Archive for the “SEC Investigation” Category

The Ospraie Fund. 1861 Capital Management. ASTA/MAT. Tontine Partners LP. The freewheeling world of hedge funds has crashed and burned in recent months, its fate tied to the financial crisis, investor redemptions and illiquid assets. As a result, thousands of individual investors, charities and pension fund holders are now facing unexpected and unprecedented financial losses.

The past year has seen hundreds of hedge funds go out of business. In 2008, some 920 funds were shuttered - a figure that eclipses the prior record set in 2005 when 848 hedge funds closed down. On average, hedge funds lost more than 18% last year. The previous worst performance by hedge funds occurred in 2002, posting a loss of 1.5%. In 2007, hedge funds returned 9.9%.

As hedge funds literally fought for survival in 2008, many would lose the battle altogether. Among them: The Ospraie Fund, which posted nearly a 40% loss in 2008. An even worse performance came from the Tontine Partners LP hedge fund, which ended the year down an astonishing -91.5%.

Other funds such as Tudor Investment Corp. and Citadel Investment Group LLC have been forced to limit investor redemptions or risk implosion. Earlier this month, Citadel, whose flagship hedge fund lost 55% in 2008, announced plans to resume payouts to investors. Investors’ access to their money, however, will occur no sooner than April 1.

Hedge funds that trade municipal bonds also are experiencing a rough time these days. As reported Feb. 29, 2008, by MarketWatch, problems with bond insurers and other disruptions borne out of the global credit crunch have pushed yields on municipal bonds close to, or above, those of comparable Treasury bonds. For hedge funds that try to make money from the difference, called the spread, between the yields, the end result translates into the likelihood of margin calls.

That’s exactly what happened to hedge funds like Citigroup’s ASTA/MAT hedge funds. In using a municipal arbitrage strategy, the funds ultimately were forced to sell their positions at fire-sale prices, causing significant losses to investors. 

The dismal performance of hedge funds has continued into 2009. One of the most recent hedge funds to shutter is the Highland CDO Opportunity Fund, which encountered massive losses from its holdings of high-risk collateralized debt obligations (CDOs). In October, similar circumstances forced Highland to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund.

The shocking upheaval in the hedge fund industry is casting new light on the largely unregulated world of hedge funds. Registration with the Securities and Exchange Commission (SEC) is done on a voluntary basis only. At the same time, investments in hedge funds have grown astronomically. At their peak, approximately 10,000 hedge funds managed nearly $2 trillion in assets. Today, the figure is closer to $1 trillion.

On Jan. 29, 2009, a new bill was introduced in the Senate designed to improve oversight and transparency of the hedge fund industry. Described by Senators Chuck Grassley and Carl Levin as an “attempt to address securities law loopholes that enable hedge funds to operate under a cloak of secrecy,” the Hedge Fund Transparency Act of 2009 (S. 344) would make it mandatory for hedge fund managers to register with the SEC and open up their books to government examiners.

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 the $330 billion auction-rate securities (ARS) market froze up last year, Citigroup was one of the first financial firms to publicly announce its intent to provide much-needed liquidity to investors by selling the securities or buying them back. For many corporations, however, that promise has yet to materialize.

Institutional investors are taking action. One of those corporations is American Eagle Outfitters, which sued Citigroup Global Markets on Feb. 6 for fraudulently inducing it to buy $258 million worth of auction-rate securities that the Pittsburgh-based clothing retailer says it can now only sell at a major loss.

In the lawsuit, American Eagle contends Citigroup initially represented auction-rate securities as safe and good as cash - a good fit for the company’s conservative investment policies. When the market for auction-rate securities collapsed in February 2008, American Eagle, like thousands of retail and institutional investors across the country, found itself stuck with an investment no one wanted to buy. 

In December 2008, Citigroup agreed to buy back some $8 billion of auction-rate securities from investors in order to settle an investigation by the New York Attorney General’s office. However, under the terms of the settlement, the buy-back program applied to retail investors and small businesses only. Corporate and institutional investors like American Eagle were left out in the cold.

The reasoning behind the exclusion of institutional investors from ARS settlement programs has to do with their supposed level of “sophistication” regarding the financial markets, according to the Securities and Exchange Commission (SEC). The line of thinking is that they should have known better.

