle with Cuomo and other state regulators and the Securities and Exchange Commission (SEC), Morgan Stanley said it would buy back $4.5 billion in auction rate securities. Cuomo immediately dismissed the offer as insufficient.

As part of the Aug. 14 agreement with JPMorgan and Morgan Stanley, JPMorgan will repurchase the auction rate securities it sold to nearly 10,000 clients by Nov. 12. In addition, the bank will buy back any securities sold by Bear Stearns, which it acquired in May.

Morgan Stanley will repurchase its securities by Dec. 11. About 20,000 customers are involved in that deal.As is the case with Citigroup and UBS, JPMorgan and Morgan Stanley did not admit or deny any wrongdoing over how they marketed or sold auction rate securities to investors.

The SEC is not part of the settlement agreement with JPMorgan or Morgan Stanley.

Cuomo’s office is pursuing about 30 Wall Street banks as part of an investigation into the alleged mishandling of auction rate dealings. Other states and the SEC are investigating the issue, as well.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Image is king, and Goldman Sachs - an undisputed corporate powerhouse king that only caters to the wealthy - may have an image problem.

For the past five months, New York Attorney General Andrew Cuomo has been vigilant in his pursuit of Wall Street investment banks for their mishandling of auction rate securities sales. So far, Citigroup, UBS and Merrill Lynch all have agreed to repurchase billions of dollars of the now-illiquid securities at face value from individual investors. Other firms are said to be close to reaching similar settlements with state and federal regulators.

Goldman Sachs, however, has remained silent on the auction rate securities issue. As reported Aug. 14 in the Wall Street Journal, Goldman is a major player in the auction rate arena. Between 2003 and 2007, the firm was the No. 5 underwriter of the instruments.

When the auction rate market came to an abrupt halt in February, following an exit by Wall Street firms like Goldman Sachs which stopped serving as buyers of the last resort for the securities, investors were suddenly left holding illiquid securities. Some of those investors are Goldman Sachs clients, and they want to know what the company plans to do about their situation.

Goldman’s clients could be in for a long wait. Despite disclosing back in April that it had received requests from various governmental agencies and self-regulatory organizations for information relating to auction products and recent auction failures, Goldman has so far refused to settle the matter and, according to the Wall Street Journal article, has no intention to buy back clients’ auction rate paper.

The Wall Street Journal cites the case of Carl Everett, a Goldman Sachs client who rates the service at Goldman as top of the line - until now. Everett apparently has money tied up in auction rate securities, and faces the same situation as thousands of other investors: stuck with illiquid investments. Recent settlements by investment banks like Citigroup and UBS to resolve the matter focused on small investors, leaving wealthier investors like Everett, institutional clients and corporate buyers of auction rate securities out of the picture thus far.

Everett says that on Aug. 9 he was told by Goldman Sachs that the company would not be buying back his auction rate securities.

“That’s disappointing to me - my expectation is for the Goldman Sachs brand,” said Everett in the Wall Street Journal article. “My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents.”

With Wall Street’s image already tattered and tarnished - some say beyond repair - Goldman Sachs might want to rethink its position in the days ahead.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.