Sophistication aside, companies and institutions that bought billions of dollars worth of auction-rate securities cannot possibly be expected to know facts about financial products that may have intentionally been kept hidden from them. Look for the American Eagle Outfitters lawsuit to be among a slew of forthcoming lawsuits in the months ahead as institutional investors take Wall Street investment firms to task for using misleading and deceptive marketing practices to unload their financial wares.

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. 

Once again, the Securities and Exchange Commission (SEC) is in the hot seat. This time, Harry Markopolos, the former investment manager who tried for years to warn U.S. regulators about disgraced money manager Bernard Madoff, is behind the grilling. On Feb. 4, Markopolos testified before lawmakers that the SEC did nothing to stop Madoff’s alleged $50 billion Ponzi scheme, despite the many red flags that literally were presented at the agency’s doorsteps.

Markopolos is the whistleblower who first lifted the veil surrounding Madoff and his so-called investing business back in 1996. At the time - as well as in later years - Markopolos presented strong evidence of Madoff’s illegal activities to the SEC, but no actions ever were taken. 

House lawmakers are now leveling harsh criticism on the SEC for its failure to stop Madoff and prevent investors from losing some $50 billion. During the course of Wednesday’s testimony, some lawmakers threatened to issue subpoenas to SEC officials who would not answer questions regarding Madoff because of what they said is the agency’s ongoing investigation.

Meanwhile, Markopolos, who is now a fraud investigator, says it is unlikely Madoff acted alone in his crime.

Markopolos also told lawmakers on Wednesday about other Ponzi-type schemes that he has uncovered.

As for Madoff, he remains free on bail, living in his luxury, $7 million Manhattan penthouse. On Feb. 4, the trustee in charge of liquidating Madoff’s businesses said that nearly $1 billion in cash and securities has been recovered to date. Investors have until July 2 to file their claims.

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 Bernie Madoff scandal is a classic tale of modern-day dysfunction - and a life lesson for codependents everywhere. For years, investors were quick to sing the praises of the now-disgraced 70-year-old hedge fund manager who is charged with running a $50 billion Ponzi scheme. It wasn’t just individual investors who revered Madoff; global financial institutions from as far away as Switzerland and Colombia, pension funds, banks, hedge funds and charities and foundations were caught up in the adulation, as well, with many holding Madoff in almost God-like status.

Closer inspection of Madoff’s fraud is focusing new attention on the role of certain investment firms - the so-called feeder funds - that funneled clients’ money to Madoff. In spite of constant red flags, including indecipherable accounting statements and double-digit returns that miraculously appeared even in a down market, the people in charge of these feeder funds apparently never thought to ask any questions of Madoff. They simply paid their fees for his investing acumen, and reaped the benefits. 

After all, Madoff was the former chairman of NASDAQ. In investing circles, colleagues referred to him as the King of Wall Street. As it turns out, the King was indeed fallible. 

When asked in interviews how he achieved such remarkable returns month after month and year after year, Madoff would remain coy. He said it was a “proprietary trading strategy.” Now we know that Madoff never did any actual trading at all.

Many people thought Madoff participated in what’s known as “front running,” or using knowledge of trades you are about to do for clients to make a profit. As reported Jan. 26 by Bloomberg, allegations of front running apparently have followed Madoff for years. In fact, many of the feeder funds that did business with Madoff had long suspected he was involved in the illegal activity.

Despite those suspicions, the feeder funds took an ‘ask no questions of Bernie stance.’ The cost of that enabling would be dear, however, with clients of those funds ultimately losing billions and billions of dollars.

Granted, no evidence has been uncovered - yet - to prove that any of the feeder funds connected to the Madoff scandal actually participated in front-running themselves.  Instead, they just ignored the obvious. Faced with returns that were too-good-to-be true, they chose to look the other way.  In other words, they enabled Madoff to conduct his scam. They were just like the parents of the 30-year-old child who is now an adult yet still lives at home, without a job and sponges off Mom and Dad. By obliging the child/adult, they are shrieking their responsibilities as parents because the child will never learn how the real world works.

According to the Bloomberg article, Madoff never could have pulled off his historic crime without the participation of this constant stream of feeder funds-turned-enablers. The premise of a Ponzi scam relies on the reputation of its participants. And Madoff had plenty of participants eager to profit. The feeder funds that funneled money to Madoff included the likes of respected firms like Access International Advisors LLC of New York and Geneva-based Banque Marcuard Cook & Co.

The job of a feeder fund is to thoroughly examine hedge funds for the wealthy clients it represents. Instead of practicing due diligence, however, the feeder funds tied to Madoff turned a blind eye when it came time to protect their clients’ money. In return for that codependency, they charged clients hundreds of millions of dollars in service fees.  

Federal regulators played the enabler card, as well. As far back as the 1970s, the Securities and Exchange Commission (SEC) received complaints about Madoff and his investment-advising business. Among the accusations: Madoff was running a large-scale Ponzi scheme. Despite the seriousness of the claims, regulators never charged Madoff with a crime.

The actions - and inactions - of the many enablers surrounding Madoff came to an abrupt end on Dec. 11, when federal agents formally arrested the hedge fund manager at his luxury $7 million Manhattan penthouse. Later, Madoff confessed to authorities that his business had “all been just one big lie.”  

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. 

Despite alarm bells ringing loud and clear, Citigroup apparently chose to look the other way when it came to selling auction-rate securities to unsuspecting investors. Internal email communications show that officials at the New York-based bank were well aware of pending trouble in the auction market, yet they continued to peddle the securities to both individual investors and municipalities.

One of those investors was New York’s Metropolitan Transportation Authority, which operates the Big Apple’s subway, bus and commuter rail systems. According to a Jan. 26 story in the New York Times, Citigroup convinced the Metropolitan Transportation Authority to issue more than $400 million worth of auction-rate bonds shortly before the market’s demise in February 2008.

The MTA deal took place on Nov. 7, 2007. Less than a month later, interest rates on the bonds began to climb. By early February, the rates had more than doubled to 8%. One week later, the auction-rate market collapsed entirely. Investors were unable to access their supposed “liquid” investments, while municipalities faced major penalties in the form of soaring interest rates. 

For New York’s Metropolitan Transportation Authority, the interest rate penalties totaled more than $550,000 a week. The added costs forced the authority to redeem their auction-rate securities in March. To do so, it issued a new round of bonds, outside the auction-rate system and at better interest rates, according to the New York Times article. But the move came with a price tag - and an expensive one at that. The authority spent $5.6 million in fees to bankers, lawyers and others, including the state of New York.

As for Citigroup, it earned more than $500,000 on the two bond sales. Goldman Sachs, which served as the Metropolitan Transportation Authority’s financial adviser, pocketed nearly a cool million dollars in the deal. Not surprisingly, Goldman - like Citigroup - had been in favor of MTA entering into the initial auction-rate sale in November.

Citigroup and its handling of auction-rate securities is cited in a complaint filed Dec. 11 by the Securities and Exchange Commission (SEC) against a Citigroup subsidiary, Citigroup Global Markets. In the complaint, the SEC contends Citigroup not only misled investors about the inherent risks of auction-rate securities but also continued to underwrite and sell the bonds when it knew the auction market was headed for disaster.

Supporting the SEC’s claims is an August 2007 email from a Citigroup executive to another colleague that warns of potential trouble in the $330 billion ARS market.

“There are definitely cracks forming in the market. Inventories are starting to creep higher in the market and failed auction frequency is at an all-time high,” reads the e-mail.

As reported in the New York Times, on the same day that the SEC filed its complaint against Citigroup Global Markets, a prearranged final settlement was announced with Citigroup.

Without admitting wrongdoing, Citigroup agreed to settle the SEC complaint and other cases brought by state regulators, including New York Attorney General Andrew Cuomo, and buy back more than $7 billion of ARS securities from investors. In addition, it agreed to pay a $100 million fine.

The Metropolitan Transportation Authority wasn’t mentioned in the SEC’s Dec. 11 complaint. But, as part of the settlement with the New York attorney general’s office, the authority’s underwriters must reimburse it for a portion of their fees from the second bond sale. As one of those underwriters, that includes Citigroup. Last week, it sent a reimbursement check of $97,650 to the authority.

That money will do little, however, to help the Metropolitan Transportation Authority address its $1.2 billion budget deficit. To make up for the shortfall, the authority is looking at double-digit fare hikes, severe service cuts and layoffs this year.

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. 

Investors with Raymond James Financial are still holding out for answers from the St. Petersburg-based financial services firm regarding their illiquid auction-rate securities. So far, all they’ve gotten is a four-page letter dated Jan. 2 from Thomas James, chairman and chief executive officer, in which he “apologizes” for investors’ dilemma but says the company cannot repurchase the securities it sold because it doesn’t have enough capital on hand.

The message is of little comfort to clients of Raymond James Financial who currently own about $1 billion in outstanding auction-rate bonds and auction-rate preferred securities. It’s the same scenario they’ve faced since February 2008, when the $330 billion auction-rate securities market collapsed and left hundreds of thousands of investors unable to sell securities that had been touted as cash equivalents.

Facing pressure from state and federal regulators, a number of financial firms such as UBS, Wachovia, Merrill Lynch, Morgan Stanley and others announced plans to repurchase the illiquid securities from their clients. Many already have completed their buyback programs. Clients of Raymond James Financial, however, have been left in a holding pattern.

As it turns out, they may be in for a long wait. Any potential relief is likely tied to Raymond James Financial’s ability to secure a bank loan and buy back the securities after it becomes a bank-holding company. But that process will not be completed until next summer.

Meanwhile, Raymond James Financial remains under investigation by the Securities and Exchange Commission (SEC), the New York Attorney General and the Florida Office of Financial Regulation for its handling of auction-rate securities.

The company’s stock also has taken a beating from the firm’s inability to make good on its customers’ auction-rate securities. As of Dec. 31, 2008, shares of Raymond James Financial had fallen more than 40%.

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 Securities and Exchange Commission has charged Philadelphia investment manager Joseph S. Forte and his firm, Joseph Forte LP, of swindling investors out of $50 million in a giant Ponzi scheme. According to the complaint filed Jan. 5, Forte is accused of running the scam from 1995 to 2008.

It is the second multimillion-dollar Ponzi scheme to be uncovered by authorities in the past month. On Dec. 11, New York hedge fund manager Bernie Madoff was arrested on charges of duping investors out of $50 billion. Thousands of retirees, Hollywood celebrities, charities, foundations, global banks and big hedge funds lost everything in Madoff’s subterfuge. Even Madoff’s own sister, Sondra Wiener, was a target of her brother’s scheme. Wiener, 74, lost an estimated $3 million in the Madoff scam, and is now trying to sell her Florida home.

In the case of Forte, the Broomall, Pennsylvania, money manager told FBI agents he had solicited approximately $50 million from dozens of individuals and entities to participate in a commodity futures pool to trade, among other things, S&P 500 stock index futures, foreign currency futures, and metal futures. To conceal his fraud, Forte did not register with the U.S. Commodity Futures Trading Commission and provided quarterly account statements to pool participants that showed profitable returns.

In reality, however, Forte was neither successfully trading nor making an effort to do so.

According to the SEC complaint, Forte consistently lost money in the limited trading that he did, withdrew millions of dollars in so-called fees for his personal use based on the falsely inflated value of Forte LP, and used investor funds to repay other investors.

In addition to misrepresenting the profitability of his trading business, Forte and Forte LP are accused of lying to investors about the use of their funds. Although Forte claimed he raised approximately $50 million from investors for the purpose of participating in the trading program, Forte deposited only $25.8 million in the trading account between January 1998 and October 2008. During that same time period, he withdrew $23.1 million. Forte claims he took at least $10 million to $12 million in fees for his personal use based on the falsely inflated value of Forte LP. However, Forte LP statements to investors reflect fees charged of $28.7 million between March 1995 and September 2008.

Forte also told authorities he used up to $20 million of investor funds to repay other investors, which is the hallmark of a Ponzi scheme.

The SEC’s complaint alleges that Forte and Forte LP also lied to investors about the value of the partnership portfolio. For example, in September 2008, investors were told that the Forte LP portfolio had a value of more than $150 million. In fact, Forte LP’s trading account at the time had a balance of only $146,814.

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. 

Corporate and institutional investors with significant holdings in collateralized debt obligations (CDOs), auction-rate securities and other structured finance products will be feeling the repercussions of a recent fair-value accounting ruling by the Securities and Exchange Commission (SEC). On Dec. 31, 2008, the SEC announced that it would not suspend FASB 157, the much-maligned measurement standard of “mark to market” accounting.

FASB 157 initially evolved as a result of the Enron scandal and various regulations contained in the Sarbanes Oxley Act. In October 2008, following the federal government’s approval of a $800 billion bailout package for U.S. financial industry, the SEC was asked to conduct a study on FASB 157 and its possible role in the recent failures of several large Wall Street investment banks and financial services firms.

On Dec. 31, the SEC recommended against suspending fair-value accounting standards. Rather, the 211-page report suggested making improvements to existing practices, including the development of additional guidance for determining the fair value of investments in inactive markets.

For corporate and institutional investors, this means they will be forced to value certain securities like CDOs and auction-rate holdings at their actual market values. In other words, they can no longer simply accept valuations provided by their brokerage firm or value holdings based on “guesstimates” by management.

In many instances, the value of these securities will be much lower than originally reported. For example, to determine the true market value of their CDO holdings, institutional investors must consider Merrill Lynch’s CDO sale in July of 2008 to Lone Star Funds. At the time of the sale, Merrill Lynch sold $30.6 billion of CDOs for 22% of their face value.

Moreover, the majority of the sale was funded via a loan from Merrill Lynch.

The bottom line: Investors are likely to be in for a rude wake-up call when they discover how little their holdings are actually worth today in the open market. Many of these investments were poorly structured from the outset, with investment firms failing to conduct due diligence on behalf of clients and downplaying the true risks of the products. Now, it appears a whole new can of worms has been opened.

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. 

Following the collapse of the auction-rate securities market in February 2008, state and federal regulators were adamant that investment firms and brokerages find a solution for the securities’ illiquidity. Since then, many firms have begun the process of restructuring and refinancing auction-rate securities; the problem is that recourse may cut investors’ already-reduced ARS holdings even further.

Raymond James Financial, a financial services firm headquartered in St. Petersburg, Florida, has yet to buy back nearly $1 billion in outstanding illiquid auction-rate securities from investors. In response to a lawsuit filed against the firm for alleged securities violations, the company said, “it would need sufficient regulatory capital and cash or borrowing power to do so, and at present, it does not have either.”

The filing also stated that any move to buy back customers’ ARS holdings at par value could result in a “market loss if the underlying securities’ value is less than par and that any such loss could adversely affect the results of its operations.”

Auction-rate securities are investment vehicles whose interest rates are reset through periodic auctions. In February, auctions for the securities began to fail after Wall Street investment banks pulled their financial support from the market. As a result, the securities have become nearly impossible to trade.

Following investigations by the Securities and Exchange Commission (SEC), the New York Attorney General’s Office and other state securities regulators, many of the large investment banks and brokerage firms that underwrote and supported the auction-rate securities market announced agreements to repurchase the securities at par value from their clients.

In a letter dated Jan. 2, 2009, Thomas James, chairman and chief executive of Raymond James Financial, apologized to clients for his company’s involvement in the purchase of their auction-rate securities. As reported Jan. 5 in the Tampa Bay Business Journal, James said Raymond James Financial was unable to repurchase the $1 billion of outstanding securities from clients because it did not have access to the needed financing.

As a possible solution, James said his company may be able to secure a bank loan to buy back the securities when it becomes a bank-holding company, a process that is expected to be completed by June 2009.

For clients who are unable to access their funds, however, such news provides little comfort.

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. 

Auditors, bankers, financial professionals and legislators hoping for less stringent accounting standards in 2009 because of the current economic downturn are out of luck. Their reality check came Dec. 31 courtesy of the Securities and Exchange Commission (SEC), which ruled it would not suspend the so-called “mark-to-market,” or fair-value, accounting rule that requires financial institutions to value hard-to-sell assets at current market prices.

Critics blame the rule, defined in the Financial Accounting Standards Board’s Statement No. 157, for the excessive write-downs that have taken place in the wake of the subprime crisis and credit crunch. Those in favor of fair-value accounting contend any changes would do more harm than good to investors.

The SEC has ruled on the side of investors. In a 200-plus-page report examining a possible connection between fair-value accounting and the nation’s financial meltdown, the SEC compared the idea of suspending the accounting standards to “shooting the messenger and hiding from capital providers the true economic condition of a financial institution.”

The SEC did offer eight recommendations for refining the rule’s application when valuing hard-to-price assets, however. Among the agency’s proposals: the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.

The SEC’s report was mandated as part of Congress’ $700 billion bailout package in October.

Now that the SEC has agreed to maintain fair-value accounting standards, companies that hold various structured finance products such as mortgage-backed securities and collateralized debt obligations will be required to value those assets at current market prices, even if it means market values are substantially lower than the values previously assigned. As for auditors, their work will likely get even more involved, as they begin punching in overtime to ensure clients don’t miscalculate the true value of their holdings.

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.